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By John W. Ralls, Paul W. Berning, and John A. Foust
Thelen Reid Brown Raysman & Steiner LLP
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I. |
The contents and purpose of this article
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This article is meant to provide construction industry professionals with a general overview of the major legal issues involved in the licensing and registration of contractors, architects and engineers. Accompanying this article is a compliance checklist to help identify and evaluate these issues in a chronological manner.
Licensing is regulated at the state and sometimes the municipal level, and the laws can vary greatly from one state to the next. Nevertheless, common themes and trends persist throughout the licensing laws of most states, making it possible to identify major issues. In an effort to identify and comment on these major issues, the authors have surveyed and analyzed the contractor, architecture and engineering laws of seven Western states - Arizona, California, Colorado, Hawaii, Nevada, New Mexico and Utah. Cases and laws from other states occasionally are mentioned to illustrate points.
Still, it must be emphasized that purpose of this article is only to provide an overview of the general types of issues likely to be confronted while navigating the statutes and regulations of any particular state or municipality. In that regard, this article is a primer rather than a substitute for studying the licensing laws of a particular state. Thus, readers with more than a casual interest are encouraged to review the licensing laws of the state or municipality of interest to them. It also may be prudent to obtain assistance from a lawyer on particular licensing law matters.
Before beginning the narrative, we want to make two points concerning our terminology. First, we use the term "firm" to refer to the business that may need a license. We selected that term to encompass corporations, partnerships or any business entity. Most of the points we make apply equally to sole proprietorships. Second, we use the terms "license" and "licensing" to encompass both license and registration requirements.
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II. |
The risks of non-compliance
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All seven states that are the subject of this article require architects and engineers to be licensed, as is true with all U.S. states. All of the seven states except Colorado require all contractors to be licensed. Colorado requires only electricians, electrical contractors and plumbers to be licensed. While many of the licensing laws seem picky, some even nonsensical, the penalties for failing to have the right licenses are severe. They include civil and criminal penalties as well as the loss of any ability to sue to recover for the cost of work performed. In California and Arizona, unlicensed contractors may be required to pay back any compensation received for work that was performed without a license. In Hawaii, an unlicensed contractor takes the risk of forfeiting property used to engage in unlicensed contracting.
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A. |
Penalties for non-compliance |
In most states, performing design or construction work without the appropriate license is a crime, punishable by fines and imprisonment. In addition, a contractor or design professional found to have violated the license laws may be precluded from pursuing public or private work for a certain period of time.
Unlicensed contractors and design professionals generally cannot sue to recover the cost of doing their work, regardless of how well performed it was. This consequence poses an even greater risk than criminal penalties because it does not depend upon a regulator or prosecutor to enforce.
Most construction lawyers, when analyzing a claim for additional compensation, will check the license status of the party bringing the claim. If the claimant does not have the necessary license, that fact will be turned into a weapon, either in an attempt to defeat the claim entirely or, at the very least, to extract concessions. Any firm that finds itself in a payment dispute must have the appropriate license(s) or risk losing the dispute on that basis alone.
For these reasons, complying with the license laws is not only good business practice. It is an essential element of a proper risk management program for any firm involved in the construction business.
| | 1. | The Hydrotech case -- No mercy for an unlicensed contractor |
One high-profile California case provides a chilling example of the ramifications of failing to have the appropriate licenses.
In Hydrotech Systems Ltd. v. Oasis Water Park, 52 Cal.3d 988, 803 P.2d 370 (1991), a New York company named Hydrotech was approached by the owner of a water park to enter into a contract under which Hydrotech would provide equipment for and construct a "surfing pool." Hydrotech's main business was the manufacture of patented equipment that simulated ocean waves, not the construction of pools using such equipment. California requires any firm that enters into a contract that includes construction work, even if that work will be performed by others, to have a contractor's license. (California Business and Professions Code §7026.) Hydrotech had no such license.
Before the job started, Hydrotech told the owner that it was concerned about signing a contract that called for it to do construction work. The owner insisted that Hydrotech sign and lend its expertise to the construction of the pool. The owner promised Hydrotech that it would pay for the work. Hydrotech relied on this promise. Hydrotech also apparently assumed that it was in compliance with California's license laws because the owner assured Hydrotech that licensed California contractors also would be involved in the project. Based on the owner's promises, Hydrotech agreed to do the work.
Ultimately, Hydrotech was not paid. Hydrotech then sued the owner. The owner defended against the claim by asserting that Hydrotech did not have the necessary licenses. The trial court agreed with the owner and denied Hydrotech any recovery.
Hydrotech took the matter all the way to the California Supreme Court. That court also ruled in favor of the owner, concluding that the owner had every legal right not to pay Hydrotech, even though the owner had lied to Hydrotech to induce it to take the job.
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The Aesthetic Property case -- license lapse wastes years of effort
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In some cases, contractors are able to overcome a failure to have the appropriate licenses. But even in these cases, the risks are hardly worth it.
For instance, in an Arizona case, Aesthetic Property Maintenance, Inc. v. Capital Indemnity Corp., 183 Ariz. 74, 900 P.2d 1210 (1995), a landscape contractor's license had lapsed. When it got into a payment dispute, it was denied recovery. After years of litigation, the contractor ultimately proved that it was in "substantial compliance" with the license law and therefore that it was entitled to recover for the work it performed.
Although the contractor ultimately prevailed, its principals and employees undoubtedly devoted hours of their time to the case and incurred substantial legal expenses. Also, the contractor was deprived for years of money for work it performed and was unable to put that money back into its business. The contractor could have avoided all that wasted effort if it had taken steps to make sure its license was current.
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C. |
Risks of disgorgement of compensation
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Contractors who perform work without the appropriate license may be required to pay back any compensation received while unlicensed. The seriousness of this risk cannot be overstated. An owner in California or Arizona who pays for work performed by an unlicensed contractor can sue that contractor for return of all money paid regardless of how well the work was performed. Note that this right to disgorgement includes all compensation paid to the contractor and not just profits. This means that the contractor would have to repay the entire contract price, including amounts already paid to subcontractors and materialmen. For many contractors, this penalty could result in financial ruin.
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The California mandatory disgorgement statute
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California Business and Professions Code §7031 (b) creates a direct cause of action authorizing any person who paid money to an unlicensed contractor to sue to recover that money. Specifically, the statute states that "[a] person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the contractor for performance of any act or contract."
Currently, very little is known about California's mandatory disgorgement statute. It did not take effect until January 2002. There are presently no published judicial decisions interpreting the scope of the law or ruling on its constitutionality. Nevertheless, it is safe to predict that the provision will be strictly applied in a manner consistent with the courts' approach to §7031 (a) as demonstrated in the Hydrotech case.
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2. |
The Wilkinson case - Arizona's doctrine of criminal restitution
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A person in Arizona who contracts without a license may be required to repay any compensation received as criminal restitution. (State v. Wilkinson, 202 Ariz. 27, 29, 39 P.3d 1131, 1133 (2000)).
