October 6, 2020

By: Todd Heffner Associate, Jones Walker LLP.

Given the current environment, many contractors are seeking new ways to increase their business and considering expanding to new states. The laws relating to contractors in the construction industry can vary widely state by state. Therefore, this article runs through a series of items each contractor must consider before working in a new state. This is not meant to be a complete list, but highlights the importance of doing your homework before starting work in a new state.

Licenses and Registration

Licensing requirements can vary a lot by state, including variations in: which trade contractors are required to obtain a license, how different trades are defined, whether general contractor licenses are required, and whether the project size determines whether a license is required. This means that you cannot assume whether you will, or will not, need a license in a new state. Also keep in mind that licensing requirements may vary by city and county within the state—so be sure to check the local rules for where you plan to work.

The failure to obtain the proper license can come with some harsh penalties. For example, in Georgia, the failure of a contractor to obtain a general contractor’s license when required not only results in the contract becoming unenforceable by the general contractor, but also prevents the general contractor from enforcing any lien or bond remedies. The contract can, however, still be enforced against the unlicensed general contractor by the other party, which can lead to some very harsh results if a problem emerges. In contrast to Georgia, in California the penalties for not having a license include fines and even the potential for prison time. Operating without a proper license has consequences.

It is also important to learn when the license is required. Again, in Georgia, the general contractor is considered unlicensed if there is no license by the time the parties enter into the contract or the first date work begins. So while you could bid work in Georgia without a general contractor’s license, given that it can take a long time to get a license, it would be a huge risk to bid a job without one. In other states, Alabama for example, it is not even proper to submit a bid without a general contractor’s license for a project in excess of $50,000.

Related to licensing, but most often with less severe penalties, is the requirement of registering to do business in a new state. But unlike licensing, registering is more likely to apply to every class of contractor. This process is often done with the secretary of state’s office and is an important step, that if not followed can lead to fines or other problems. Simply put, a little bit of time and energy spent on determining a new state’s licensing and registration requirements before even bidding work in that state can save you from large headaches later—your attorney and the AGC have plenty of resources you need to get started with the process.

Lien laws are different everywhere

Lien laws are another issue that contractors will face that vary widely by state. For example, some states may even have lien requirements before the work starts—for that reason you simply cannot wait to learn a state’s lien laws after something has gone wrong. Louisiana, for example, requires that general contractors file a “notice of contract” before commencing work on site, otherwise the general contractor will lose all lien rights. Georgia is another state that includes various pre-work components with its lien laws that may cause lower tier contractors to lose their lien rights if the various requirements are not followed.

After you meet all the prerequisites to do work and file a lien, if you need to file a lien, the time to file a lien also varies significantly. For South Carolina and Georgia, it is 90 days. Louisiana’s deadline can be anywhere from 30 days to seven months depending on certain factors. And in Colorado it is either two months or four months depending on the contractor’s role on the project. Also, the date these deadlines run from can vary from the last day work was performed by a specific contractor to substantial completion of the entire project. Finally, even once a lien is properly filed, the time to bring a lawsuit to foreclose on the lien will vary by state as well and could be anywhere from 90 days to a whole year or more.

It’s important to note that lien laws are almost always strictly enforced and “close enough” is not good enough—lien laws must be followed exactly to protect a claimant’s rights in all but the most unusual of circumstances. You are strongly urged to contact your attorney when filing a lien, even if the state’s laws allow you to file it yourself. One misstep can result in a loss of lien rights.

Some typical contractual provisions may be unenforceable in other states

Some standard contract provisions you have in your contract may be unenforceable in another state. First, “pay-if-paid” clauses—those that condition payment to a subcontractor on the general contractor’s receipt of payment by the owner—are not enforceable in all states. California and New York prohibit their use, and in Massachusetts their use is effectively prohibited outside of some very narrow exceptions. Also, many states that do not outright prevent the use of pay-if-paid clauses still disfavor their use. The states that disfavor pay-if-paid clauses will try to convert them into contact provisions that affect the timing of payment, not whether payment is required at all. It is important, therefore, that these provisions be drafted very carefully to be effective.

Second, there may be restrictions around “pay-when-paid” clauses in certain states as well. Some states have limited them by requiring that payment still be made within a reasonable timeframe, regardless of whether the owner has paid the general contractor yet. Alabama is one such example, even if the contractor never receives payment from the owner. General contractors need to be aware of this risk when picking owners to work with.

Third, no-damages-for-delay clauses are yet another contract clause that lack universal enforcement, although they are more likely to be enforceable than the other types of clauses mentioned in this section.

Two final points on contract provisions. One, keep in mind that the enforcement of the four contract provisions mentioned above, or any provision, may depend on whether the project in question is public or private. Contracts for public projects are far more likely to restrict the use of certain provisions. And public projects may come with a host of other requirements that vary considerably by state, such as prompt payment requirements (often referred to as “Little Miller Acts”), bond requirements, and minority or small-business set-asides. Two, contracts are most often interpreted by the courts as written, but as the above examples illustrate, there are certain provisions that for various reasons may prove unenforceable. Knowing which provisions will and won’t be enforceable going into a contract negotiation can be extremely valuable.

This article is not meant to scare anyone off from working in a new state, but rather to arm you with some of the basics so that you can plan for success. If you came away from this article with one piece of knowledge, hopefully it is that a little bit of homework on the front end can save you from potentially large headaches on the back end.

The  views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.