Since I occasionally hire contractors, I sometimes read the ads for various trades in the local newspapers. Here in Arizona, the contractors are required to say if they are licensed or not in their ads. The majority of the ads say “Not a licensed contractor.” One that has particularly caught my eye says, “Not licensed by choice.” I find this a very interesting marketing choice. When I have spoken to other contractors who work without a license by the state, and asked them why they choose to do so, they say, “If I got licensed, I’d have to charge more.” I think this is a red herring excuse used only to justify not doing the work to get licensed.
Let’s look at the arguments for and against a contractor being licensed.
The basic argument against being licensed is that state licensing involves considerable paperwork, proof of insurance, a bond, a financial statement, plus the expenditure of money. Completing all that paperwork, in addition to requiring the ability to read and comprehend detailed instructions, requires a considerable time commitment during which, the contractor is not actually involved in activities that generate income or additional customers. For example, the 11 documents required to be a licensed contractor in Arizona, include proof of a business formation (such as LLC, partnership, sole proprietor, etc.), a financial statement, a background check, proof of a bond, and test scores. The actual application form for a new contractor in Arizona is 10 pages long, with an additional 33 pages of instructions on how to fill out the application.
After the paperwork is all completed, now there are the fees for the license. Licensed contractors need to be bonded and insured and provide proof of that bonding and insurance. The actual license fees range from $650 to $1,555 depending on the type of work to be done, residential or commercial, classifications, etc. Bonding costs approximately $200 per year for a $5,000 bond, the minimum bond amount acceptable in Arizona. Those fees can add up quickly. A license applicant is looking at a minimum of $850, assuming the contractor has good credit and an acceptable financial statement, in addition to obtaining an Employer Identification Number from the IRS (there’s no cost for that) and having a licensed business (there are fees for this one). I found similar requirements in other states where the contractor’s license requirements are available online.
One item on the checklist that intrigued me was “Original test scores.” I certainly can’t speak to the reliability of the contractor tests; however, it appears that these exams require at least some basic knowledge of business and trade. The required exams include a “Business Management Exam” and a “Trade Exam.” Proving basic knowledge of these two subjects sounds like an acceptable expectation. Can’t pass the test? Hmmm… Given these criteria, I can understand why someone would be “Not licensed by choice” if he had questionable business ethics or couldn’t read.
What does any of that have to do with the person who hires a contractor, though? The reasons for not being licensed are all about the contractor, not the property owner or manager, which brings us to the possible arguments for hiring a licensed contractor. There is no guarantee that a licensed contractor will do better work than an unlicensed one, so that isn’t the issue. Obviously, you need to check references on anyone you hire, including looking at previous and current jobs, checking for Better Business Bureau complaints or Contractors’ Board complaints, and maybe checking Angie’s List reviews. The issue really at stake is our, the property owners’, financial and legal responsibility and well-being.
For example, if an unlicensed, un-bonded contractor gets hurt while working at our property, we are financially responsible for that injury. If he’s insured, the injury is covered by their insurance, and we are likely off the hook. If the contractor is uninsured, or under-insured, we may be financially responsible. Think this doesn’t apply to you and your properties? Contact your attorney and ask their opinion.
Another scenario could be if a contractor does sloppy, inadequate or dangerous work. If the contractor is unlicensed, we have no legal recourse except to try to track him down and sue him personally. Chances are not good for that to be a pleasant experience. Also consider that if someone, a tenant or a guest, is injured as a result of that work, we are financially responsible for that injury as well. Now, if the contractor is licensed, we can file a claim against their bond and insurance. With an unlicensed contractor, again we find ourselves left with only the prospect of personal litigation to mitigate those costs.
The final piece to look at is the excuse that the contractor can offer cheaper work when unlicensed rather than licensed. This boils down to the difference between price and cost. The price is what the contractor charges for the labor and materials; the cost is the dollar amount paid at the end. Things do go wrong sometimes, even with licensed contractors. The difference is, with a licensed contractor, there is most likely no extra cost to us. With an unlicensed contractor, we end up paying twice for sloppy, inadequate, or even dangerous work. Once to the original unlicensed contractor, and again to fix the problem they have caused.
A contractor choosing to be unlicensed is SOLELY a benefit to the contractor, not the person who hired them; even if the initial price is cheap. A contractor choosing to be licensed is a benefit to BOTH the contractor us. It is a benefit to the contractor since it shows they are serious about their business and have done what it takes to take financial responsibility for their work. It is a benefit to us because we are more adequately protected financially and legally, than we are if the contractor is unlicensed.