Multi-Prime Contract Arrangements Should Prompt Owners to Review Contractor Licensing Requirements

If necessity is the mother of innovation, then increased market pressures have caused owners, contractors, and designers to think outside of the box. Owners are increasingly resorting to alternative delivery methods and non-traditional ways to allocate the risks and responsibilities associated with their innovative ventures.

The traditional design-bid-build method, otherwise known as a “hard bid,” is characterized by the owner contracting first with a designer and then with a prime contractor to construct the project in accordance with the design. The prime contractor would subcontract separately with multiple trade contractors. The design-bid-build delivery method with a prime contractor has many advantages — including clearly defined roles between the owner, contractors, and design professionals. However, more innovative delivery methods — like design-build—have prompted new contract arrangements, facilitating increased collaboration, the blurring of formerly defined scopes, and unique licensing requirements.

Now, an increasing number of owners are forgoing the cost of a prime contractor’s markup and electing a multi-prime arrangement, where the owner contracts directly with the trade contractors for the project. In the multi-prime setting, the owner takes over the project’s management and coordination efforts. The owner may engage a construction manager to assist with the project’s schedule, budget, and coordination efforts during the construction process.

As owners select contract arrangements that diverge from the clearly defined roles and responsibilities of a design-bid-build project with a single prime contractor, it becomes necessary to pay careful attention to the licensing requirements applicable to each party. When owners become more involved in the construction of their projects, they may be considered contractors in the eyes of the law. Owners interested in a multi-prime arrangement should consider the licenses, and associated costs and liabilities, associated with their potentially increased responsibilities.

The Contractor’s Registration Act, RCW 18.27.010 (“CRA”) defines “contractor” as “any person, firm, corporation, or other entity” who undertakes or offers to undertake to “construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish” any building, infrastructure project, or development. The statutory definition of “contractor” also includes a consultant acting as a general contractor and those who offer “to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year from the date the structure, project, development, or improvement was substantially completed or abandoned.” However, the statute includes an important exception for a property owner who contracts with a registered general contractor and does not superintend the work.

The Washington Court of Appeals decision in Hinton v. Johnson, 87 Wn. App. 670, 942 P.2d 1061 (1997), illustrates how a real estate developer may be categorized as a “contractor” within the meaning of the CRA. Hinton, an unregistered contractor, entered an oral contract with Johnson the owner for a large residential real estate development project. Johnson employed multiple trade contractors on the project. After Johnson refused to pay Hinton, Hinton filed a lien foreclosure and breach of contract action against Johnson. Johnson prevailed on summary judgment by arguing that Hinton’s claims were barred because he was an unregistered contractor under the CRA.

On appeal, the judgment was reversed on the ground that Johnson operated as a “contractor” under the CRA because he hired multiple trades; accordingly, Johnson could not use the CRA as a shield against Hinton’s claims because the Washington Supreme Court has held that the CRA does not bar a claim by an unregistered contractor against a prime contractor.

In light of the CRA’s exception for an owner that contracts with a registered general contractor and does not superintend the work and the Hinton case, owners should seriously consider the protections provided by engaging a single general contractor as opposed to pursuing a multi-prime arrangement. The Hinton case shows how developers and other entities that are not engaged in actual construction work may still fall into that category.

An owner’s failure to obtain the requisite licenses in a multi-prime scenario carries serious legal and financial consequences. The CRA provides that it is a gross misdemeanor for any “contractor” to advertise, offer to do work, submit a bid, or perform any work as a contractor without being registered as a contractor as required by statute. Gross misdemeanors can make guilty parties susceptible to penalties up to $5,000 and just under a year in jail. Additionally, a party’s failure to comply with the CRA may impact the viability of its lien claims.

Fortunately, the biggest barrier to success here is knowing whether an owner or developer’s activities categorize it as contractor; it’s relatively easy to form a business entity and become a licensed, bonded, and insured contractor that is compliant with the CRA. Owners interested in pursuing a multi-prime contract arrangement should review these requirements, allow sufficient time to obtain the requisite licenses, and reflect their roles in the parties’ construction contracts.

Originally published as “Using multiple prime contractors on your job? Pay careful attention to licensing requirements” by the Seattle Daily Journal of Commerce, Feb. 27, 2020.