In Wilkinson, an unlicensed contractor agreed to perform remodeling work on two Phoenix-area homes. After the homeowners complained to the Registrar of Contractors about poor performance and non-performance, the contractor was charged with and convicted of two counts of acting as a contractor without a license - a misdemeanor in Arizona. As a result of this conviction, the municipal judge ordered the contractor to pay restitution to the homeowners in an amount that included the compensation paid to the contractor under the contracts. Although an intermediate appellate court temporarily vacated the award, the Arizona Supreme Court reinstated that portion of the order requiring the contractor to repay the compensation received from the homeowners.
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D. |
Risks of forfeiture in Hawaii
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In 2000, the Hawaii Legislature created a new and unusual penalty for contracting without a license. Hawaii Revised Statute §44-23.5, entitled "Forfeiture of property for unlicensed activity," provides that a contractor who performs construction work without the appropriate license may be required to forfeit tools and equipment used in connection with "unlicensed activity." The statute also outlines the procedure for forfeiture, including service of notice, entitlement to an administrative hearing and the right to appeal to the appropriate court.
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E. |
"Substantial compliance" often is not enough
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California has limited the doctrine of substantial compliance
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The doctrine of substantial compliance once offered contractors some respite from the harsh penalties for contracting without a license in California. Over the last 15 years, however, the doctrine has been severely restricted.
The substantial compliance doctrine was created by the California Supreme Court as a way of allowing recovery by a contractor who had substantially complied with the licensing law. (Latipac, Inc. v. Superior Ct., 64 Cal.2d 278, 281 (1966).) But, believing that the doctrine undermined the punitive purpose of the contractor licensing laws, the California Legislature amended Business and Professions Code §7031 in 1989 to abolish the doctrine altogether. Two years later, the Legislature amended the statute again to allow for a very limited application of the doctrine when the non-compliance resulted from an inadvertent clerical error not caused by the licensee. In 1994, the Legislature further amended §7031 to its present state.
Under §7031, an unlicensed contractor must be able to satisfy the following three elements to prove substantial compliance: (1) the contractor must have been duly licensed in California before performance of the contract began; (2) the contractor must demonstrate that it acted reasonably and in good faith to maintain proper licensure; and (3) the contractor must demonstrate that it did not know and reasonably should not have known that it was unlicensed.
The cases following the 1994 amendments indicate that the substantial compliance doctrine now is limited to cases where the non-licensure occurred because of some clerical or administrative oversight and the contractor acted quickly to correct any licensing defects brought to its attention. (Pacific Custom Pools, Inc. v. Turner Construction Co., 79 Cal.App.4th 1254, 1264-1265 (2000); ICF Kaiser Engineers, Inc. v. Superior Ct., 75 Cal.App.4th 226, 241-242 (1999).) In the case of a suspended license, the contractor must have been unaware of the circumstances giving rise to the suspension at the time it entered into the contract or began work on the project. (Slatkin v. White, 102 Cal.App.4th 963, 970-971 (2002).)
Thus, the doctrine of substantial compliance now offers the unlicensed contractor little relief from the substantial risks of contracting without a license in California.
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Arizona also narrowly construes the doctrine of substantial compliance
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Like California, Arizona narrowly construes the doctrine of substantial compliance to apply only when the contractor was unlicensed through no fault of its own and immediately acted to rectify the problem. In Aesthetic Property Maintenance, Inc. v. Capital Indemnity Corp., 183 Ariz. 74, 900 P.2d 1210 (1995), the Arizona Supreme Court articulated five factors that the courts must consider to determine whether the doctrine applies in any given case. They are: (1) whether the Arizona Registrar of Contractors contributed to the non-licensure; (2) whether the contractor was financially responsible while it was unlicensed; (3) whether the contractor knowingly ignored the registration requirements; (4) whether the contractor acted to remedy the license immediately after learning of its defects; and (5) whether the contractor's failure to comply with the licensing laws prejudiced the party with whom it contracted.
Aesthetic Property and the cases following it have held that either a failure to be financially responsible while unlicensed or knowingly ignoring registration requirements is fatal. For example, in Crowe v. Hickman's Egg Ranch, Inc., 202 Ariz. 113, 41 P.3d 651 (Ariz. App. 2002), the Arizona Court of Appeals refused to find substantial compliance because the contractor knew it was unlicensed when it entered into the contract.
In Crowe, an experienced Mississippi contractor agreed to build hen houses for the owner of an Arizona farm. The contractor was not licensed in Arizona at the time the contract was signed and so informed the owner. The contractor became licensed shortly after beginning work on the project. When a payment dispute later arose, the contractor attempted to bring an action to recover payment for work performed while it was licensed. But, the trial court dismissed the complaint on grounds that the contractor was not licensed when the contract was signed.
On appeal, the Arizona Court of Appeals refused to find that the contractor had substantially complied with the law and affirmed the trial court's dismissal even though the owner had paid the contractor for work performed while it was unlicensed and the work at issue was performed while the contractor was licensed. Applying the factors from Aesthetic Property, the appeals court found that the contractor was fully aware of the licensing requirement and had made no effort to obtain a license before entering into the contract. The court noted that substantial compliance is limited to cases where "the contractor was unlicensed through no fault of its own and immediately acted to rectify the problem."
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III. |
Overview of licensing law compliance
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The accompanying Licensing Law Compliance Checklist provides a step-by-step approach to determine whether a firm is complying with license laws.
Because many licensing issues turn on particular contractual or business arrangements, there is no substitute for obtaining legal advice on a particular situation. We do hope, however, that the checklist will provide a useful guide to construction industry professionals to ensure that licensing issues are fully addressed in particular cases.
We have prepared both the checklist and this narrative from the standpoint of a corporation or partnership doing design and/or construction work. However, most of the questions in the checklist apply equally to an individual doing the same work.
The following sections of this narrative review issues in the checklist, making note of some of the ways the seven states address the issues.
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A. |
Identifying the pertinent agency or regulatory body
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The first step in making sure that a firm is complying with the license laws is to identify the source of those laws. In most states, the source of the licensing laws are statutes that were enacted by the state legislature and that are supplemented by regulations issued by state boards.
All states regulate architects and engineers. Some have comprehensive license schemes for contractors, some license only certain trades (electricians, electrical contractors and plumbers in Colorado) and some have no licensing requirements at all (as with New York State). In many states (for example, California), separate boards oversee the contractor, engineer and architect licensing schemes. In other states (for example, Arizona), one board oversees two or more of the licensing schemes. Click here for a 50-state listing of licensing agencies, with contact information and Web links.
In states with no statewide contractor's license requirement, the task of ensuring compliance with license requirements can be even more difficult because cities and counties may impose their own requirements. Click here for links to sources of city and county ordinances.
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B. |
Exactly who is the license holder?
