In the construction industry, getting paid is essential for project continuity and firm profitability. In times of economic uncertainty caused by COVID-19, ensuring cash flow becomes even more essential. While your firm likely understands the importance of maintaining licensure to operate, you may not look at compliance as a way to ensure cash flow and long-term stability.
We’ll discuss five key areas where your firm can leverage licensing compliance to ensure payment through every stage of the engagement, from business development to project delivery, and in the event of legal recourse.
Licensure prior to bidding
First, let’s talk about the importance of licensure at the negotiation table. Whether it’s a new prospect or your most loyal client, anyone building right now wants to move fast. Your firm’s ability to win their bid directly ties into your firm and key qualifiers being licensed prior to the opportunity surfacing.
However, industry licensing for construction firms and contractors is complex. With so many types of specialty licenses, exam requirements, complicated applications and frustratingly slow government agencies, the licensing process can take a long time. While your license application sits with the Nevada or California contractor’s board for for months, that customer might not be willing to wait.
The mitigating factor is to incorporate the license research and application process into your business development horizon. Firms should routinely review their current client portfolio, acquisition funnel over the next 12 to 18 months, and to some extent, the plans of their competitors. By analyzing this footprint, firm management can confidently estimate where opportunities might surface.
From there, legal and compliance staff can work to ensure qualifiers have taken exams and maintain individual licenses, firm license applications are filed, and that the firm can quickly source bonds, financial statements, and local permits as required. While no plan can address every possible contingency, proper preparation can help you be equipped the moment you receive an RFP.
Subcontractors must be up to date on compliance
On a given project, your firm may enter the agreement as the prime contractor and utilize subcontractors for specialty elements of the build. In many states, the pattern of required licenses roughly follows this arrangement. In other words, your firm may hold a general contractor license in a state, but each of your subcontractors will need licenses in their specialty trade or classification.
If your firm relies on an existing network of subcontractors, conduct a similar analysis of their licenses. As your firm pursues and prepares for opportunities, ensure that you can count on reliable, licensed subcontractors. These relationships are just as important to winning the bid.
If you’re in the process of vetting new subcontractors, it’s no longer enough to review their experience, safety record, equipment and overall worthiness. Using subcontractors that aren’t properly licensed not only generally puts your firm on the hook for unlicensed work, but can result in prompt payment issues between parties. As the general contractor, your firm has plenty of responsibilities, but be sure to count ensuring compliance among them.
Maintain licensure throughout the project
Any reputable firm will have the proper licenses in place when it submits its RFP, and certainly when it breaks ground on the project. Despite shifting focus to the deliverables, it’s equally important to maintain licensure of the firm, qualifying parties and subcontractors for the duration of the project.
At the local level, a lapsed license can result in not only fines and penalties but also substantial project delays. And, when there are delays on critical milestones, someone along the line isn’t getting paid.
Even costlier, failure to maintain licensure for a project can result in legal action for unlicensed activity. In Twentynine Palms v. Bardos, a California court ordered that a contractor return the entire amount paid him on the project, a sum of over $750,000. Imagine how costly such an event would be for your firm. Then, discuss how your firm can ensure proper licensure to avoid surrendering hard-earned revenues.
Effective license management
Firms that manage their own portfolio of legal entities and licenses know how complicated the process can be. Submitting complete license applications, tracking renewals and dealing with government “red tape” takes hours of qualified staff time.
Despite knowing this, many firms use disparate systems to keep track of their compliance obligations. Administrative staff may lack access to critical information about the firm or to key vendors who furnish insurance policies, financial statements or records needed to apply for a license.
Other firms further decentralize by placing the responsibility to keep up with continuing education, examinations and individual licenses on their employees themselves.
Now consider that any lapse in licensure can result in project delays, payment delays or penalties for unlicensed practice. By maintaining records and information in a centralized location and granting access to key staff (allowing for management oversight), your firm closes potential gaps in communication, and effectively allows your management to provide updates and alerts to branch offices, staff on the job and other key stakeholders. Through centralization, your firm mitigates many of the risks associated with noncompliance.
Compliance affects access to legal and remuneration channels
When parties cannot resolve disputes in the ordinary course of business, they naturally escalate to legal channels. In the construction industry, failure to maintain the proper licenses and entity registrations limits, if not completely stonewalls, access to these forms of remuneration. Here are just three examples:
When doing business in a new state, generally the first step is to register the legal entity with the secretary of state. This process is known as foreign qualification and provides important protections for your firm. Many states bar companies that have not foreign qualified from the court system.
Georgia, for instance, holds that foreign corporations may not maintain a proceeding in any court until it obtains a certificate of authority. That means a Florida firm seeking restitution for a job across the border in Georgia may not be able to pursue it until it has foreign qualified and appointed a Georgia registered agent.
In Bardos, not only was the contractor required to return all payments received, but also a precedent was set that unlicensed or improperly licensed contractors were barred from suing to recover compensation for work requiring a license.
Lastly, while every state has laws concerning mechanics liens as a form of protection from nonpayment, many make access contingent on licensure. For example, in some states like New York, unlicensed contractors are unable to file a mechanics lien.
In all of these examples, you can imagine the consequences on your firm’s cash flow and long-term viability. Yet many of the potential problems can be mitigated through prior planning and preparation for opportunities. The cost of a few hundred dollars for a license not only can result in avoidance of penalties and lost revenue in the thousands but also allows your firm to respond more quickly to opportunity.
And at a time where every competitive advantage matters, it’s time to leverage your compliance strategy for growth.
James Gilmer is a Compliance Specialist at Harbor Compliance, a leading provider of compliance solutions for companies of all types and sizes. Founded by a team of government licensing specialists and technology trailblazers, Harbor Compliance has helped more than 25,000 organizations apply for, secure and maintain licensing across all industries. Gilmer is passionate about helping AEC firms and nonprofits leverage compliance for increased operational and financial success. He also works to educate the sector on compliance issues. Gilmer is a Co-Founder of Berks Sinfonietta, Inc., a nonprofit chamber orchestra located in Reading, PA.
Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.