Can Developers With No Contractors Licenses Originate Solar Projects And Select Vendors? Posted on Jul 21, 2017
Yes, but the business model for unlicensed Solar Developers must be adapted to state contractors licensing laws for the reasons discussed below.
Each state has a different set of laws governing the licensing of contractors. Unlicensed Solar Developers must navigate these laws to avoid liability under state law and reduce financial vulnerability. For instance, in California only licensed contractors can enter into contracts involving construction activities. Thus, in California the licensed contractor must own any contract with a property owner (“Owner”) to the extent that the contract includes construction activities, including solar property improvements. (See Cal. Bus. & Prof. Code Section 7026) This rule also applies to using subcontractors. As a result, Solar Developers cannot subcontract through licensed contractors to avoid the requirement of having the licensed contractor enter all contracts with Owners for any labor, equipment, and materials on the solar project.
Since Solar Developers in California are prohibited from contracting directly with Owners for construction activities, when unlicensed developers create solar projects in this location they must ensure that the Owner signs all of the construction contracts directly with the contractors. The Solar Developers can still originate solar projects, select vendors, obtain development fees, and require exclusivity from the Owners, however, through the use of an Energy Development Services Agreement. This agreement provides that Owners do not pay the Solar Developer for its development work. It provides that the development fees are paid by the contractors directly to the Solar Developer once the contractor is hired by the Owner.
Additionally, it is important that the Solar Developer ensures its services for the Owner always fall under the definition of what qualifies as an exemption from the contractor licensing requirements. For instance, the business model of unlicensed Solar Developers requires it to stay vigilant on not providing services for which a contractor license is required. The penalties for violating contractor licensing laws are steep and the laws are not uniform across the nation.
The general rule in California is that no contractor license is required for entities who simply act as advisors to Owners 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. However, some commentators have noted that the line is blurry as to exactly what activities stay within the lines of these rules. Courts in California have held that non-licensed advisors can perform activities, such as:
- Assisting on behalf of Owner 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 Owner’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.
- Providing 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.
As a result of these rules, 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 an Owner to perform any activities listed in the statutory definition of a contractor or perform any of those activities, and (iii) the Owner is in direct contract with a licensed general contractor to perform or supervise all construction on the project.
While staying mindful of these rules, even unlicensed Solar Developers can enter into Energy Development Services Agreement with Owners and develop solar projects. Pursuant to the Energy Development Services Agreement, the Owner will include development fees in all contracts that it executes for construction activities related to the solar project and the developer will have exclusivity with the Owner while it puts together the project (eg., selects all suppliers, financiers, and vendors). To the extent necessary by state law, the agreement's scope of work can be modified to ensure the developer is not providing any services for which a contractor license is required. As the solar project proceeds and the Owner enters into EPC Agreements or Commercial Solar Installation Agreements with licensed contractors, the Solar Developer receives its fees directly from the contractors and other vendors on the project. This business model allows developers to successfully operate without a contractor license when developing solar projects and makes for happy customers who do not need to pay upfront for their services.