Chasing Out-of-state Work May Cost Unsuspecting Contractors
Many Idaho contractors are seeking work in other states as a result of the current local construction market and opportunities in other areas. Energy related construction in states like North Dakota has attracted contractors from all over the country. Although these states offer substantial business opportunities, Idaho contractors should be aware of potential problems that can arise when performing work in other states.
Typical statutory and regulatory schemes that impact contractors include licensing and registration requirements; registration requirements for foreign companies to do business in-state; insurance, bonding, and workers’ compensation requirements; sales and use tax at a state and local level; prevailing wage and local preference labor requirements; and ability to recover amounts owed pursuant to mechanic’s liens, payment bonds, and stop notices. Because these requirements vary from state-to-state, contractors should become familiar with local laws before seeking out-of-state work.
Due to its booming construction market, North Dakota provides a good example of some potential issues awaiting Idaho contractors when performing interstate work. The following differences between Idaho and North Dakota law illustrate only some of the relevant issues that exist between the laws of each state.
As with Idaho’s contractor registration requirement, North Dakota requires that all contractors working in the state obtain a contractor’s license before engaging in the business of a contractor on any project exceeding $2,000.00 in value. In Idaho, certain contractors, such as licensed electricians and plumbers, are exempt from contractor registration when engaging in their licensed trade. In contrast, North Dakota requires that licensed trade contractors obtain both a contractor’s license and their respective trade license. Additionally, North Dakota’s licensing statute provides four license categories based on contract value and contractors cannot perform work on contracts exceeding the value of the license. Idaho has no such requirement for private construction projects. Idaho contractors should be aware of these and similar technical nuances to ensure compliance with North Dakota’s licensing requirements.
The potential penalties for North Dakota’s licensing requirements also differ from Idaho. In both states, performing work without the proper registration or license may result in a misdemeanor. In North Dakota, however, engaging in work without the proper license subjects a contractor to North Dakota’s consumer protection laws. Thus, in the event of a lawsuit, failure to comply with the licensing requirements could subject a contractor to liability up to three times actual damages and the party bringing the action would be entitled to recover all attorneys’ fees and costs. Clearly, failure to comply with North Dakota’s licensing requirements could become a costly error.
In addition to contractor licensing, the differences between the lien laws in Idaho and North Dakota illustrate the need for care before expanding business outside of Idaho’s borders. These differences are both technical and substantive in nature.
Idaho and North Dakota both require that a contractor record its claim of lien within ninety (90) days after completing work. Unlike Idaho, North Dakota also requires that a contractor give the owner of real property written notice of its intent to record a lien claim at least ten (10) days before recordation. Without knowledge of this requirement, an Idaho contractor would be precluded from timely recording its claim of lien by attempting to file within the last ten (10) days. A claim of lien filed in North Dakota must also contain the dates of the contractor’s first and last day of work on the project site. This requirement is absent from Idaho’s lien statute.
In addition to technical differences between the lien laws in Idaho and North Dakota, construction lenders and property owners are afforded far greater rights under North Dakota’s laws. Unlike Idaho, a mortgage securing a construction loan in North Dakota has priority over a mechanic’s lien even when it is recorded after visible work begins on the improvement. During periods of depressed property values, this could potentially render a contractor’s lien right valueless. Further, in contrast to Idaho’s lien laws, which provide costs and attorneys’ fees to successful lien claimants, North Dakota law requires that a court award an owner costs and reasonable attorneys’ fees for successfully contesting the validity or accuracy of a lien claim.
When working in states like North Dakota, which favor the interests of lenders and owners, Idaho contractors should more aggressively negotiate contractual payment provisions, require strict compliance with such provisions, and seek further security when possible.
While these are only some of the differences between Idaho and North Dakota laws, they indicate the potential cost of performing work in other states without sufficient knowledge. Make sure you consult with your attorney and have him or her investigate the local laws pertinent to your company’s business before seeking work in another state.
(Published in the Idaho Business Review, October 2012)
Ensuring Performance In A Troubled Economy
The current economic downturn and credit crisis is causing significant problems
for the construction industry. As new projects become scarce, competition for the
limited work increases as companies seek to keep their employees working. This
sounds like a “good” deal for owners but it comes with some added risks. Owners must
balance the desire to accept the lowest bids received with the risk that the contractors
submitting those bids are under-estimating costs and may default before the project
is complete. This is also a risk to general contractors who rely upon low bids from
subcontractors desperate to get new work. As such, owners and contractors on both
public works and private construction projects must implement risk management
strategies to minimize the risk of default.
Performance bonds are almost always required for public works projects as a
way to protect the public while accepting the lowest bids through an open, competitive
bidding system. Performance bonds are agreements among and between at least
three parties: (1) the principal – the primary party who will be performing the underlying
contractual obligation; (2) the obligee – the party who is the recipient of the principal’s
obligation; and (3) the surety – the party who guarantees that the principal’s obligations
will be performed. Under these agreements, the surety guarantees to the obligee
that the principal will fully perform the underlying construction contract between the
principal and obligee. In the public works context, the obligee is the government entity,
the principal is the general contractor, and the surety is the bonding company. The
bonding company guarantees to the government entity that the contractor shall perform
in accordance with the terms and conditions of its underlying contract. If the contractor
fails to meet its obligations, the surety becomes liable to the amount of the bond.
As in the public works arena, owners and contractors can also protect private
construction projects by requiring performance bonds. The decision generally depends
on two factors: the added cost of requiring the bonds, and the financial stability of the
contractor or subcontractor submitting the bid. In times of economic hardship, the
second factor becomes more important for several reasons. First, the cost of replacing
a defaulting contractor or subcontractor is often much higher than the original bid. This
is even more pronounced when the original bid was submitted at or below the actual
cost to perform the contract. Second, the party who absorbs the cost of hiring the
replacement contractor or subcontractor may have little or no luck collecting from a
defaulting party who files for bankruptcy or closes its doors.
The increased cost on a project due to performance bond requirements is
another important factor to consider. The cost is a premium based on the amount of
the underlying contract and is adjusted as the contract amount changes. The owner
generally pays this additional cost because it passes through the contractor’s bid and
Owners typically contract only with one prime contractor on a project. They must
decide whether to incur the additional costs of requiring a performance bond to protect
against the failure of the prime contractor to fully perform the work. Prime contractors,
on the other hand, have multiple subcontracts with many different trade contractors on
each project. Thus, in addition to evaluating the financial stability of each subcontractor,
they must decide whether to incur the added cost of bonding each subcontractor or
whether to bond on certain portions of a project. At the very least, contractors should
take the time to identify which portions of a project, if abandoned by the subcontractor,
would cause the most serious financial
contract with the owner.
Owners and contractors can reduce the potential financial risk arising from a
defaulting contractor or subcontractor by requiring performance bonds on a project.
The rights arising under a performance bond may be lost, however, if the claimant
does not comply with the bond’s technical claim requirements. As claim requirements
are defined by the bond itself, owners and contractors should become familiar with
its terms and conditions. Great care must be taken in providing all required notices
to the appropriate parties in a timely manner. Additionally, bond claimants should
retain detailed documentation regarding the defaulting party for the bonding company’s
review. Finally, a lawsuit to enforce bond rights must be filed within the deadlines
established by the bond.
Hard economic times create more competition in the construction industry. Thus,
owners have the opportunity to contract for construction projects at a discount. By
understanding and preparing for the risks that accompany this increased competition,
owners and contractors can avoid turning a potential bargain into a substantial loss.
(Published in the Idaho Business Review, February 2009)