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Once the source of the license laws is identified, the next step is identifying exactly who must hold the license. Must the firm hold the license in its own name? Or, must the license holder be an employee or principal of the firm. Or, must a person with a license serve as qualifier for the firm's license. Typically, the answer is different for contractor's licenses than for design professional's licenses.
In the case of contractor's licenses, any individual or entity typically may hold the license. In the case of a construction firm that is organized as a corporation, the corporation itself typically must hold the license. The same holds for partnerships and joint ventures.
In the case of design professionals, the answer typically is a bit more involved. Many states require that the individual design professional responsible for the design work, even if he or she works for a firm, have the requisite license. Often, a firm that wants to practice architecture or engineering also must obtain a license from the appropriate state board in its own name. In these states, there are two levels of license requirements, one at the individual, professional level; the other at the firm level.
For instance, in California, a firm that performs engineering work must have an "officer in charge" of the engineering practice of the business who is a licensed professional engineer. The firm must file an organization record form with the California Engineer's Board that lists the officer in charge. (California Business and Professions Code §6738 (b).) In addition, professional engineers licensed in the appropriate engineering disciplines (civil, mechanical, electrical) must be in charge of all engineering work performed by the firm.
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Identifying the major licensing category
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The next step in ensuring compliance with the license laws of a particular state is to identify the major category of license (that is, contractor's, architect's, and/or engineer's license) that a firm needs.
In most states, the license requirement turns on the definition of a key term, generally "contractor," "practice of engineering" or "practice of architecture." A typical set of statutory provisions will say that one who acts as a "contractor," one who "practices engineering" or one who "practices architecture" must have the corresponding license. The definitions of these terms usually are very broad. A firm must focus carefully on the scope of the license requirement and consider whether the activities of the firm fall under the language even if the firm does not consider itself to be a contractor or to be practicing engineering or architecture.
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D. |
Many contractor's license requirements extend to work a firm agrees to do
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Firms should pay particular attention to whether the license requirement is limited to services that actually are rendered by the firm or whether the license requirement also pertains to services that the firm seeks to or agrees to render. This consideration is particularly important in connection with contractor's license requirements because merely bidding on a project or negotiating to perform a project may trigger a license requirement.
Also, in many states, a "contractor" is defined not only as one who performs construction work but also as one who offers to perform or enters into a contract to perform construction work, even if all of the construction work will be performed by licensed subcontractors.
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California's broad definition of "contractor"
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In California, anyone who acts as a "contractor" must have a contractor's license. California's license law defines "contractor" as "any person, who undertakes to or offers to undertake to... or does himself or by or through others, construct, alter, [or] improve... any building... or other structure... whether or not the performance of work described involves the addition to or fabrication into any structure... or improvement herein described of any material or article of merchandise...." (California Business and Professions Code §7026.)
There is no doubt that the California courts read this definition to mean what is says. The Hydrotech case discussed above serves as proof that if a company agrees to do construction work in California, the company must have a contractor's license, even if the work will be performed by other, licensed contractors.
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The Vallejo case -- developers may need to be licensed
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Another California decision, Vallejo Development Co. v.
Beck Development Co., 24 Cal.App.4th 929, 29 Cal.Rptr.2d 669 (1994), confirms the broad reach of California's contractor's license law.
In the Vallejo case, a master developer for a residential project was denied the right to recover for millions of dollars of construction work because it was not licensed. The master developer had agreed to install certain infrastructure improvements for several new housing developments. The developer asserted that it was exempt from having a contractor's license because it furnished labor and materials through licensed, third party contractors and therefore was not a "contractor" under the license law. The California Court of Appeals disagreed, finding that any party who enters into a contract to provide construction work must have a license even if that work will be performed by other licensed contractors.
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Arizona's and Hawaii's broad definitions of "contractor"
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The definitions of the term "contractor" in the Arizona and Hawaii license laws are similar to California's broad definition.
Arizona defines "contractor" as "a person, firm, partnership, corporation, association or other organization, or a combination of any of them, that for compensation, undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or by or through others, or directly or indirectly supervises others to... [c]onstruct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or any other structure or work in connection with the construction." (Arizona Revised Statutes §32-1101 (2).) In 2000, Arizona broadened the definition of "contractor" to include any person or entity that responds to a request for a proposal for construction services or a request for qualification. (Arizona Revised Statutes §32-1101 (A) (3).)
Hawaii defines "contractor" as "any person who by oneself or through others offers to undertake... to alter... any realty or construct... any building...." (Hawaii Revised Code §444-1.)
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E. |
Design professional licenses also may extend to work a firm agrees to do
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In the case of design professional's licenses, the focus generally is on the services rendered rather than agreed upon. Some design professional licensing laws, however, require a firm to have a license just to enter into a contract that calls for the performance of design work, even if that work will be performed by others.
A firm examining a license requirement should pay particular attention to words like "offer to practice" or "offer to perform." In our experience, many regulators take the position that such language does require a firm to have a license if it submits a proposal or enters into a contract that includes design or construction work, even if that work will be performed by others. In the absence of a specific court or administrative ruling or specific advice from regulators, a firm should assume that words like "offer" include these activities.
New Mexico statutes require that any person "practicing or offering to practice engineering" or "rendering or offering to render any service which requires architectural education" must be a licensed engineer or architect, as the case may be. (New Mexico Statutes Annotated 1978 §§61-23-2, 61-15-1.) Regulators in New Mexico may take the position that a firm is "offering" to render design services merely by entering into a contract that calls for the performance of such services even if the design work will be performed by licensed design professionals doing their work as subconsultants.
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F. |
License requirements may extend to equipment suppliers
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All participants in the construction process (and not just those who consider themselves to be architects, engineers or contractors) must be attentive to licensing requirements that may apply to them. The Vallejo Development Co. case from California (discussed above) shows, for instance, that developers must be attentive to licensing requirements.
Suppliers of manufactured equipment also must be attentive to these requirements. In many cases, the installation of manufactured equipment may entail some construction work, be it electrical work to power the equipment, general construction work to accommodate the equipment, new plumbing or HVAC modifications. A purchaser of such equipment may want to enter into a single contract with the manufacturer for sale and installation of the equipment, including necessary construction. The manufacturer may enter into such an arrangement intending to subcontract the construction work to a capable, licensed contractor. Under the laws of many states, this arrangement would be prohibited. The reason is that many license requirements apply to entering into contracts to perform construction work, even if licensed contractors are the persons who actually do the work.
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G. |
License requirements may extend to construction managers
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Construction managers also must be careful to ensure their compliance with licensing laws. Although none of the seven states that are the subject of this article have a separate licensing scheme for construction managers, the definitions of who must be licensed in each state (as contractors and/or as design professionals) very often expressly apply to construction managers or include activities routinely performed by construction managers. If a firm is performing construction management work and does not have a license, the firm should immediately determine whether it must be licensed. The breadth of some of the statutes raises questions about whether even construction managers acting only as owner's agent must be licensed.
