Everywhere we look, costs are rising all around us. Labor costs, insurance costs, material costs. And for associations, business keeps moving forward. With pressure from homeowners to keep assessments low, and increased requirements being placed on associations contributing to rising costs, associations across the state are looking for ways to keep costs down. For some, this might include energy saving measures, reduced services, or putting off projects for the time being. However, some may be tempted reduce costs by contracting with the lowest bidder they can find for their projects. While this may work out on some occasions, it is imperative that associations protect themselves by using licensed, insured contractors for their projects, as well as ensuring that any contractor holds active status with the Secretary of State.
In California, contractors performing work over $500 are required to hold a valid license from the Contractors State License Board (CSLB) in whatever specialty they are performing within. But why do we care about licensing?
First and foremost: insurance coverage. An unlicensed contractor is far more likely to be uninsured or under insured. This means that if something goes wrong with the project, property is damaged, or someone is hurt, injured, or worse, the contractor may not be covered – leaving the association to foot the bill.
You may be asking yourself – this seems like an easy fix – I will just obtain a certificate of insurance from my contractor! And yes, you should always verify your contractors’ insurance – but if you have hired an unlicensed contractor, it might not do you any good. Unfortunately, most commercial policies have exclusions for working without a license, and this may still mean a claim will not be covered.
Workers’ compensation is also a huge concern when hiring unlicensed contractors. According to case law, if an association hires a contractor that is unlicensed, it becomes the employer of any injured workers, even if the contractor represented that they were licensed and insured. This could lead to large claims, and possible future special assessments for the association. While associations should always hold a workers compensation policy in case of a claim, they should do everything possible to avoid this liability. Not only could the association be held liable for workers compensation claims when hiring unlicensed contractors, according to a 2009 court case, an association could be held liable for wage and hour claims for employees of unlicensed contractors, even if they have already paid for the work.
Another concern with unlicensed contractors is that very few unlicensed contractors will hold bonds. The Contractors State License Board requires all licensed contractors to hold a $10,000 contractor’s license bond, and while this is a small amount it is one more added layer of protection for the association.
Finally, unlicensed contractors may have less expertise in their field, which can lead to subpar workmanship, which may cost the association more money in the long run.
In addition to ensuring that a contractor working on your project is licensed, the contractor’s Secretary of State status should be verified as active. This simple step can protect the association from significant fall out, in the end. On the Secretary of State website, you can easily find whether the status is “active” or “suspended.” A company can be suspended for many reasons, but most likely the company either (1) failed to file the appropriate forms with the Secretary of State, and/or (2) has been suspended by the Franchise Tax Board for a tax related issue. Why is this important?
The most important concern is that with a suspended Secretary of State status, a company cannot legally do business in the state of California. This means that any contract entered into with this business becomes both void and unenforceable. While this means the business cannot enforce the contract against the association (even for monies owed for work performed), it also means the association is not entitled to any of the protections written within the contract. This includes warranties, defense provisions, and indemnity and hold harmless provisions. Essentially, the contract has no “teeth” on either end, and is rendered useless. A simple check of the Secretary of State website can protect the association from this peril.
It is important to note that while you may be tempted to save some money by hiring unlicensed contractors or skip important steps like checking the Secretary of State website, in doing so a Board would be putting the association in a precarious position. Boards have a fiduciary duty to act in the best interest of the association, and do appropriate due diligence. Ensuring a contractor is licensed, bonded and insured falls under this duty. Furthermore, Boards have a requirement to follow the business judgement rule, which generally requires that a Board consult experts – which includes licensed and active contractors. Finally, be sure to check your governing documents, and association insurance policies, both of which may require the association only hire licensed contractors.
In summary, hiring an unlicensed contractor should not be an option for your association. For assistance with verification of contractor licensing and insurance, or review of scope of work or contracts, please contact us at firstname.lastname@example.org
Check your contractor: check the CSLB Web site, www.cslb.ca.gov, or call the Contractors State License Board at (800) 321-CSLB, to make sure the contractor is properly licensed, and the license is in good standing.
To check Secretary of State status, visit: https://bizfileonline.sos.ca.gov/search/business
Project Checklist for Success
- Write a scope of work so bids are apples to apples
- Request proposals from three (3) licensed contractors
- Compare bids
- Select the vendor who meets your needs
- Submit contract to legal for review, prior to execution
- Verify contractor’s license status
- Obtain certificate of insurance and verify coverage
- If a corporation, verify status with the Secretary of State