Thinking of setting down a new flag? What must a contractor know when expanding to a new region?

By: Shoshana E. Rothman, Partner, Smith, Currie & Hancock, LLP.

During periods of growth and diversification, contractors often look to new geographic regions as part of their strategic business development. When expanding to a new region, contractors must examine several risk and operational considerations before setting down that flag and opening a shop. It serves contractors well to establish their own internal checklist to account for licensing, requirements, regulations, tax implications, market conditions, and personnel adjustments before breaking ground on business. Even relocating to another city within the same state may present unique changes. Thus, knowing what to include on that checklist allows contractors to hit the ground running and focus on building their portfolio rather than becoming mired in bureaucratic red tape or worse.

With any expansion, contractors should first complete their business registration and proper licensure with states and local governments. Many states require construction companies to obtain separate contracting licenses before performing any construction in a new state. Some states even require licensure before bidding on work. Contractors must therefore verify the laws and regulations of the jurisdiction before engaging in any business in that new locale.

Expanding to a new geographic region may also raise concerns and considerations for the home office and human resources. Contractors need to know the specific laws of a new jurisdiction, and that is when legal counsel can help guide contractors through a maze of state and local compliance requirements. For example, wage and hour laws differ by state, and although many states simply defer to the federal Fair Labor Standards Act, some states have their own requirements. Additionally, specific to the construction industry, some jurisdictions have evolved their laws to hold general contractors liable for subcontractors’ violations of statutory payment obligations. States also vary in the classification of workers as employees versus independent contractors, resulting in different withholding tax consequences. The misclassification of employees denies individuals access to critical benefits and may result in lost tax revenue, state unemployment insurance, and workers’ compensation funds. For these reasons, legal counsel is essential for navigating the various laws and practices to ensure contractors’ smooth and successful expansion.

When going through an expansion to a new region, it is always important to take a hard look at the operations, but regardless of the business, some of the top practical items to consider include:

• Required licenses or permits, including the application process.

• Adequate coverage by insurance policies for the work to be performed in the new region.

• Bonding rights and obligations for the new jurisdiction.

• Lien or claim rights for the jurisdiction, including any lien notice requirements.

• Evaluation of any special risks or required changes to any contract forms or documentation systems, such as ensuring the general contractor’s standard subcontracts and purchase order forms comply with local laws and whether uniform documents can be used across projects.

• The availability of skilled local labor and any requirements or preferences for the local labor force, such as any quotas for minority businesses, small businesses, or women-owned business enterprises.

• Whether the local labor available is predominantly union or non-union.

• Requirements for project labor agreements for the work.

• Market conditions.

• Availability of local sources for materials and equipment and material lead times.

• State and local tax considerations.

• Local or required labor rates and fringe benefits.

• Identifying any unusual business or political circumstances which may affect the business, including any social issues at the forefront of the jurisdiction.

• Compliance with foreign corporation registration requirements, including regulations for establishing an office or registered agent in a new state.

• Specific environmental permits or considerations for the work.

• Requirements for vehicle or equipment leases.

• Concerns for any joint ventures.

• The culture of the new locale and any “inside baseball” on project stakeholders in the new region.

While this list is not all-inclusive, it can be a useful starting point for a contractor’s internal discussions on whether to proceed with an expansion to a new geographic region.

Finally, it is imperative to consider personnel during any period of growth. A contractor’s personnel are its biggest asset, and with any corporate expansion, a contractor must ensure that key talent is retained and not lost to the war on talent. The best laid out plan for a contractor’s business development will fail if the company does not have the skilled manpower to support the growth. A contractor’s expansion plans should therefore consider incentives to retain talent and guarantee sufficient onboarding of new personnel.

While traditionally monetary incentives are often used by contractors to keep talent engaged, companies across the nation are now finding non-monetary support to be an attractive motivation for the retention of personnel. Contractors can offer mentoring programs, promotions, tools to manage workload, and an energizing work environment. Some contractors invest in employee education, expanding trades to self-perform, and investing in technology.

Construction companies are also investing in diversity, equity, and inclusion by rethinking recruiting processes and implementing practices and policies to better support employees of diverse backgrounds. Contractors are encouraged to create inclusive job postings, involve diverse employees in the hiring process, provide networking and support, and offer opportunities for growth. The AGC’s Culture of Care initiative and its model HR policy and best practices are great resources for contractors seeking to foster a diverse, safe, welcoming, and inclusive community within the industry. Opening a new office is a great opportunity to use those tools to spread a contractor’s values across the business. 

Any change to a company’s structure comes with risk, but it can also present substantial rewards through strategic planning and development. While time and monetary investments at the outset of any expansion may seem high, ensuring compliance with legal requirements and supporting the workforce can go a long way to solidify its success. Knowledgeable construction counsel can help assist with those efforts by serving as trusted advisors when advice is needed. 

Smith Currie provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.

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.