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Colorado's definitions of "architect" and "engineer"
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Colorado's definition of "practice of architecture" includes "observation of construction" and "contract administration." (Colorado Revised Statutes §12-4-102(5).) Similarly, Colorado's definition of "practice of engineering" includes "observation of construction to evaluate compliance with plans and specifications...." (Colorado Revised Statutes §12-25-102(10).) Colorado has no statewide contractor's license requirement.
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Utah's licensing requirements may extend to construction managers
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Utah is similar. The definition of "practice of architecture" includes "administration of construction contracts." (Utah Code §58-3A-102(6).) The definition of "practice of engineering" in Utah includes "the review of construction for the purpose of monitoring compliance with drawings and specifications...." (Utah Code §58-22-102(9).) Finally, Utah's definition of "contractor" includes "a construction manager who performs management and counseling services on a construction project for a fee." (Utah Code Annotated §58-55-102 (12) (a) (v).)
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Nevada's treatment of construction management activities
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Nevada's definitions of "practice of architecture" and "practice of professional engineering" also are sufficiently broad to possibly include construction management. In Nevada, the practice of architecture includes "administration of construction" while the practice of engineering includes "responsible supervision of construction." (Nevada Revised Statutes §§623.023, 625.050.)
Like Utah, the Nevada's contractor's license statute expressly includes "construction manager." However, a construction manager is one who "perform[s] management and counseling services on a construction project for a professional fee." (Nevada Revised Statutes §624.020.4.)
Most states provide a series of exemptions from license requirements. Most of the exemptions to the licensing requirements are narrow, so the scope of the exemption must be carefully analyzed. What appears at first to be an extremely helpful exemption may prove to be so narrow that it is of little value.
The classic exception to a contractor's license requirement is for owners performing improvements to their own property. But, even this widely recognized exception has limitations. In California, for instance, owner-builders are prohibited from selling improvements they performed to others. (California Business and Professions Code §7044(a), (b), (c).) And, in Utah the Legislature recently amended the licensing laws to add two new conditions to the owner-builder exception: (1) an owner-builder can build "no more than two residential structures per year. that the owner lives in for at least three months" or (2) the structures must be "incidental to a residential structure on the property, including sheds, carports, or detached garages." (Utah Code Annotated §58-55-305 (4) (a), (b).)
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Federal contractor's exemption
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Federal courts have ruled that contractors doing work for the federal government are exempt from state contractor's license laws. (Leslie Miller, Inc. v. Arkansas, 352 U.S. 187, 190, 77 S.Ct. 257 (1956); Gartrell Constr., Inc. v. Aubry, 940 F.2d 437, 441 (9th Cir. 1991).) The courts found that requiring federal government contractors to comply with state licensing laws would subject the federal government to decisions by inferior state government officials. The courts concluded that the supremacy clause of the U.S. Constitution prohibited such a result.
Despite these decisions, a federal contracting officer could direct that contractors on a particular project have all licenses required by state licensing laws. The contracting officer only would need to require the contractors to have all such licenses as a condition of awarding the contract. The supremacy clause would not bar such a decision by a federal official, especially when the contractors agreed by contract to comply with state licensing laws.
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Exemptions for "out-of-state" firms
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A firm that wants to undertake a project outside its home state may be able to take advantage of an exemption for out-of-state firms.
California's engineering license law, for instance, provides that a firm that does not maintain a regular office in the state may be exempt from the license requirement. In order to qualify for this exemption, the firm must be legally qualified to practice civil engineering in another state. The exemption is severely limited by the fact that the firm's employees must not practice engineering in California. If the firm meets these requirements, it may subcontract design services to California licensed engineers. (California Business and Professions Code §6741.)
If the firm does not meet these requirements, however, it must comply with the requirements imposed on a California engineering firm. It must designate an "officer in charge" of the firm's engineering practice who is a licensed California engineer. It must file an organization record form with California's Engineer's Board listing the officer in charge. (California Business and Professions Code §6738(b).) It also must ensure that registered design professionals in the appropriate engineering disciplines are in responsible charge of all engineering work performed by the firm or its subcontractors.
In some states, public utilities are exempt from licensing requirements in connection with construction work they perform on their own facilities.
California's contractor licensing law contains such an exemption. (California Business and Professions Code §§7042, 7042.1, 7042.5.) Amplifying on this exemption, California's Attorney General has issued a formal opinion that Amtrak is not required to be licensed in order to perform maintenance work on the commuter train lines it operates but does not own. In the same opinion, the Attorney General found that Pacific Bell is not required to be licensed to install and maintain telephone wiring inside the premises of its customers. (78 Op. Cal. Atty. Gen. 261.) In issuing this ruling, California's Attorney General relied on the fact that both Amtrak and Pacific Bell were regulated by the Public Utilities Commission and that such regulation provided the necessary protection of the public from contractor incompetence and dishonesty that the contractor licensing system is designed to provide. Any business that does not fall under the classic regulated public utility category probably would not qualify for this exemption.
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Cross-over practice by design professionals
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Although not technically an exemption, many states permit "cross-over" practice by design professionals (that is, practice of architecture by engineers and practice of engineering by architects). The typical cross-over statute permits a design professional to perform work for which it is not licensed provided that the work is "incidental" to or overlaps with the work for which the design professional is licensed.
As an example, New Mexico's license law states, "It is recognized that an architect who has complied with all of the laws of New Mexico relating to the practice of architecture has a right to engage in activities properly classifiable as engineering insofar as it is incidental to his work as an architect. Likewise, it is recognized that an engineer who has complied with all of the laws of New Mexico relating to the practice of engineering has the right to engage in activities properly classified as architecture insofar as it is incidental to his work as an engineer, provided that in such cases an architect shall not hold himself out as practicing engineering and an engineer shall not hold himself out as practicing architecture, and further provided that the architect or engineer, as the case may be, shall perform only that part of the work for which he is professionally qualified and shall utilize qualified professional engineers, architects or others for those portions of the work in which the contracting professional engineer or architect is not qualified...." (New Mexico Statutes Annotated 1978 §61-15-2(B); see also New Mexico Statutes Annotated 1978 §61-23-22(A).)
Regulations define "architectural work incidental to engineering" as "that architectural work provided on projects with a building construction value not greater than two hundred fifty thousand dollars ($250,000) and having a total occupancy load of not greater than fifty (50)...." (16 New Mexico Administrative Code §30.1.7.12(a); see also 16 New Mexico Administrative Code §33.4.8.1.) The regulations also define "engineering work incidental to architecture" as "that engineering work provided on projects with a building construction value not greater than two hundred fifty thousand dollars ($250,000) and having a total occupancy load of not greater than fifty (50)...." (16 New Mexico Administrative Code §30.1.7.12(b); see also 16 New Mexico Administrative Code §33.4.8.2.)
