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.