Look Before You Leap: Legal Considerations For Contractors Pursuing Work In A New State

With ever-changing market trends in construction — think the Las Vegas boom in the early 2000’s and data centers now — contractors pursue work where it is available, even if that means traveling to a state in which they have never worked before. But as the adage goes: “act in haste, repent in leisure.” Before packing the suitcase and gassing up the truck, contractors first need to understand (i) how the laws of a new state might affect their ability to pursue work in the first place, and (ii) how those laws impact the administration of the work once obtained.

State Licensing Requirements

The first thing to determine before pursuing work in a new state is whether a state contractor’s license will be required in order to do so, since even the act of submitting a bid or soliciting work may require a license. Licensing requirements vary significantly. Some states require licenses at the state level, while others require licenses from the local municipality in which the work is performed. Some states require general contractors to be licensed, while others may limit licensing requirements to specialty trades (e.g., MEP contractors). Still others may draw even finer distinctions as to the type of license classification within a specialty trade.

Most states administer licensing through some form of contractors licensing board that typically has broad regulatory powers. Penalties for working without a license can be significant, ranging from being barred from pursuing further work, to being precluded from recovering payment for work performed, to being subject to criminal charges that could lead to fines and possible imprisonment.

Understanding the licensing process and starting early is critical. Exams are often required and typically consist of a “trade exam” focusing on the skills expected for a particular trade classification, and a “business and law” test. The individual taking the exam usually has to meet specified requirements of a “qualifying party” for the business entity seeking the license. Application forms can be intrusive, requiring information on corporate officers and shareholders, company finances, and background checks. A bond or other form of financial guarantee is usually required as is adequate workers compensation and liability insurance.

Prompt Pay Statutes

Just like licensing statutes, many states have prompt pay statutes governing the flow of project funds.  Some states limit the application of prompt pay statutes to public projects only, while others apply them to both public and private projects. Although the specifics vary from state to state, prompt pay statutes typically address some combination of the following: (i) the timing requirements for payment by the owner to the contractor and the contractor to its lower tiers; (ii) permissible retainage amounts and triggers/timing for release; (iii) interest penalties for untimely payment; and (iv) the right to stop work if payments are not timely received.

Before embarking on work in a new state, verifying the existence and becoming familiar with the application of prompt pay statutes will not only help shield a contractor against penalties for untimely payments to its lower tiers, but arm the contractor with rights and remedies against slow-paying owners.

Lien Laws/Waiver Forms

Lien claims on private projects provide the most common enforcement mechanism for contractors to get paid. However, no two states have identical lien laws, which are highly technical in nature and where missteps could wipe out lien rights. While common threads run through most state statutory schemes regarding notice requirements and filing deadlines, the devil is truly in the details with respect to the steps needed to perfect lien rights, where requirements can also vary depending on how far removed the potential lien claimant is from the project owner or general contractor.

In addition to specifying the process for perfecting liens, many state statutes address related topics such as the enforceability of contract clauses requiring advanced waiver of lien rights, the enforceability of unconditional lien waivers absent actual payment of amounts reflected in the waiver, and acceptable forms of the lien waivers themselves. The point is that there are wide variations in the lien laws of all fifty states and those requirements should be understood before the work begins in order to preserve lien rights.

Variations in the Enforceability of Common Risk-Shifting Contract Clauses

In addition to the foregoing, the enforceability of various contractual risk-shifting clauses often vary from state to state. A few of the more common clauses subject to differing interpretations and applications include:

Indemnity and State “Anti-Indemnity” Statutes. Most, if not all, states have statutes banning indemnity provisions in construction contracts that shift liability for personal injury or property damage resulting from an indemnitee’s sole negligence to an indemnitor, deeming such clauses a violation of public policy. Yet, many state statutes do not stop there, also voiding any contractual indemnity clause obligating indemnification beyond the extent of the indemnitor’s own negligence. Application of these anti-indemnity statutes are wide ranging, depending on the type of project (public or private) and the scope of the obligation (comparative fault versus something more). The key is to compare the state law requirements with the indemnity clauses in the applicable prime contract and subcontracts to confirm compliance.

Pay-If-Paid Provisions. The enforceability of a pay-if-paid clause, if not otherwise expressly prohibited by state statute (including conflicts with prompt pay statutes and mechanics lien statutes), often hinges on compliance with certain “magic language” as prescribed in state court decisions. Therefore, before assuming that owner non-payment entitles a contractor to rely on its pay-if-paid clause as a basis for not paying its lower tiers, confirm that the clause complies with both statutory and common law legal requirements for enforcement. This is particularly important where the state’s prompt pay act imposes significant interest penalties tied to late payment of amounts otherwise deemed due and owing.

Choice of Law and Venue. Many contracts include provisions dictating which state’s law will apply to contract interpretations and where disputes will be resolved. Many states have construction-specific statutes voiding such choice-of-law and/or choice-of-venue provisions if the applicable law and location of dispute resolution are not tied to the state in which the project is located. This can be of particular significance when contract provisions such as indemnity are drafted to comply with the laws of the state identified in the contract, but those provisions are unenforceable under the laws of the state in which the project is located.

State Labor and Safety Laws

Labor Unions. When starting business in a new state, become familiar with applicable employment and labor laws.  Given the prevalence of union trades in the construction industry, whether a given state is a “Right to Work” state or a union-friendly state can make a huge difference in labor costs and availability, as well as adding complexity to project administration for things such as two-gate access.  Use and frequency of mandated project labor agreements (“PLA’s”) can also vary by state.

Safety and Hazardous Materials Laws. Project site safety is, of course, a primary concern for owners, contractors, and subcontractors. But these laws, too, can vary by state.  The federal OSHA and EPA laws apply to establish minimum or base standard requirements for ensuring worker safety and for handling hazardous materials.  But in many states, foremost California, state-specific safety regulations have been established that are stricter than those permitted under federal regulations and are enforced at the state level. Likewise, at least in terms of hazardous materials, many states impose additional insurance requirements with respect to the use of such materials.

While the foregoing lists some of the more common legal issues that tend to vary by state, that list is not exclusive. The bottom line is that while the ability to travel out of state to pursue work helps maintain a full backlog, the decision to venture into unfamiliar territory should not be made lightly. It involves thoughtful planning not only of the work itself, but of compliance with applicable regulatory schemes and legal requirements that may be starkly different from those to which a contractor has grown accustomed while working on its “home turf.” Fortunately, assistance is readily available. Many states have websites providing access to regulatory resources and instructional materials to help navigate these issues; national trade organizations such as the Associated Builders and Contractors (ABC) and Associated General Contractors (AGC) can also provide useful information and assistance; and there is a whole industry that has grown up around assisting contractors through the licensing and legal compliance process. When in doubt, contractors should seek legal advice from reliable counsel before leaping into uncharted territory.