But, architects and engineers should take care about practicing outside the scope of their registrations. A professional engineer was fined $5,000 for practicing architecture without a license by the Arkansas State Board of Architects. The pre-engineered metal building in question was primarily intended for human occupancy as office space, which was within the scope of an architect's registration, and not primarily for equipment, goods, vehicles and processes, which is within the scope of an engineer's registration. The Arkansas Supreme Court affirmed the fine. Holloway v. Arkansas State Board of Architects, 101 S.W.3d 805 (Ark. 2003).
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I. |
Can my company obtain the requisite license? |
Design professionals face an additional obstacle in many states to obtaining a license. The laws of many states prohibit a general business corporation (as opposed to a professional corporation) from practicing architecture or engineering. In such states, architecture or engineering can only be practiced by individuals who are licensed in the field or by professional corporations or partnerships, the individual shareholders or partners of which are licensed in the field. Contractors can face similar problems. California, for example, does not permit limited liability companies or limited liability partnerships to hold a contractor's license.
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J. |
The nuts and bolts of obtaining a license |
If a firm decides that it needs a license it does not have, the next step is to identify exactly how the needed license can be obtained.
The process to obtain a contractor's license in California is typical. The process consists of three steps: (1) submission of an initial application; (2) an examination; (3) and submission of required bonds and proof of insurance. California's Contractors State License Board may waive the examination if the qualifier has been previously licensed. (California Business and Professions Code §7065.1.)
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K. |
Who may serve as a qualifier
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Typically, a firm must designate a "qualifier" or an individual who will take the necessary examination (or has already done so) to obtain a license. In most states, there are rules concerning the relationship that a qualifier must have to the firm obtaining the license as well as limitations on the number of firms for which a qualifier may serve. A firm must be aware of these rules and limitations to make sure it has a proper qualifier on staff.
In California, the qualifier for a contractor's license must be a "responsible managing employee" of the firm or a "responsible managing officer" (if the firm is a corporation) or a general partner (if the firm is a partnership). The pertinent statutes and regulations for qualifiers are at California Business and Professions Code §§7068 and 7068.1 and at 16 California Code of Regulations §823. In order to understand the requirements for a qualifier, these statutes and regulations must be read together.
Subdivision (d) of §7068 defines "responsible managing employee" as "a bona fide employee [who] is actively engaged in the classification of work for which that responsible managing employee is the qualifying person...." Subdivision (a) of §823 defines "bona fide employee" as "an employee who is permanently employed by the applicant and is actively engaged in the operation of the applicant's contracting business for at least 32 hours or 80% of the total hours per week such business is in operation, whichever is less." As a result, a qualifier for a California contractor's license may not serve in that capacity for more than one firm at any one time (except for joint ventures of which this firm is part).
Section §7068.1 requires that a "responsible managing employee" be "responsible for exercising that direct supervision and control of his or her employer's or principal's construction operations as is necessary to secure full compliance with the provisions of this chapter and the rules and regulations of the board relating to the construction operations." Subdivision (b) of Regulation §823 defines "direct supervision and control" as "one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites."
In California, failure to maintain a bona fide responsible managing officer or responsible managing employee ("RME") automatically invalidates an otherwise valid license. (Buzhgheia v. Leasco Sierra Grove, 60 Cal.App.4th 374, 385-86 (1997).) That case involved a framing contractor who had been defrauded by an owner-developer into performing work under cost in exchange for a promise of more lucrative work that never materialized. When the contractor sued, the owner defended in part by claiming that the contractor had used a "borrowed" RME and was therefore not duly licensed. Evidence was presented that the RME worked for another company throughout the project history, that he could only document $2,072 in wages from the contractor, and that his role on the project involved "quality control" and not supervision or layout. After being instructed that the owner carried the burden of proving that the license was invalid, the jury found that the license was valid and awarded the contractor more than $3 million in damages, interest and attorney fees.
On appeal, the court reversed the jury's verdict on the grounds that the jury had been incorrectly instructed on the burden of proof regarding the issue of licensure. The court held that the contractor carried the burden of proving licensure and that this "encompassed the burden to prove a bona fide RME when such was controverted." The court stated that once the owner had offered evidence suggesting that the RME was not an actual employee of the contractor, the contractor needed to prove that the RME was in fact a bona fide employee in order to demonstrate valid licensure. Therefore, the court held that the contractor was prohibited from recovering against the owner unless it could successfully prove to the jury that its RME was a bona fide employee.
The court's ruling in Buzhgheia makes it very clear that a contractor who performs work without a bona fide RME is not licensed for that work. This is consistent with an earlier California decision holding that a contractor who "borrowed" an RME in order to qualify for a swimming pool specialty contractor's license was not duly licensed to perform work in that specialty. (Rushing v. Powell, 61 Cal.App.3d 597, 605-606 (1976).) Moreover, the court in Buzhgheia expressly held that an owner has standing to challenge the bona fide character of a contractor's RME, stating: "It is possible for a party in a civil action to attack a contractor's license by going behind the face of the license and proving that the required RME is a 'sham.' "
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L. |
Reciprocity and comity
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If a firm is licensed in another state, the rules of reciprocity and comity should be explored. In many states, and especially with regard to architect's licenses, obtaining a license in one state makes it easier and quicker to obtain a license in a second state. Reciprocity also can be of help to engineers. But, typically, it is of little help regarding contractor's licenses.
New Mexico, for example, has fairly liberal rules for registering architects that are already licensed to practice in other states. If the applicant holds a current National Council of Architectural Registration Boards ("NCARB") certificate, registration through reciprocity is routine. The applicant need only pass a New Mexico architectural jurisprudence examination, which is an open book, "take home" examination. (16 New Mexico Administrative Code §§30.3.10.1, 30.3.10.4.)
New Mexico's rule for engineers is different. "An applicant may be registered by endorsement or comity if... he is currently registered as an engineer in the District of Columbia, another state, territory or possession of the United States, provided the registration does not conflict with the provisions of the Engineering and Surveying Practice Act [this article] and that the standards required by the registration or the applicant's qualifications equaled or exceeded the registration standards in New Mexico at the time the applicant was initially registered...." (New Mexico Statutes Annotated §61-23-14.1(D).) The New Mexico Engineer's Board makes this determination on a case by case basis. For this reason, a prospective applicant on the basis of reciprocity should contact the board to determine whether pursuing registration in this manner is worthwhile.
As another example, the California Engineer's Board excuses out-of-state engineers from taking many examinations. However, all applicants must take the California Seismic Examination, given in April and October each year.
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M. |
License classifications
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If a firm has the appropriate license (be it contractor's, engineer's or architect's license), the firm also must determine whether its license is in the appropriate classification. A firm obtaining a new license also must make sure that the license it obtains is in the right classification.
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1. |
Classifications of contractor's licenses
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Most states provide a number of different classifications of contractor licenses. Some of these classifications limit the type of construction that may be undertaken, such as commercial vs. residential. (Nevada Administrative Code §624.440.) States also may limit the dollar size of projects that a particular contractor may build. (Nevada Revised Statutes §624.3015, Nevada Administrative Code §624.670.)
