When It Comes to Licensing, Prevention Pays

It’s always cheaper to seek preventive medical care than to wait until the last minute to go to the emergency room. Yet construction companies often end up in the licensing equivalent of the ER, paying a steep price in wasted time, higher fees and damaged performance when rushing to enter a new jurisdiction or juggling multi-state filing obligations.
The first step in establishing healthy regulatory habits is to understand the full scope of data and processes that play a role in licensing and corporate good standing. The following factors affect a contractor’s licensing fitness:
  • filings for each stage of the corporate life cycle;
  • licenses and registrations to enter new states;
  • renewals of existing licenses;
  • employment statuses of qualifying individuals;
  • registrations of branch offices; and
  • corporate information such as fictitious names on file with the secretary of state and other authorities.
Contractors are often unprepared for the fallout that can come from a gap in any of these areas. In a typical construction company, these critical aspects of compliance are spread among staff in different areas using dead-end systems like spreadsheets and calendars, despite the fact they are interrelated in ways that directly affect a company’s bottom line. 
The following preventive measures can help construction companies avoid costly errors and unexpected disruptions.
Companies must maintain good standing in every state where they are registered. This includes filing annual reports, maintaining registered agent service to receive service of process, and maintaining accurate records with state authorities. 
Yet few companies have a system in place that can:
  • track filing deadlines, including renewals;
  • identify where entities are registered;
  • alert staff of changes that must be reported to the secretary of state and licensing boards;
  • funnel critical notices to appropriate staff across the organization; and
  • provide key stakeholders with a single source of truth for all of these activities.
To close the gaps and stay in front of these ongoing responsibilities, companies should identify all filing events that will come due in a given year and create an automatic system of reminders to ensure timely attention. 
In addition, companies should identify information on record with authorities in each state and establish a formal way to alert appropriate staff when any of this information changes. 
Another area where proactivity pays is licensing for opportunities in new jurisdictions. To enter a new state, contractors must navigate a complex process that generally includes foreign qualification of the business entity through the secretary of state, sitting for exams and applying for a license through the relevant licensing board. 
The review process alone can take anywhere from two to six months, and even longer in some jurisdictions. This doesn’t even account for the time required to assemble all the required documents and prepare the application package for submission.
Because licenses must usually be in hand before offering services, contractors frequently miss out on prime opportunities because they couldn’t get the required license in time. Having to pass on millions of dollars in potential work over a license that costs a few hundred dollars is a tough pill to swallow.
To avoid those opportunity costs, companies should consider licensing proactively in jurisdictions where business development teams see potential. This is where making small investments in compliance pays off exponentially in future capabilities.
An additional proactive step firms can take to protect their bottom lines is creating a system to track license renewals. Most contractor licenses must be renewed periodically, and for multi-state contracting firms, those deadlines tend to run throughout the year. As a result, it is very easy for a renewal to slip by unnoticed. In addition to the extra fees required to reinstate a lapsed license, every day that the lapse goes undetected exposes the company to charges of unlicensed practice.
For contractors, the risks are substantial. States are aggressively enforcing licensing laws, levying fines of up to $10,000 per violation. In addition, unlicensed practice can bring citations, project disruptions, and loss of the company’s legal right to enforce contracts, liens and bonds. In many states, any instance of unlicensed practice during the course of a project may jeopardize the company’s ability to collect payment for services, even for work that was completed perfectly. That’s a major hit to the bottom line.
The final area where contractors should exercise preventive care is succession planning for qualifying individuals. Because a general contractor license is tied to the qualifier who earned it, construction companies need to have a contingency plan in case of a sudden departure. 
Once a qualifier leaves, a construction company has a short window, in some cases as little as 30 days, to appoint a replacement or risk forfeiting the company’s license. Given the licensing timelines noted above, loss of a key staff member can wreak havoc on a firm’s operations, particularly in companies where a single qualifier is licensed in numerous states.
To prevent a licensing emergency, companies should research the steps required to license a qualified replacement in every jurisdiction where they are licensed. Use that information to draw up a formal, step-by-step plan, and make sure more than one staff member understands how to deploy it. In addition, contractors should identify staff members in the talent pipeline who could step up and apply for a license if a qualifier departs.