Construction firms face extensive regulatory challenges when attempting to do business outside their home state. Compliance obligations such as researching state requirements and applying for licenses are often non-core to the firm’s competencies. On one hand, a lack of systems to manage compliance can result in costly penalties, project delays, and missed opportunities. On the other hand, firm management and ownership that place strategic emphasis on compliance can use that status as a source of agility and competitive advantage.
This article will serve two purposes. First, we will provide a checklist of high-level considerations for construction and contractor firms doing business in another state. Second, while each firm faces unique regulatory challenges, management can incorporate this general information into their own comprehensive compliance strategy.
Legal Entity and Tax Requirements
Let’s begin with a common scenario. A current client approaches your firm with a job opportunity in another state. They like your work, but they need to move fast. You’re probably familiar with the legal entity, tax, and licensing requirements in your own state. But, each new state’s requirements vary greatly, including the overall time it takes to register. Whether you can successfully win and deliver this project depends on your level of preparedness.
Most states first require out-of-state companies to register with the secretary of state to “do business.” This process is known as “foreign qualification,” and it is often needed before applying for a license or even during the RFP process. Companies will submit an application for a certificate of authority, proof of corporate standing from the home state, and pay a filing fee. Each state will also require that you designate a registered agent for service of process at the time of filing. Most firms don’t maintain physical offices to meet the statutory registered agent requirements in every state. Wise management will ensure the firm has a registered agent vendor that can step into new states at a moment’s notice.
Tip: When foreign qualifying, you will need to factor in the processing time of two state agencies, not just one. Plan ahead!
Similarly, registration for state tax accounts can take weeks or even months. Whether it’s payroll, sales, or another tax specific to your firm’s activities, ensure that you have started the process early enough to pay your employees, vendors, and other parties on time and avoid state-enforced penalties.
Firm License Requirements
Construction firms face unique licensure requirements not only in every state but within specific specialty trades, such as electrical or mechanical. Simply researching the right type of license (or set of licenses) needed to operate is a project in and of itself. For firms with multiple companies in its portfolio, deciding which entity to license and where presents even more complexity.
When submitting the actual license applications, firms will file a laundry list of information and records to the state licensing board. While the exact list will vary in your particular situation, you might expect to produce:
- An application detailing company information, ownership, and legal history
- Copies of corporate records, such as articles of incorporation or certificate of authority
- Proof of general liability and worker’s compensation insurance
- Financial statements, credit reports, or proof of working capital, which may vary by project and project size
- Surety bond, which may vary on creditworthiness
- Information about responsible managing employees (RMEs), including work experience, exam scores, and proof of individual licensure
- Filing fee
Some states, like New Mexico, also require the appointment of a registered agent. Like foreign qualification, failure to designate the appropriate in-state contact at the time of application will normally result in a rejection.
As you can see, the process is anything but straightforward. Preparers will need to source information about company ownership and financial standing, and request documents from vendors, field offices, and records archives. Often, this places the responsibility in the hands of management – individuals who have plenty of other work to do.
Tip: When applying for firm licensure, a proactive approach is best. Research your firm’s requirements well in advance, and designate experienced professionals for the assignment. When it comes time to submit applications, ensure those responsible have access to records, vendors, and other company information needed to file.
If your firm is acting as the general contractor on a project, don’t forget that subcontractors also must have the appropriate licenses for their particular specialty. Take a moment to verify your existing subcontractors are properly licensed, and consider including proof of licensure as part of your ongoing vetting process.
Many states require individual contractors to maintain their own licenses, especially if they act as RMEs. At the time the firm submits its license application in many states, it will include proof of licensure and exam scores of its RMEs. This creates a connection between individual and firm: without a valid individual license, the firm’s license may be rejected. If that individual leaves the company or loses their license, the firm’s ability to work in that state may be jeopardized.
Tip: Ensure RMEs maintain licenses where your firm currently operates. Since the process of individual licensure and examination can take weeks or months, adopt a proactive mindset. Aligning licensure of RMEs to your business development forecast can only help your firm.
On an ongoing basis, many firms find success by ensuring they have multiple RMEs for operation in a given state. And, many firms benefit from centralizing management of their employees’ license renewals and providing oversight of any continuing education and exam requirements.
Internal Systems for Managing Compliance
By this point, you probably realize that expanding into even just one new state can add hours of administrative time. This is a common feeling in fast-growth firms, but it’s far from an insurmountable challenge. Much of the solution stems from establishing the proper internal systems for managing compliance responsibilities.
Centralized Records and Information
Remember that laundry list of records and information needed when applying? Do yourself a favor and store that information in a central location. Ensure that the employees responsible for preparing and submitting license applications have access. In light of COVID-19, consider a cloud-based software solution to reduce the reliance on in-office personnel. By doing this, your staff will have company data at their fingertips, leaving only the details of a specific application or project to fill in.
Leveraging Software for Success
Construction firms should consider software tools to maximize productivity and minimize compliance gaps. Even in an era of remote work, many firms use legacy processes to keep track of license data and manage statutory deadlines. As firms expand into new states and hire additional staff, they quickly realize the need for purpose-built software to track deadlines, assign tasks, and provide central reporting insights to management and key stakeholders.
When entering a new state, licenses aren’t the only state-specific requirement. Filing mechanics liens and preliminary notices are time-consuming activities, but essential to getting your firm paid on time. Additional tools to scout creditworthiness are essential to choosing the right subcontractors and supplies. In short, software preparation and management tools offer an effective, outsourced solution for firms of all sizes.
Establishing Clear Internal Processes
The last element is the human element. Few things are more effective at ensuring compliance than establishing clear responsibilities. Certain tasks, like sourcing information from management and field offices, may be best suited to an administrative assistant. But, sourcing audited financial statements, surety bonds, or credit reports from vendors may be a role filled by someone with a higher level of access to sensitive information. At the same time, tasks like the actual preparation of licenses and periodic renewals can either be handled internally or by specialty service providers. In all cases, employees should know exactly who is handling what, management has a level of oversight, and that lines of communication are crystal clear.
Rethinking Strategic Priorities
Compliance presents specific benefits to construction firms. Companies that adopt a proactive approach towards entity registration and professional licensing are better equipped at the bargaining table, get paid faster, and enjoy the public reputation that comes from being properly licensed and insured. While it’s not possible to anticipate every last-minute opportunity, firms that take a 12-18 month view of their business development pipeline — and research their corresponding compliance obligations — are better prepared to respond in short notice. And in a competitive, uncertain economy, it’s an advantage your firm will certainly cherish.
This is a guest post from James Gilmer, a Compliance Specialist at Harbor Compliance, a leading provider of compliance solutions for companies of all types and sizes. Founded by a team of government licensing specialists and technology trailblazers, Harbor Compliance has helped more than 25,000 organizations apply for, secure, and maintain licensing across all industries.