In addition, specialty contractors may need to obtain a license in a particular classification. Typically, electrical contractors, plumbing contractors, HVAC contractors and other specialty contractors have particular license classifications, with separate training and testing requirements.
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a. |
California's contractor's license classifications
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California recognizes three major classifications of contractor's licenses, Classes A, B and C. Class A is for the "general engineering contractor" and covers contractors whose principal business is in connection with fixed works requiring specialized engineering knowledge and skill, such as dams, bridges and canals. (California Business and Professions Code §7056.) The Class B license is for the "general building contractor" and covers contractors whose principal business involves carpentry, structural framing or at least three unrelated trades performed or supervised on the same structure. (California Business and Professions Code §7057; 16 California Code of Regulations §834(b).) As the name implies, Class B licenses are for building contractors.
The Class C license is for specialty contractors whose construction work involves a single trade. A Class C contractor may perform work outside its license classification only if the work is incidental, supplemental and essential to accomplish the work for which the contractor is licensed. (California Business and Professions Code §§7058, 7059; 16 California Code of Regulations §831.) California recognizes 42 separate C license classifications, including carpentry, electrical and glazing.
In many cases, these specialty license requirements pertain to the firm performing the work in the specialty classification as opposed to a firm that enters into a contract that includes such specialty work. For example, in California, a firm must have the appropriate "general" contractor license (either Class A or B depending on the project) to enter into a contract to perform construction work. However, the firm need not have an electrical license but may subcontract that work to a licensed electrical contractor.
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b. |
New Mexico's contractor's license classifications
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The New Mexico Construction Industries Division has established approximately 100 contractor's license classifications. (14 New Mexico Administrative Code §5.6.8.) The classifications range from the general (such as "general building" and "mechanical") to the more specialized (such as "framing" and "plumbing"). New Mexico offers several license classifications that permit a contractor to perform work that would otherwise require multiple specialty classifications. For instance, a contractor may obtain a "plumbing" license (a specialty license) or it may obtain a general mechanical license that permits it to perform not only plumbing but also natural gas fitting, HVAC and process piping work. (Id. §§5.6.8.5.MM-1, 5.6.8.5.MM-98.).)
New Mexico's contractor's license law recognizes that projects routinely involve multiple disciplines, "A contractor may bid and contract as the prime contractor of an entire project provided he holds the proper classification for the major portion of the work to be performed, based on dollar amount." (Id. §5.6.8.8.B.) Thus, in order to determine the appropriate license classification, a prime contractor in New Mexico must identify the classification of work that is the greatest based on dollar amount.
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2. |
Classification of design professional's licenses
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Design professionals -- especially engineers -- also must be attentive to license classifications. Many states distinguish between engineering disciplines, such as civil, mechanical and electrical, and permit engineers to practice only in the engineering discipline for which they are licensed.
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3. |
New Mexico's roster of engineer licenses
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New Mexico engineers are not licensed in particular disciplines; they may perform any engineering work they are competent to perform. However, the New Mexico Engineer's Board does maintain a roster that "indicate(s) the discipline(s) in which the registrant is competent to practice...." "Registrants or organizations may advertise for work only in those disciplines of engineering in which they are listed to practice." (16 New Mexico Administrative Code §39.3.11.2.)
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N. |
How long will it take to obtain the pertinent license?
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If a firm does not have the licenses it needs, the time to obtain the license should be identified as soon as possible.
The timeframe for obtaining the license can vary dramatically depending on the manner in which a firm intends to qualify. In the case of contractor's licenses, a firm may be able to hire a person who already holds the pertinent license in an individual capacity and can serve as the qualifier for the firm. Typically, proceeding in this fashion speeds up the process. However, if a firm wishes to have an in-house person train and qualify for the examination, the timeframe could be considerably longer.
The California State Contractors License Board reports that the time to obtain a license is a minimum of 11 days and a median of 253 days when an examination is necessary. But, when an examination is unnecessary (because the firm seeking the license has retained a qualifier that already has passed the examination), the Board reports a minimum of one day and a median of 48 days. (16 California Code of Regulations §827.)
Temporary authorizations also should be explored. Some states permit out-of-state contractors or design professionals (who are licensed in their home state) to perform work for which is license is required for a short time.
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O. |
Making sure the license is current
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If a firm believes that it has the correct license, it is a simple but necessary step to make sure that the license is current.
This is precisely the step that would have saved the contractor so much heartache in Aesthetic Property Maintenance, Inc. v. Capital Indemnity Corp., 183 Ariz. 74, 900 P.2d 1210 (Ariz. 1995). There, a landscaping contractor obtained the appropriate license in January 1990. It renewed its license in December 1990 and, because it had moved, included its new address with the renewal. Unfortunately, in late 1991, the Arizona registrar of contractors mistakenly sent a renewal notice to the contractor's old address. The contractor did not receive the notice and failed to renew its license. As a result, the contractor unknowingly did business for roughly six months before it discovered the problem and obtained a reinstatement. During that time, it did work for a general contractor that went bankrupt. When the landscape contractor sued to recover for its work, the general contractor's surety asserted that it was under no obligation to pay because the landscape contractor had failed to maintain its license. The Arizona trial court as well as the Arizona Court of Appeal sided with the surety and found that the landscape contractor was entitled to nothing for its work.
Finally, after three years of litigation, the landscape contractor persuaded the Arizona Supreme Court that it was entitled to be paid because it had "substantially complied" with the license law. The Arizona Supreme Court noted that the contractor had taken steps to have its license reinstated, that the suspension of its license was caused in part by the fault of the Arizona registrar of contractors and that the contractor had at all times maintained the bonds and insurance required by the license law.
The holding in the Aesthetic Property case is fairly narrow. The courts in Arizona still would deny recovery to a contractor or design professional that did not have the appropriate licenses unless they could fit themselves within the narrow "substantial compliance" exception.
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P. |
Obtaining advisory opinions
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In many cases, especially situations involving design-build projects (discussed in more detail below) or work in multiple disciplines, the license requirements remain unclear. In these situations, the most prudent course of action is to adopt the most conservative interpretation of the rules.
A firm also might consider obtaining an advisory opinion from the relevant board. Most boards are willing to provide written rulings on a particular licensing scenario. In fact, most boards will do so on a "no names" basis, thereby preserving the confidentiality of the firm. The most prudent way to obtain such an advisory opinion is through counsel so that the firm's name is not used.
The principal downside to such an approach is that it is time-consuming. In addition, the board may provide an overly restrictive answer. Despite these problems, obtaining an advisory opinion on a license law issue makes good sense. If the opinion is favorable, the firm may be able to undertake work it previously could not. If the advisory option is unfavorable, that information is far more useful before a project is under way.
