Think about licenses before working out of state

by David M. Wolfenden, CPA, CVA, MS, Managing Director

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Construction markets can turn on a dime. One new manufacturing plant or infrastructure project can transform a sluggish region into a booming economy. Problem is, these hot markets often ignite across state lines. In such cases, you may rush to commit valuable time and resources to preparing a bid. Among the many small details that could trip you up, however, is proper licensing.

Lead time required
When approaching the bid stage, it pays to think ahead if you want to snag out-of-state work. Contractors who bid across state lines and plan to put off licensing until they land their jobs may be in for an unpleasant surprise — some states allow only licensed contractors to bid on work.

Licensing requirements for bidders may depend on a project’s size. One state may require that contractors be licensed if they’re bidding on a project that’s, say, $50,000 or more, while another may set the cutoff at $25,000 or more.

The lead time required for licensing also varies widely, which can trip you up if you land a job and then want to start it quickly. Some states review license applications only during official meetings, and those meetings may be held quarterly. If your job is time-sensitive, check on the state’s licensing timetable so you don’t miss a licensing application deadline.

Details matter
Once a project is awarded and it comes to performing the work, you will find that each state has its own twist — so research the details closely. Not all states require licenses for contractors. License requirements may also vary based on the municipality where you’ll be working and the scope of work.

In some states, a license to perform work isn’t required if a job falls below a certain dollar threshold. As with bidding, the job performance threshold varies from state to state — for example, it might be only $2,000 or it might be $50,000.

Other states don’t license contractors directly but have alternative requirements that you’ll need to meet. For example, you may be required to register with the state and, once registered, apply for licenses in the specific towns or counties in that state where you’ll be working.

While you’re researching the specifics, don’t forget your subcontractors. Some states require subs to be licensed separately — even if they’re working under a general contractor’s supervision. Other states require licenses only for certain trades, such as plumbing or electrical work.

Paperwork involved
When you apply for an out-of-state license, prepare for a mountain of paperwork. Some commonly requested documents for license applications include:

  • Professionally prepared financial statements,
  • Summaries of your assets, including equipment,
  • Copies of your general liability and workers’ compensation insurance certificates that list the state licensing board as an additional insured,
  • References from your suppliers, and
  • Detailed explanations of any lawsuits you’ve been involved in or disciplinary action taken against you.

State regulators typically require contractors to meet certain qualifications to do business in that state. You may also have to obtain a tax identification number before they’ll issue a license. In addition, you may need to take exams or participate in training.

Certain states have license reciprocity agreements with one another. This means that, if you’re licensed in one state, you may qualify for a license in a reciprocating state without having to sit for that state’s trade exam. While reciprocity doesn’t mean you’ll be automatically waived in, it generally accelerates the licensing process a bit.

Obtaining an out-of-state license also means dealing with related tax and financial issues. Some states and municipalities assess an annual license tax based on a percentage of the contractor’s gross receipts, while others charge an annual fee that goes toward a recovery fund for project owners who have financial disputes with licensed contractors.

Help is advisable
Naturally, licensing isn’t the only factor to consider when working out of state. You’ll also need to look into sales and use taxes, for example. Work with your CPA and attorney to anticipate these and other challenges.

We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.

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