General Contractors: Important Licensing Considerations

09/26/2018 by Ashley G. Moss

Businesses must become licensed before acting in a contractor’s capacity.  The ability to issue licenses serves an important function of protecting public safety by ensuring that contractors meet established minimum competency requirements.  When applying for licensure, important considerations include (a) where the work will be performed, (b) the type of work the contractor plans to do, (c) the size of its projects, and (d) the clients it plans to service.

Location.  Before acting as a contractor, a business must obtain a license in the location where the work is to be performed.  Each state has its own licensing requirements – most requiring state-wide licenses, some requiring municipality-specific licenses, and a few requiring both state and municipal licenses.

Type of Work.  A business desiring to become licensed must evaluate which trades it plans to perform or coordinate.   Nearly every state issues both expansive general contractor’s licenses, which encompass a variety of trade areas, and also specialized licenses.  Licenses limited to specialties are typically easier and less expensive to obtain, requiring less reference letters and more limited examinations.  The broader general contractor licenses allow room for growth and more flexibility as new job opportunities arise but are more difficult and usually more expensive to obtain with lengthy and comprehensive examinations and verifiable work experience requirements.

Size of Projects.  Most contractors’ licenses are divided into classes based on the contract price of the contractors’ projects.  The selection of a classification dictates many of the prerequisites for licensure.  For example, a state or locality typically requires information regarding the financial worth and working capital of a business before they will issue a license.  Lower classifications may simply require signed/notarized financial statements whereas upper classifications may require professionally prepared and audited financial statements.  Furthermore, upper classifications require a demonstration of higher working capital than lower classifications and may also require a contractor to maintain large (and expensive) bonds.

Clients.  The clients that a contractor expects to service can also dictate the license(s) needed.  For example, some (but not all) states require specific licenses when performing public works contracts.

A contractor must be careful to ensure that it obtains the appropriate license(s) that encompass the type and size of its anticipated work and also the clients it intends to service.  Exceeding the scope or classification of a license can be both dangerous and costly – leading to expensive penalties and possible suspensions or terminations of licenses, not to mention damage to the reputation of the business.  Planning ahead will save time, expense, and face later.

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