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Q. |
Additional obligations created by license laws
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Most license laws continue to impose obligations on licensed contractors and design professionals even after the license has been obtained. Some of these regulations are obvious; others are not.
For example, the California Contractor's License Law prohibits contractors from abandoning a project or deviating from trade standards for good and workmanlike construction. (California Business and Professions Code §7107.) Every advertisement (including vehicle signs) must contain the contractor's license number. (16 California Code of Regulations §861.) Every contract with an owner must contain a statutory notice regarding licensing requirements. (California Business and Professions Code §7030.) In addition, there are notice and contract requirements for particular jobs, such as home improvement projects. (California Business and Professions Code §7150.)
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IV. |
Impediments to design-build arrangements
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One subject that demands special attention from a licensing standpoint is design-build. Although few states expressly prohibit design-build arrangements, there are substantial impediments, on both public and private projects, to such arrangements. The primary impediments to private design-build projects are created by the licensing laws. On public jobs, competitive bidding requirements also pose additional impediments to design-build.
Before addressing these impediments (as well as the means to overcome them), we want to be clear what we mean by "design-build." Although the term may have other useful definitions, for purposes of this discussion, we use "design-build" to mean a project in which one firm provides both design and construction services under a single contract with the owner. It includes EPC, or engineer-procure-construct, contracting and turnkey projects.
As discussed above, some license requirements apply when a firm enters into a contract for construction and/or design work, even if that firm intends to have other licensed firms or individuals perform the work. In particular, a large number of contractor licensing statutes define "contractor" as one who agrees to perform construction work, by itself or through others. For this reason, in order to perform design-build projects, a firm may need to have multiple licenses, including a contractor's license.
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B. |
The design-build Catch 22
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In some states, a firm that wants to perform work on a design-build basis will find itself in a Catch 22. On the one hand, the applicable statutes and regulations may require that any firm that enters into a contract to perform design or construction services first obtain a license. On the other hand, the same statutes and regulations may not permit that firm to obtain such a license. Under these circumstances, a firm would be effectively shut out from performing design-build projects.
This Catch 22 problem is greatest when a state's licensing laws require licenses for parties that enter into contracts (even if they intend to have others perform the work) and when limitations are placed on the types of business entities that may do design work. Many licensed contractors are organized as general business corporations. In some states, however, a general business corporation cannot obtain a license to perform design work; rather, such licenses are reserved for professional corporations or partnerships. Such a combination of rules effectively prohibits a large number of highly qualified contractors from performing design-build projects in such states.
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C. |
Alternate methods to comply with the license laws
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The most obvious approach to complying with the license laws is to obtain all of the appropriate licenses. Even assuming a firm has the capacity to obtain multiple, new licenses, a firm might want to avoid the expense of doing so. There are two alternate approaches that, in some states, will enable a designer/builder to execute design-build projects without obtaining all of the requisite licenses in its own name.
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1. |
Design-build by subcontract
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One alternate approach to complying with the license laws for purposes of design-build projects is to subcontract the work for which a firm does not have a license.
In many states, a licensed design professional may not enter into a design-build contract and subcontract the construction work. The reason is that the contractor license requirement in many states covers any person who enters into a contract to perform construction work. The reverse arrangement -- whereby a licensed contractor enters into a design-build contract with an owner and then subcontracts the design work to licensed design professionals -- is more commonly permissible. However, even some design professional statutes require a person who "offers" or "agrees" to perform design work to have a license.
Arizona law provides a good example. Arizona requires that any firm acting as a "contractor" have a contractor's license. (Arizona Revised Statutes §32-1101.) Arizona defines "contractor" not only as one who performs construction work but also as one who "undertakes to or offers to undertake to... by or through others" construction work. (Arizona Revised Statutes §32-1101(a)(2).) For this reason, any designer/builder must have a contractor's license in Arizona.
But, the Arizona designer/builder would be entitled to subcontract design work to licensed design professionals. Arizona defines engineering practice as "professional service or creative work requiring engineering education, training and experience...." (Arizona Revised Statutes §101(B)(9).) The definition of "architectural practice" is similar. (Arizona Revised Statutes 101(B)(3).) The definitions focus on the performance of design work. They do not define practice to include offering to provide services or the provision of services by or through others.
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2. |
Design-build by joint venture
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Another approach to complying with the license requirements while undertaking a design-build project would be to form a joint venture. Under this approach, a firm would form a joint venture with another firm that had licenses to do work for which the other did not. For example, a contractor would joint venture with an architect. The joint venture then would enter into contracts to provide design-build services.
In most states, the joint venture itself must obtain any license that a firm otherwise would need. For this reason, the joint venture approach provides an advantage only if forming the joint venture makes it easier for a firm to satisfy a particular license requirement.
In New Mexico, for instance, the joint venture approach would provide no assistance in obtaining licenses. In that state, a joint venture may not bid on or enter into a contract to perform construction work unless it first obtains a contractor's license in the appropriate classification. (14 New Mexico Administrative Code §6.3.8.10.A, C.) In order to obtain such a license, each joint venturer must hold a New Mexico contractor's license in some classification. (14 New Mexico Administrative Code §6.3.8.10.B).
In other states, however, the joint venture approach does assist in obtaining the licenses needed to perform design-build projects. For instance, in Arizona the same individual may serve as the "qualifying party" for both a joint venture and a general contractor that is a member of the joint venture. Thus, if a firm did not have a contractor's license, it could locate a joint venturer that did have such a license and thereby streamline the process for obtaining such a license.
If pursuing the joint venture approach, a firm must be attentive to limitations on the number of entities for which one person may serve as the "qualifying party." In Arizona, for instance, the same individual may serve as the "qualifying party" for two contractors provided that the individual is a regular employee of both contractors and there is a common ownership of at least 25% of each. (Arizona Revised Statutes §32-1127.)
In California, the limitations are different, depending on the type of qualifier. California's Contractor's License Law recognizes three types of qualifiers, responsible managing employees, responsible managing officers and general partners. The same individual may not serve as the responsible managing employee for more than one active licensee at a time. (16 California Code of Regulations §823.) However, if the qualifying individual is a responsible managing officer or a general partner, he or she may serve as the qualifying individual for an active joint venture and an active contractor that is one of the joint venturers. The contractor/joint venturer must be at least a 20 percent owner of the joint venture and the individual may serve in this capacity for no more than three licensees in any one year. (California Business and Professions Code §§7068 (f), 7068.1.)
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D. |
Design-build in New Mexico
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Design-build is available in New Mexico. But, a firm must comply with a series of licensing requirements to perform such projects.
The firm must obtain a contractor's license in its own name. The firm also must have licensed architects or engineers who are either employees (if the firm is a corporation) or partners (if the firm is a partnership).
