Licensing: The Tipping Point?

Michael Hamman sat for the California licensing exam more than a quarter of a century ago, but the memory still makes him laugh — and cringe.

“I was so naïve,” chuckles the San Francisco contractor. “I stayed up and studied for days.” He assumed it would be a grueling, day-long test of his construction knowledge. He drove to Sacramento the night before to cram, then the next morning “went in and was shocked at the absurdity of the questions.”

Hamman was applying for a Class B license. As defined by the California Contractors State License Board (CSLB), Class B licensees are general building contractors whose “principal business is in connection with any structure built, being built, or to be built.” That meant that Hamman, who at the time was doing small residential remodeling jobs, “was taking the same test that contractors who build high-rises take. Yet there was only one question on concrete,” and it went something like this:

Good concrete should:
a. Stick to the shovel
b. Run off the shovel
c. Slide off the shovel

Faced with questions like that, Hamman “was out in an hour.” The licensing test was a joke, he says, with more questions about color mixing and matching than on construction methods or structural issues. “Obviously they had hired a consultant who knew nothing about construction but said, ‘Where are the complaints?'” Well, Hamman notes, “most complaints are about finish stuff.”

“This was scary,” Hamman says. The licensing exam “certainly didn't test one's ability to be a contractor.”

The real test came later, and it turned out to be one of faith rather than knowledge or ability. Because for Hamman and thousands of other licensed remodelers, it's not so much acquiring a contractor's license that's hard, although the process can take months in California. The bigger challenge for remodelers is balancing their inherent belief in an ideal based on protecting consumers and raising the professional bar with their frustration at a reality that can be administratively burdensome, prohibitively expensive, and dubiously effective.

With this dilemma in mind, REMODELING set out to explore the current state of licensing: its relevance and flaws, and a few strategies that can make it work.

Licensing is a local issue that has taken on national importance as the industry's steady march toward professional legitimacy is beset by incidents that the media love to sensationalize — “Is a rogue contractor eyeing your house? Story at 11!” — and law-abiding remodelers recognize as a growing problem. Eighty percent of respondents in the REMODELING Reader Panel survey say licensing should be mandatory for remodelers.

Vince Butler, a Virginia remodeler and vice chairman of the National Association of Home Builder's Remodelors Council, considers licensing “sort of the baseline. You're either above it or below it.” And for those who fall below, “there's going to be a whole slew of other things” beyond legal requirements that fall by the wayside, such as following code, treating employees fairly, and being accountable for problems.

A major factor behind recent licensing activity is fraud in the aftermath of big storms. Several states and jurisdictions have created or toughened legislation partly in response to hurricanes, tornadoes, and other storms that have torn off roofs, flooded basements, and otherwise made homeowners vulnerable to unaccountable operators.

Another impetus is transient contractors vying to cash in on the building boom. Idaho passed the Contractor Registration Act in March at the behest of established remodelers like Bill Keilty of Boise. “Most of us are tired of putting time and effort into bidding on a project, only to have some guy come in and undercut you so severely that there's no way you can compete on cost,” Keilty explains. Without some form of regulation, there's absolutely nothing to stop any “truck-and-dog contractor” — a characterization cited by several people we spoke to — from calling himself a remodeler.

Keilty welcomes the new law as a great first step toward undoing Idaho's reputation as a safe haven for contractors who are banned from doing business in other states. Yet he and others acknowledge there's no panacea for a problem that is as entrenched as the underground economy itself. “Everybody agrees that one cannot legislate against those who are full-bent to do havoc,” says Kendall Buck, executive director of New Hampshire's Home Builders & Remodelers Association (HBRA).

California may be an extreme example of licensing ambition overshooting its reach, but its struggles underscore some weaknesses that seem to pervade licensing programs everywhere. That is, unless licensing laws are thoughtfully crafted and rigorously enforced, they sometimes seem to have the inverse effect of actually pushing more people under the radar of legality.

For instance, one of Hamman's beefs with the state's licensing laws “is that they've simply devolved into a system of collecting money for the state,” he says. The problem isn't the $200 a year he pays to renew his license, but the overhead expenses that come with compliance, including liability insurance, payroll taxes, and workers' compensation insurance, which in California is among the highest in the country. Throw in record keeping and safety training, along with additional requirements at the local level, “and operating perfectly legally at least doubles our labor costs,” Hamman adds.

