A few months ago Nate wrote an article titled “Unlicensed Contractor? Depending On The State You May Be Working For Free.”  The subject of this article is very important, as is the topic of contractor licensing. In many states, those who are required to have a contractors license, and who do not, could be completely bared from any payment whatsoever. That’s a harsh but real penalty.

This begs the question: Who is required to hold a contractors license?

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The contractor licensing question can be a difficult legal inquiry that depends on the state law and the specific work being performed at a job site. Last year, there were a few cases about whether construction managers were required to hold contractor licenses, with the results being quite messy. In response to a controversial California appeals decision, The Fifth Day LLC v. James P Bolotin,  the state enacted a law that more clearly defined the term “contractor.”

This article will review the situation in California and the ambiguity surrounding the licensing requirements and lien rights of a “construction manager,” and how construction managers licensing rules affected by this new law.

Is The Fifth Day Decision Dead in California? No. It’s Stronger.

After the California appeals decision in The Fifth Day, we published an article stating that “Construction Managers Probably Can File Mechanics Liens In California – Even Without A License.”  The court in that case was called upon to decide whether a construction manager could recover money owed to it despite lacking a contractors license. The question, in other words, was whether a construction manager needed a contractors license at all.

This is a sensitive question. Construction management roles are increasing on construction projects across the nation and state licensing statutes don’t exactly contemplate the role. Licensing statutes call for licenses from electricians, plumbers, and “contractors,” but a construction manager is none of these things. Instead, managers are hired by the property owners to act as a liaison between the GC and the owner, and/or to help the owner manage the project.

The California court in Fifth Day looked at the construction management role and decided that it did not meet the definition of “contractor.” This seemed to irk the legislature and the California licensing board a bit, and was the genesis for Assembly Bill 2237. Take a look, for example, at the Senate Floor Analyses of the bill:

In 2008, the CSLB adopted Precedential Decision No. 1, establishing that someone acting in the capacity of a swimming pool consultant is a contractor. In 2009, the Appellate Court decision The Fifth Day v. Bolotin found that someone acting in the capacity of a construction manager is not required to be licensed as a contractor. The Fifth Day v. Bolotin decision undermines the CSLB’s Precedential Decision, and the CSLB believes the law should be amended to clarify that an individual performing these services is required to be licensed as a contractor and comply with the law.

The CSLB further indicates that recently, an unlicensed contractor facing criminal prosecution for violating BPC Section 7028 (engaging in business of a contractor without a license) claimed to have been a project coordinator and asserted exemption from licensure, citing The Fifth Day v. Bolotin decision. Although the unlicensed contractor was not overseeing a contract between the project owner and a general contractor as in the Fifth Day v. Bolotin case, the defense strategy was nonetheless of concern to the prosecutor and ultimately resulted in a plea bargain dismissing the BPC Section 7028 charge, according to the CSLB.

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The Assembly Bill, therefore, was inspired by The Fifth Day case. Further, many folks seem to think that the court case itself completely overrules the case.  A comment on our blog post originally about the case, for example, states this:

Unfortunately, while Construction Managers did not need to be licensed at the time this blog post was written, this is no longer the case! Assembly Bill 2237 was passed by the State of California on April 9, 2012 as a direct result of The Fifth Day, LLC v. James P. Bolotin.

But does the recent AB 2237 actually overturn The Fifth Day?  I don’t think it’s a simple answer.

AB 2237 certainly addresses some issues brought up by the controversial case, but in my opinion, it only effects a tiny portion of it. The law amends California Business & Professions Code §7026.1 to add the following language:

(b) (1) Any person, consultant to an owner-builder, firm, association, organization, partnership, business trust, corporation, or company, who or which undertakes, offers to undertake, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct , alter, repair, add to, subcontract from, improve, move, wreck, or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or home improvement project, or to do any part thereof, whether or not the performance of work herein described involves the addition to, or fabrication into, any structure, project, development or improvement herein described of any material or article of merchandise.  ‘Contractor’ includes subcontractor and specialty contractor.

(2) For purposes of this subdivision, a consultant is a person, other than a public agency or an owner of privately owned real property to be improved, who meets either of the following criteria as it relates to work performed pursuant to a home improvement contract as defined in Section 7151.2:  (A) Provides or oversees a bid for a construction project. (B) Arranges for and sets up work schedules for contractors and subcontractors and maintains oversight of a construction project.

Underlined text is new text, struck through text is text removed.

