An important and common issue for the construction clients our firm represents is the law of proper licensure for contractors and subcontractors. While all states have licensing requirements, Alabama’s are arguably among the nation’s strictest.
The state has very specific laws governing the licensure of general contractors and subcontractors. Anyone working on a construction project over a specific amount must be licensed. Otherwise, there can be virtually no collection on a mechanic’s lien or a civil judgment if the contracting client does not pay for services rendered.
What is a “contractor” in Alabama?
As an overview, “construction” is defined broadly in Alabama. To that end, per the licensing statute, anyone working on a construction project under a contract with costs exceeding $50,000 (or $5,000 for a swimming pool project) needs to be licensed with the state’s Licensing Board for General Contractors. Not having a license while working on a successfully bid project is a complete defense to any claim to collect amounts owed for work completed.
Sometimes, this is not as straightforward as it seems. For instance, many subcontractors are not aware that if they use another company, including a labor broker, for a portion of their work, that company must also have a general contractor’s license. If not, then the portion claimed to be owed for that work does not have to be paid. For anyone conceiving strategies to get around the licensing statutes through license-sharing or other loopholes, cases in Alabama impose a catchall roadblock, disallowing “creative schemes designed to circumvent its requirements.”
What are the basic requirements for licensure?
Licensure requirements are covered by Alabama Code § 34-8-2 and additional rules created by the Licensing Board for General Contractors. To briefly summarize, a general contractor must apply to the licensure board by completing the required forms and paying an application fee of $300 or a renewal fee of $200. Renewals are required annually. The forms must be accompanied by proof of liability insurance. General contractors are classified into categories based upon the most recent financial statement prepared by a certified public accountant, as well as previous experience and equipment. Contractors may not bid on a type of work not included in their request for a license. As part of the initial application process, an examination may be required by the licensure board to determine the contractor’s qualifications.
Once all of the requirements have been met, the board issues a certificate to engage in general contracting. The certificate stipulates the type or types of work the contractor is allowed to bid upon or perform and sets maximum bid limits for a single contract, which are set by the lesser of no more than ten times the net worth or ten times the working capital shown in the contractor’s latest financial statement. These types are defined this way:
A is not to exceed $100,000
B is not to exceed $250,000
C is not to exceed $500,000
D is not to exceed $1 million
E is not to exceed $3,000,000
U is for unlimited bids
Subcontractor licensure requirements also include an annual application with a $150 fee and a renewal fee of $100. However, instead of the other required documents, subcontractors are required to provide three references, which could come from general contractors, architects, or engineers.
What are some of the possible fines, punishments and repercussions for non-compliance?
Anyone found to be engaging in contractor work without the proper license or who is using an expired or revoked license, is subject to criminal penalties in the form of a Class A misdemeanor, which can carry up to a year in prison and a fine up to $6,000. Anyone found to neglect to provide a licensure number to an awarding authority can be charged with and convicted of a Class B misdemeanor. There is also potential misdemeanor liability for an awarding authority who considers and accepts a bid from an unlicensed contractor.
Anyone found to be engaging in contractor work without the proper license or who is using an expired or revoked license may be found guilty of a Class A misdemeanor, which can carry up to a year in prison and a fine up to $6,000.00. It is a Class B misdemeanor to neglect to provide the licensure number to an awarding authority. There is likewise potential misdemeanor liability for an awarding authority who considers and accepts a bid from an unlicensed contractor.
Further, a subcontractor cannot recover any amounts if it was not properly licensed. Claims relying on work from an unlicensed sub-subcontractor, including labor brokers, are not collectable even if the work has been performed. Because of this, it is important to check whether any such company providing subcontractor work or labor has a proper State of Alabama general contractor’s license. In our collective experience, most labor brokers do not.
What do the courts say? What are some potential complications and caveats under the law?
Alabama courts have routinely held that general contractors must have their license in place before bidding on a job. However, subcontractors may bid without a license if their license is current before their work on the project begins. Remember, a contractor or subcontractor’s failure to obtain proper licensing is a complete defense that ultimately leave you unpaid.
As mentioned earlier, a contractor or subcontractor’s failure to obtain proper licensing is a complete defense to any attempt he or she may make to collect a judgment or enforce a lien in a civil lawsuit for non-payment. With limited exception, it is a defense that is most often successful if raised.
Complicating matters are the rules that flow from the statute. These include Regulation 230-X-1-.26, commonly known as the “51% Rule”. The rule allows a general contractor to take a job as long as 51 percent or more of the work is in a classification in which the contractor is licensed. If no part of the work makes up 51 percent of the project, the contractor must be licensed in the type of work that comprises the largest percentage. The types of “Major Classifications” listed in Regulation 230-X-1-.27 include:
· Building Construction
· Building Construction under 4 stories
· Highways and Streets
· Municipal Utility
· Specialty Construction
The Licensing Board advises that if an applicant is not qualified for a Major Classification, it should request to be classified under one of several Subclassifications or Specialty Classifications. It is important to note that a contractor can be licensed in one specialty and still be in violation of the licensure rules if that subcontractor additionally performs work for which it is not licensed. For example, a contractor licensed in the major classification of Building Construction with a specialty in sitework may not be able to also pour concrete foundations.
There are no court rulings at this time regarding general contractors who are licensed within a Major Classification but who start a project in a specialty under that classification for which they do not have the proper license. Unless the Rules are revised and clarified, the question could be eventually decided by the Alabama Supreme Court in a way that surprises general contractors who believed they were complying with the law.
Thus, the best practice is to ensure that the contractor is licensed for any specialties that may be included in its work.
Alabama contractor licensure law can be a bit brutal, but it is generally fair and predictable. Knowledge of the legal requirements and preparation are key.
While compliance with Alabama’s laws requires an initial investment of money, time, and mental effort, proper licensure avoids far more expensive conflicts that could arise later, including a loss of remedies for breach of contract or specific performance. That is why regular, direct communication by contractors and subcontractors with the Licensing Board for General Contractors—and with seasoned construction attorneys—is strongly recommended.
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