Construction Project Managers Not Required to Be Licensed for Private Projects Under California's State Licensing Laws
In a case of first impression, the Second Appellate District Court of California recently considered whether an entity that provided construction management services to a private owner was required to be licensed under California’s Contractor’s State Licensing Law. (The Fifth Day, LLC v. Bolotin (2009) 172 Cal.App.4th 939.) The Court’s response was a surprising and simple “no.”
There, the parties entered into a development management agreement for the construction of a seven-building commercial office park. The Court observed that the construction manager “neither contracted with the owner to perform any of the activities listed in California Business & Professions Code, section 7026’s definition of a contractor, nor performed any of those activities.” Therefore, because the project manager simply enters into construction contract(s) with the general contractor(s) who then performs and supervises all construction on the project and hires all of the subcontractors, the Court concluded that section 7026 does not require the construction manager to be a licensed contractor. Thus, no license was required because the construction manager “had no responsibility or authority to perform any construction work on the project, or to enter into any contract or subcontract for the performance of such work.”
The Court also relied on the omission of such an express requirement in California’s Government Code. The Court referred to California Government Code section 4525(e), which expressly requires construction managers on public projects to be either a licensed architect, a registered professional engineer, or a licensed contractor. Section 4525 is, more importantly, entirely silent as to private projects. Accordingly, the legislature did not define the term “contractor” to include persons who perform construction management services on private projects.
Eloquent and pithy, Justice Mosk’s dissent observed the obvious concern and resulting adverse effect of the Court’s ruling. He opined that the effect of the majority’s ruling is that “unqualified, unscrupulous and unlicensed contractors have a loophole in the license requirement that will facilitate their illicit or incompetent activities—they need merely call themselves ‘construction managers’ rather than ‘contractors’ and, regardless of the services they perform, the licensing requirements will not apply.” Although a valid concern, section 7026 applies to entities who undertake to perform the subject work “by and through others.” A construction manager cannot, therefore, avoid the requirements of section 7026 by undertaking work and delegating all of the construction activities to subcontractors.
The actual implication of this ruling is still vague and open to wide interpretation. The critical component of the analysis is the extent to which the construction manager, in fact, enters into subcontracts or directly performs work on the project. The majority concluded that the legislature should be responsible for regulating a construction manager’s activities. Maybe the Supreme Court or California State Licensing Board will speak to this issue in the near future, but until then, Fifth Day reflects California’s law on a construction manager’s licensing requirements.
Unexpected Risk for Engineering Corporations
The Washington statute governing registration of engineers, RCW 18.43, establishes a licensing board with jurisdiction over disciplinary proceedings against engineers. Under RCW 18.43.130, a corporation may engage in engineering if the corporation submits an application to the board that designates a licensed engineer as “responsible for the practice of engineering by the corporation in this state [with] full authority to make all final engineering decisions on behalf of the corporation.” This statute may create problems for engineers who practice in S or C corporations.
While the apparent purpose of this statute is to make the “designated engineer” answerable to the board if the corporation departs from professional standards, a Washington trial judge recently ruled that the “designated engineer” was personally liable in tort for the negligent acts of corporate employees.
There is also a risk that the licensing board could conclude that, under the statute, the “designated engineer” must exercise his or her authority by personally making or confirming every engineering decision of the company. This would obviously be impractical for a large firm. The board has not had occasion to rule on this issue.
The statute provides that professional services corporations established under RCW 18.100 are exempt from the “designated engineer” requirement. Engineers in corporate firms practicing in Washington, or other states with similar licensing requirements, should consider whether changing to a professional services corporation will reduce their risk of unwanted consequences.