It is clear that the law now encompasses “consultants,” but it does not name a “construction manager.”  The court in Fifth Day specifically explained that the “construction manager” role is real, unique, and specifically defined by legislatures in other laws.  See, for example, the court’s comment in The Fifth Day here:

We note as well that the Legislature provided that construction managers on public works projects must be licensed architects, engineers or general contractors. (Govt.Code, §â€‚4525, subd. (e).)  The Legislature determined that licensure was required for public works projects, and so enacted a statute to that effect;  the fact that a similar statute applicable to privately owned real estate development projects was not enacted strongly suggests that the Legislature determined that licensure of construction managers was not necessary in that arena.

In short, the Legislature has not defined the term “contractor” to include persons who perform construction management services such as those set forth in the DMA…Unless and until the Legislature does so, its failure to expressly address the issue must be the last word.

Certainly, there is a compelling case that the legislature has tried to regulate construction managers through § 7026’s new language (just look at the bill analyses). But then why didn’t the legislature use the term “construction manager” instead of consultant?

That is only the first problem. The second and larger problem is that the legislature went out of its way to restrict the scope of the term “consultant,” defining the term as “a person…who meets either of the following criteria as it relates to work performed pursuant to a home improvement contract…Emphasis ours.  

I don’t think it changes the effect of The Fifth Day at all, and in fact, I think it makes The Fifth Day decision stronger. According to this language, the term “consultant” is only applicable on home improvement contracts, and even then, it will only affect those “consultants” who provides or oversees a bid for the construction project or arranges for and sets up work schedules for contractors and subcontractors and maintains oversight of a construction project.  The first item (bids) rarely occurs on a home improvement project, and the second item is just one of the many things a construction manager could do.

While the bill analyses in AB 2237 suggests that it passed in response to The Fifth Day, it’s my opinion that the legislatures actions actually underscore and promote the importance and effect of the controversial decision. The legislature looked specifically at the decision, passed a law in response thereto, and only regulated a very narrow scope of actors (i.e. consultants on home improvement projects doing one of two very specific actions).

I don’t think it changes the effect of The Fifth Day at all, and in fact, I think it makes The Fifth Day decision stronger.

The Dangerous World Of Being A Construction Manager

Construction manager roles are increasing on projects in California and across the country, and courts, legislatures, and licensing boards are confused about the scope of this role and how these parties fit into each state’s licensing scheme.

We continue to report about these situations across the country, to differing conclusions:

What does this all mean to those who could be considered a “construction manager?”  It means proceed with extreme caution.  

If you are in a state the requires a contractors license and you don’t have one, if you’re even close to being considered a construction manager, you can expect your adversaries to argue that you should be licensed and drag you though aggravating and expensive legal proceedings. And as I discussed in “What’s Wrong With The Law And How It Is Costing Your Business Money,” you cannot rely on the courts and the legal process to treat you fairly or even consistently within a single state’s legal framework.

There is a lot of legal gray area with respect to the construction manager role, or the “consultant to owner” role. These “roles” can encompass a lot of parties, including companies that help organize maintenance work for property owners.

If you’ve already done the work without a license the legal gray area may be helpful to you, because the property owners, developers, and other related parties will be apprehensive about rolling the dice in court to declare your work requiring registration or licensing. However, the ambiguities are going to cost you money. It’s a huge advantage to nip this issue and get your license or registration in the abundance of caution.

If you’re in California, note this great article by Garret Murai on the California Construction Law Blog:  Do Construction Managers Need To Be Licensed IN California? A Case of Blurred Lines.  Garret discusses the CA Government Code §4255 et seq. which requires construction managers to be a licensed architect, registered engineer or licensed general contractor, as well as the new AB 2237 which requires licensing in some instances on home improvement contractors. Accordingly, construction managers must be licensed to do work on state jobs or to do certain work on home improvement jobs. Insofar as all other private jobs?  It’s blurry, as discussed by Garret in that article, and us herein.

When A License Is Required – Your Lien Rights May Hinge On Registration

In conclusion of this discussion let’s briefly mention the relationship between the state licensing rules and the state mechanics lien laws.  This was discussed in great detail by Nate Budde in his article: Unlicensed Contractor?: Depending on the state, you may be working for free:

Not only can unlicensed contractors be denied payment in some states, they may be required to give back money already paid…[but] not all states are quite as draconian in licensing requirements and penalties as the states noted above. [Some states] will allow an unlicensed contractor to recover the “minimum value” of his work.

[Nevertheless, in most states a]n unlicensed contractor, if a license is required for the work he/she performs, is unable to gain the protection of a mechanics lien.

That’s a pretty big deal for anyone in the construction industry, but it’s especially difficult news for those in the “gray area” of a state’s licensing laws.