Other compliance requirements are just impractical. The California CSLB churns out “voluminous rules” that “specify things like the size of type on contracts,” Hamman says. Paul Berning, a construction lawyer with Thelen Reid & Priest, says such rules are so obtuse that when a client hired him to write a “user-friendly” contract, Berning needed 10 typewritten pages — single-spaced — to get through all the required disclosures. The client “took a look at the thing and said, ‘My God. I'll never get a customer to sign it.'”

Nor are licensing laws necessarily relevant to remodelers. The CSLB handles more than 20,000 construction-related complaints each year, says an agency spokesperson, and a good percentage of the complaints are related to residential remodeling. Yet the agency has no remodelers on its 15-member board, which consists mainly of political appointees. “All the contractor and business seats are taken by large union contractors who do large commercial projects,” says Hamman, who is working with California NARI chapters to create an additional seat for small remodeling contractors. What's more, California considers remodelers a subset of building contractors rather than a specific business class. (So does the Internal Revenue Service.) “Our interests and concerns are different,” he adds.

Finally, the cash-strapped state has weakened licensing enforcement. Data supplied by the CSLB show the agency has lost 20% of authorized staff positions since 2000, and has experienced a high vacancy rate thanks to a multibillion-dollar budget shortfall and hiring freeze. “If you don't enforce the laws, you're going to have a lot of people who ignore them,” says Hamman. “Then you create an unfair burden on the people who do play by the laws. [No wonder] the majority of the residential remodeling work done in the state is done by unlicensed contractors.”

Licensing will always be an imperfect science, but hope is on the horizon. A number of jurisdictions are enacting or considering licensing — many for the first time — and they're employing tactics to overcome resistance and make their laws meaningful. Here's a look at developments taking shape.

•Compromise on registration. Licensing's opponents range from one-man handyman businesses claiming compliance would bankrupt them to big home builders concerned it will inflate subcontractors' prices. States such as Idaho and New Jersey have found workable compromises in registration laws, which let jurisdictions track and, if necessary, pursue contractors but tend to have fewer testing or financial requirements than licensing.

Idaho's law, which takes effect next January, mandates having $300,000 worth of liability insurance and paying no more than $150 per year into a fund to cover administrative and enforcement costs. The state can also pursue contractors who flee to other states that have licensing or registration laws.

On the other hand, the New Hampshire HBRA recently helped defeat a contractor registration bill on the grounds that it lacked educational and testing components. As an alternative, the group is attempting to develop “an inclusive and comprehensive licensing program,” according to HBRA's Buck.

•Fight fire with verbal gymnastics. After years of failing to squeeze a licensing bill past the powerful Pennsylvania Builders Association, Pennsylvania remodelers this spring finally got the bill before the legislature for a vote, which is expected sometime this year.

Factors integral to this development were repackaging the licensing bill as a registration bill and changing its name from “The Home Improvement Act” to “The Home Improvement Consumer Protection Act.” Mark Kinsey, an insurance broker and NARI member who lobbied to make the bill a reality, explains: “You don't want to keep going back to ‘contractors, tradesmen.' You want to keep going back to the gist of what the bill is intended to do” — protect consumers. “You need to make that crystal clear to legislators.”

•Find a consumer-oriented ally. Pennsylvania remodelers also teamed up with AARP. Not only are seniors frequent targets of shoddy contractors, but “they've got time on their hands, and they act,” Kinsey says. The mere invocation of this powerful name and mighty voting bloc helped convince state legislators that they needed to take the bill seriously, he says.

New Orleans remodelers leveraged similar clout by enlisting the local Better Business Bureau in pushing for a city law mandating registration for projects worth $7,500 or more. Builders wanted the threshold set at $50,000, says remodeler Toni Wendell of Olde World Builders & Remodelers. “They said we'd never get this, but we fought and got it.”

•Make testing relevant. Licensing exams may generate some scorn, but not in Roswell, Ga. As of last September, the city of 80,000 gives building permits only to licensed contractors who have passed either the exam of the International Code Council (ICC) or the testing component of NARI's Certified Remodeler (CR) designation.

“The whole point is to ensure that the permit applicant has some knowledge of the code requirements,” says Allan Amick, Roswell's chief building inspector. Both the ICC test and the NARI test “far exceed the simple code knowledge that's required.”

