Can A Developer With No Contractors License Originate Solar Projects And Select Vendors? Posted on Jul 21, 2017
Developers often desire to develop solar projects through their contacts and know-how, but they are not a licensed contractor or associated with one. Such Solar Developers must navigate the contractor licensing laws that govern the construction of solar projects. The correct agreements must be used to structure these developer business models to avoid pitfalls of liability and to maximize profits.
Each state has a different set of laws governing the licensing of contractors. In California, the general rule that Solar Developers must be aware of is that only licensed contractors can enter into contracts involving construction activities. Specifically, only licensed contractor’s in California can: “undertake to or offer to undertake to, or do himself or by or through others, construct any structure, project, development, or improvement, or to do any part thereof, whether or not the performance of such work involves the addition to or fabrication into any such structure, project, development or improvement of any material or article of merchandise.” Cal. Bus. & Prof. Code Section 7026
In California, all Solar Developers must make sure that a licensed contractor owns any contract with a property owner (“Customer”) to the extent that the contract includes construction activities. This rules applies to using subcontractors. All persons who bear ultimate responsibility for supervising and directing construction of improvements of any building, project, or improvement must be licensed contractors. Consequently, subcontracting through licensed contractors to provide the actual labor, equipment, and materials for the solar project does not avoid the requirement of being a licensed contractor.
So, what is the solution for Solar Developers when navigating these licensing hurdles? One way for Solar Developers without contractor licenses to originate projects is to enter into agreements with Customers that provide for their development fees to be paid by any contractors utilized for the solar project. This fee is paid by the contractor directly to the Solar Developer once hired by the Customer. The Solar Developer should exclude in its agreement with the customers all services that require having a contractor's license. The Solar Developer’s services for the Customer should fall squarely under the definition of what qualifies as an exemption from the contractor licensing requirements. For instance, the general rule in California is that no contractor license is required for entities who simply act as an advisor to Customers by limiting their activities to certain construction management activities on private, commercial projects or when the construction of improvements is “incidental” to the parties’ overall business relationship.
In practical terms, the way this works is for the Solar Developer to enter into an Energy Development Services Agreement with the Customer that requires a development fee must be included in all contracts that the Customer executes for construction activities related to the solar project. This Energy Development Services Agreement should provide for exclusivity to protect the Solar Developer while it puts together the project (eg., secures all suppliers, financiers and vendors), again, with all such service providers subject to the development fee clause. Any services that would require a contractor license should be excluded from the Solar Developer’s scope of work in the Energy Development Services Agreement. As the solar project proceeds, when the Customer enters into EPC Agreements or Commercial Solar Installation Agreements with licensed contractors, those contractors will pay to Solar Developer the development fee.
This type of business model requires Solar Developers to stay vigilant on not providing services for which a license is required. The penalties for violating contractor licensing laws are steep and the laws are not uniform across the nation. Even in California where certain construction management services have been held as permissible for private, commercial projects without a contractor license, some commentators have noted that the line is blurry as to exactly what activities stay within the lines of these rules. In general, courts in California have held the non-licensed advisors can perform activities, such as:
- Assisting on behalf of Customer and coordinating activities of the various workers to enable them to complete their assigned tasks in an organized and efficient manner, on time and on budget, keep owner apprised of status of the project and be the on-site point person to respond to issue, and generally act as Customer’s agent with the respect to the various parties connected with the development project.
- Providing advice or opinions with respect to developing budget for construction costs. o Provide cost and performance evaluations of alternative materials and systems.
- Providing opinions and advice on administrative and management matters that relate to the coordination of work among and between contractors and subcontractors.
- Assisting the GC in developing bidders’ interest in the project.
- Assisting the GC in subcontractor bidding and ensuring the GC performs its duties with respect to bids from subs and material suppliers.
- Conducting daily on-site inspections and reviews during construction and attend and report to owner on project meetings.
- Providing to owner summaries of and document all change orders.
- Providing some amounts of cost estimation, contract administration, and coordination and scheduling of work.
Thus, Solar Developers operating in California without a contractor license should ensure that: (i) they have 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; (ii) they do not contract with a Customer to perform any activities listed in the statutory definition of a contractor or perform any of those activities, and (iii) the Customer is in direct contract with a licensed general contractor to perform or supervise all construction on the project.
Developers can successfully operate without a contractor license when developing solar projects by using Energy Development Services Agreements with customers and staying mindful of their state's contractor licensing rules.