Unlicensed Contracting is a Costly Mistake!

Unlicensed Contracting is a Costly Mistake!

Oftentimes when there are claims involving quality of construction, non-payment of subcontractors or suppliers, or payments due to a general contractor for money due from an owner, issues of licensure suddenly appear. Whether or not a general contractor and certain types or classes of subcontractors are properly licensed can have a dramatic effect on the outcome of a claim.

North Carolina requires that any person or firm or corporation who for a fixed price, commission, fee, or wage, undertakes to bid upon or to construct or who undertakes to superintend or manage, the construction of any building, highway, public utilities, grading or any improvement or structure where the cost of the undertaking is $30,000 or more, or undertakes to erect a North Carolina labeled manufactured modular building meeting the North Carolina State Building Code, shall be deemed to be a “general contractor” engaged in the business of general contracting. Any person or business that falls within this definition is required to be validly licensed with the North Carolina Licensing Board for General Contractors (“Board”), with a few exceptions. Some of the exceptions are federal projects, erecting industrial equipment, power plant equipment, radial brick chimneys, monuments, and most often claimed, when the person or firm when the building is intended solely for occupancy by that person and his family or firm after completion.  However, if the building is not occupied in that scenario for at least 12 months following completion, there is a presumption that there was not the requisite intent. In addition to having a license, the Board has created three levels or tiers of General Contractor, based on the contractor furnishing proof of financial responsibility on an annual basis. The Board issues a limited, intermediate, or unlimited license according to a company’s working capital, with a maximum cost per project of less than $500,000, less than $1,000,000, and no limit, respectively. Completing a project for more than the respective amount allowed under a licensed contractor’s tier, results in almost the same sanction as being unlicensed.

There are many nuances and fact situations that can affect the outcome when licensing is an issue.  For instance, although a general contractor always has a choice of performing the entire scope of a contract, in many cases they hire numerous subcontractors.  This will not affect the $30,000 calculation. Although several trade subcontractors are also required to be licensed by trade boards, this will not affect the calculation.  Interestingly, if a subcontractor is working under a general contractor, and if their scope exceeds $30,000, they do not have to be licensed. However, if a subcontractor deals directly with an owner, and the subcontract exceeds $30,000, then they fall under the $30,000 or more rule and need to be licensed as a general contractor.  Also important to note, if the contract later includes change orders that increase the total price above $30,000, it is considered to be a contract of $30,000 or more.

The sanction for the person or firm that enters into a contract without being properly licensed is to have the contract considered void.  Thus the unlicensed contractor cannot enforce the terms of the contract, meaning the contractor cannot compel the owner to make payment.  This is a harsh result, but the courts place a high burden on the contractor, in order to protect public safety. It is necessary for the contractor to be licensed at the time of the bid, and to maintain their licenses throughout. Entering into a contract with a contractor that is not properly licensed creates issues for all parties involved and can result in outcomes that no one can predict, so be cautioned that it should be avoided “at all costs”!

–  Paul A. Sheridan