The Roswell licensing process stands out in other ways. Inspectors are licensed, mitigating arbitrariness or favoritism. Roswell charges no licensing fees; all money changes hands through ICC or NARI. Convenience and efficiency are additional factors. ICC tests, for example, can be taken at any of more than 1,000 testing centers in airports and other public sites. Roswell also recognizes reciprocity for contractors who are licensed in other states.

NARI leaders have said they would like to see the organization's CR designation be the basis for licensing education requirements in additional states that have licensing.

•Put teeth in the laws. Arizona has had licensing laws for decades, but they did little deterring until about 18 months ago when the state's licensing agency, the Registrar of Contractors (ROC), launched a crack-down. Components include undercover sting operations at “bait houses,” unannounced neighborhood sweeps, and a homeowner education effort called the Neighborhood Ambassador Program.

“We could continue to do business as usual and work on complaint-driven cases, or make an impact by making people aware that we might be there,” explains Israel Torres, ROC director. Enforcers can't be everywhere, so “we're trying to blanket the state with uncertainty.” ROC also offers classes to help contractors get licensed. “We want to take away all the excuses” for not being licensed, Torres adds.

Arizona's program protects trade contractors as well, says Rick Cornish, a remodeler who specializes in windows, skylights, and doors. Before subcontracting to a company, he can check its licensing at the ROC Web site. If it's not listed, he doesn't work for them. If it is and they don't pay him, “I can file a complaint with the Registrar and go after their bond,” Cornish says.

•Share the burden with consumers. Legislators enact laws, lawmakers make arrests, and reputable remodelers play by the rules, but only homeowners hire remodelers. This has been a big part of the problem, says Berning, who notes two main reasons. First, “Lots of customers probably don't give a hoot whether somebody is licensed” if they can get a better price elsewhere, he says. Second, is simply that “a lot of naïve, unsophisticated people are easily cheated.” To that end, Arizona's Neighborhood Ambassador Program invites neighborhood groups and homeowners associations to attend quarterly “academies” that provide “a more detailed account of things to look out for, the most common types of scams,” Torres says.

Press releases and other efforts have furthered the message, a critical element of which is the fact that, similar to other states, homeowners in Arizona who use unlicensed contractors forfeit their ability to collect from the state Recovery Fund.

To its credit, California's licensing program has a few teeth of its own. For instance, the CSLB's fraud team conducts stings that slap first-time offenders with up to six months in prison and a $1,000 fine. And several public education programs warn homeowners not to hire unlicensed contractors. The efforts have promise, according to David Kalb, whose company, Capitol Services, helps contractors navigate licensing laws. After the recent fires and floods in Southern California, the state rapidly dispatched officials to warn homeowners not to hire the transient workers who “show up after every natural calamity.” There were no complaints, so presumably few or no abuses. Given California's long history as a bellwether state, this could be the start of something big.

At least 34 states require some licensing or registration of remodeling contractors. Within the holdout states, there are cities, counties, and townships with licensing laws.

Licensing laws vary widely but generally require a company to have liability insurance and workers' compensation insurance, and to be bonded or to pay in to a recovery fund. The licensee (typically one person holds the license for the company) must also pass an exam covering aspects of the law and building trades.

Beyond the basics, licensing and registration laws vary widely, from how jurisdictions classify remodelers (home improvement companies, general building contractors, residential contractors, etc.) to how aggressively they pursue and prosecute unlicensed contractors. Other variables include fees associated with licensing, the size of jobs that require licenses (from as little as $300 to $30,000-plus), experience and/or education requirements, reciprocity and grandfathering policies, handyman exemptions, criminal background checks, and proof of certifying documents such as credit reports, trade name registration, and articles of incorporation. States may have one licensing category or dozens.

Sources of additional information include What Every Contractor Should Know, a new book by David Kalb (order from www.cutredtape.com). It's specific to California, Nevada, and Arizona but gives a helpful overview of general licensing issues. The National Contractor License Service (www.clsi .com) and Contractor's License Reference Site (www.contractors-license.org) track current state licensing law and provide links to state licensing agencies.

The two national organizations for professional remodelers, the Remodelors Council of the NAHB and the National Association of the Remodeling Industry (NARI), believe that licensing is a decision best left to the individual states. Even so, last fall NARI adopted a policy position supporting “the licensing of general contractors provided that laws and regulations are fair and equitable for all contractors. Licensing can and should encourage ethical conduct and the demonstration of good business practices and professionalism.”