If the firm is a corporation, the corporation also would have to ensure that New Mexico-licensed design professionals in its employ (architect and/or engineer, depending on the design work) who have the authority to bind the corporation by contract are in responsible charge of the design activities of the corporation. The corporation also would have to ensure that all design work is performed, signed and sealed by a New Mexico licensed designer. Regardless of the type of work, the corporation would have to have the appropriate person on staff before entering into the design-build contract.
If the firm is a partnership, the partnership also would have to ensure that the design work is performed, signed and sealed by a New Mexico licensed designer.
These rules are discussed in more detail in the next two sections.
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1. |
New Mexico's contractor's license requirement
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In New Mexico, "[n]o person shall act as a contractor without a license issued by the [New Mexico Construction Industries] division classified to cover the type of work to be undertaken." (New Mexico Statutes Annotated §60-13-12(A).) The New Mexico license law defines "contractor" as "any person who undertakes, offers to undertake by bid or other means or purports to have the capacity to undertake, by himself or through others, contracting. Contracting includes but is not limited to constructing, altering, repairing, installing or demolishing any... building, stadium or other structure..., air conditioning, conduit, heating or other similar mechanical works..., electrical wiring, plumbing or plumbing fixture..., gas appliances or water conditioners...[and] includes a construction manager who coordinates and manages the building process; who is a member of the construction team with the owner, architect, engineer and other consultants required for the building project; and who utilizes his skill and knowledge of general contracting to develop schedules, prepare project construction estimates, study labor conditions and advise concerning construction...." (New Mexico Statutes Annotated 1978 §60-13-3(A), (C).)
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2. |
New Mexico's architect's and engineer's license requirements
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New Mexico does not issue licenses to business entities for either architecture or engineering. If a business entity is deemed to be "practicing architecture" or "practicing engineering," then in addition to observing other requirements, it must have licensed architects or engineers who are either employees (in the case of a corporation) or partners (in the case of a partnership) of the firm.
Under both the architect's and engineer's license laws of New Mexico, a person who practices or offers to practice architecture or engineering must have the appropriate license. (New Mexico Statutes Annotated §§61-23-2 [engineers], 61-15-2(F) [architects].) In light of the "offers to practice" language, a firm that undertakes a design-build project in New Mexico may be deemed to be practicing architecture or engineering even if it intends to subcontract design services to licensed design professionals.
A corporation in New Mexico may provide design services provided that one of its employees is a New Mexico-registered design professional, is the person "in responsible charge of the activities of the... corporation" and "has the authority to bind the... corporation by contract...." The corporation also must ensure that "all plans, designs, drawings, specifications or reports that are involved in such practice... bear the seal and signature" of a New Mexico licensed designer (who need not be an employee of the corporation) directly responsible for the work when issued. (New Mexico Statutes Annotated §§61-23-21(B) [engineers], 61-15-6(H) [architects].)
A partnership in New Mexico may provide design services provided that at least one of the partners is a licensed design professional. The partnership also must ensure that "all plans, designs, drawings, specifications or reports that are involved in such practice... bear the seal and signature" of a New Mexico licensed designer (who need not be a partner or employee of the firm) directly responsible for the work when issued. (New Mexico Statutes Annotated §§61-23-21(B) [engineers], 61-15-6(G) [architects].)
Regardless of the type of work, the firm would have to have the appropriate person on staff before entering into the design-build contract because "[h]iring persons qualified to do the work only after the work has been solicited or obtained shall be in violation of these... rules and regulations." (16 New Mexico Administrative Code §39.3.11.2.)
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E. |
California's treatment of design-build
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Firms that want to undertake design-build projects in California also must go through a multi-step analysis to be sure they are complying with the license laws.
The starting point for the analysis is California's contractor's license law that requires any firm that enters into a construction contract to have a contractor's license. The more involved question is whether a design-builder must have a design professional license.
California treats civil engineering differently than electrical and mechanical in this regard. If a licensed contractor wanted to undertake electrical and mechanical engineering work, it would need only ensure that the services are performed by registered professional engineers in the appropriate disciplines who are either employees or subconsultants. (California Business and Professions Code §§6737.3, 6738(a).)
However, if that contractor wanted to undertake civil engineering work, the contractor would have to designate a registered professional engineer as the "officer in charge" of the engineering practice of the business and ensure that the engineering services are performed by registered professional engineers in the appropriate disciplines. (California Business and Professions Code §§6738 (a), 6736; Bellwood Discount Corp. v. Empire Steel Buildings Co., 175 Cal.App.2d 432, 436-437, 346 P.2d 467 (1959).)
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F. |
Limitations on public jobs
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On public jobs, the impediments to design-build not only are licensing but also
competitive bidding requirements. The subject of public bidding is beyond the
scope of this article. However, it is worth noting that some states have begun
to authorize public design-build projects. It also is worth noting that some
states, such as Nevada and New Mexico, prohibit a contractor from submitting
a bid on a public project unless the contractor is duly licensed to perform all
of the work on the project. (BC & L Pavement Services, Inc. v. Higgins, 132
N.M. 490, 51 P.3d 533, 541-542 (N.M.App. 2002); Bud Mahas Construction,
Inc. v. Clark County School District, 767 F.Supp. 1045, 1048 (D. Nev. 1991).)
The effect of this requirement is that the contractor must become licensed in
those states before bidding on a public project rather than after the bid is
accepted and before performance has begun.
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G. |
New design-build statutes
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In 1998, the California Legislature amended the California Public Contract Code to permit the trustees of the California State University System to enter into design-build contracts. (California Public Contract Code §10708.)
In 1998, the California Legislature authorized design-build for projects to be authorized by the Legislature for state offices and other buildings. Design-build contractors are to be selected under a competitive pre-qualification process. The Legislature also permits the design-build contractor to designate the work that will be performed by design-build subcontractors. Such work is to be awarded by the design-build contractor under a competitive bidding process. The legislation is operative only until the completion of at least five design-build projects, each with a value of $10 million or more, or until January 1, 2006, whichever occurs later. (California Government Code §14661.)
Arizona has been involved in a similar effort. During the 1999-2000 session, the Arizona Legislature passed HB 2340, which authorizes design-build to be used by various public entities, including counties, cities and the Arizona Department of Transportation.
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V. |
Continuing changes in the law
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Because the licensing law of any given state is largely a product of statutes and regulations, the law can change dramatically in a short time. For this reason, it is extremely important that firms make sure they are working with the current version of the statutes and regulations.
We hope that this article will be of particular use to contractors and design professionals who are contemplating projects outside their "home" states or are considering expanding their range of activities. We also hope that the article will provide information useful to contractors or design professionals in their efforts to ensure that they are complying with license requirements.
Licensing laws sometimes can be annoying. But, the licensing laws remain on the books and typically are strictly enforced. Moreover, noncompliance carries substantial penalties. For these reasons, members of the construction industry should be sure they are in compliance with the license laws, especially before starting work on any new project or in any new location.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-369-7210 or at jralls@thelen.com, Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com, John Foust in our San Francisco office at 415-369-7205 or at jfoust@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
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