The High Price of Proceeding without a License

Construction and Procurement Newsletter Q1 2014

Firm Alert

Author(s)

Most contractors know that they need a license prior to execution of a construction contract. But in many states, the time to obtain a license begins long before execution. In Florida, for example, not only must a contractor be licensed to submit a bid, a contractor must also be licensed in order to represent its ability to perform services for which a license is required.

This license requirement often includes a requirement – as in Florida – that contractors list their license numbers on all advertising, including websites and social media pages. California also requires license numbers to be displayed on all advertising (even specifying the size of the letters for certain contractors) and to be disclosed on bid documents as well. Because the lead time to obtain a license in a new jurisdiction may be significant – including, if necessary, an examination and board review of the entity’s financial statements – contractors should apply for a license as soon as the contractor anticipates an opportunity in a new jurisdiction.

Nationwide, states appear to be trending toward tougher licensing laws and enforcement. Even states that have not traditionally required licenses, such as Georgia, have either instituted license requirements or are considering doing so. Many license boards conduct undercover or “sting” operations to identify businesses or individuals operating without a proper license, and almost all license boards provide public hotline information for reporting activity of an unlicensed contractor. The penalties for violation of license laws range from civil penalties (generally, a fine assessed per violation, or the inability to recover payment for work performed without a license – often known as “disgorgement”) to criminal penalties (in some states, violation of licensing laws is a felony). The Tennessee Code, for example, states that an individual who unlawfully represents himself as a licensed contractor has committed an unfair and deceptive trade practice. The Florida statutes also provide an unfair trade practice action for unlicensed activity – an action which may be initiated by state attorneys, the Office of the Attorney General, or by a private party.

This increased attention to license compliance extends both to initial licenses and renewal of licenses. Some states still allow reinstatement grace periods after a license expires, although most also require additional information and payment in order to reinstate a license, which is at the discretion of the licensing board. Increasingly, reinstatements are not retroactive.

Given the significant penalties – both commercially and criminally – of license law violations, the decision to proceed into a new jurisdiction or with a bid submission prior to obtaining a contractor’s license may ultimately cost more than any benefit. Contractors should be wary of engaging in business in a state prior to obtaining a contractor’s license. Often, the decision is a commercial one based on the costs to obtain a license weighed against the likelihood of being awarded a project – but the risk of proceeding without a license is too great to ignore.

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