Alert: Construction Managers on Private Projects Need Not Be Licensed in California

4/6/2009 Articles

A case of first impression decided by the Second District Court of Appeal on March 27, 2009, resolves the long-running debate over whether construction managers, who act as an owner's agent on private California projects, must have a contractor's license.  Fifth Day, LLC v. Bolotin, 09 C.D.O.S. 4019, 2009 WL 794516.  In short, no such license is required so long as the construction manager does not undertake - directly or indirectly - to construct the project.

In Fifth Day, a real estate development company (the "Developer") that owned land in Southern California entered into a Development Management Agreement ("DMA") with a construction manager (the "CM").  Under the DMA, the CM was to provide "development and construction management" services to the Developer in connection with the construction of a seven-building commercial office park (the "Project") in exchange for a fee.  As set forth in the DMA, these services included, among other things, developing "an overall strategic plan for the management and administration" of the Project, managing the budget and schedule, "coordinat[ing] and direct[ing] the activities of design professionals," conducting "daily on-site inspections and reviews," coordinating the "completion and correction of the work," and ensuring that the performance of the general contractor and its subcontractors is satisfactory.  Additionally, the CM represented and warranted in the DMA that it "held and would hold all licenses, permits or other certifications necessary to perform its duties."

After entering into the DMA, the Developer entered into a separate contract with a general contractor to construct the Project.  When the Project was done, the CM sued the Developer for the fees it had earned on the Project for providing construction management services.

The Developer moved for summary judgment on grounds that the CM was unlicensed as a contractor and, therefore, the CM's suit was barred under Business and Professions Code Section 7031.  (All statutory references are to the Business and Professions Code.)  Generally, Section 7031 precludes payment claims by unlicensed contractors and requires that the unlicensed contractor return all sums it received in payment for its work.  The trial court granted the Developer's motion and dismissed the CM's payment claim, concluding that the CM acted as a contractor and was, therefore, required to be licensed as such.

The CM appealed, and the Court of Appeal reversed, reinstating the CM's lawsuit.  The Fifth Day court reviewed California's contractor licensing scheme and initially observed that the Contractors' State Licensing Law "itself does not identify construction managers as workers requiring licensure."  It then noted that a contractor must "hold one of three categories of contractor's license:  Class A (general engineering contractor), Class B (general building contractor), or Class C (covering specialty licenses)."  Finally, the Fifth Day further noted that under Section 7026:

‘Contractor' . . . is synonymous with ‘builder' and ... is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct ... any building ... or other structure, project, development or improvement, or to do any part thereof[.]

Based on the licensing scheme, this statutory definition of "contractor," and the CM's actual duties under the DMA, the Fifth Day court found that the CM did not act as a contractor on the Project.  According to the Fifth Day court, although the CM's duties included "coordinating the activities of various workers to enable them to complete their assigned tasks in an organized and efficient manner," and "act[ing] as [the Developer's] agent with respect to the various parties connected with the development of the Project," the CM did not contract with the Developer to perform any construction work on the Project, nor did it directly enter into any contracts or subcontracts for such work.  Rather, the Developer itself hired a general contractor, which hired all subcontractors for the Project.  In light of these findings, the Fifth Day court held that the CM did not act as a contractor by providing construction management services and was, therefore, not required to be licensed.

In reaching this conclusion, the Fifth Day court rejected the Developer's argument that, by providing construction management services, the CM acted as a general building contractor and was required to have a Class B license under Section 7057, which defines a "general building contractor" as a "contractor whose principal contracting business is in connection with any structure . . . being built . . . or superintend the whole or any part thereof."  Similarly, the Fifth Day court was unswayed by the Developer's attempt to analogize to statutes in the Government Code that require construction managers on public works projects to be a licensed general contractor, architect, or engineer.

Interestingly, the Court of Appeals' decision in Fifth Day was not unanimous.  One judge strongly dissented, and would have held that the CM acted as a contractor on the Project.  Citing a number of legal treatises and commentators, the dissent concluded that the CM "must have a license under Section 7026.1(b), which defines a ‘contractor' to include a ‘consultant to an owner-builder.'"  Pointing then to the potential for abuse created by the Fifth Day court's holding, the dissent argued that it creates a "loophole" that allows unlicensed contractors to avoid the licensing requirement simply by calling themselves "construction managers," which will facilitate the "illicit or incompetent activities" of "unqualified, unscrupulous and unlicensed contractors."  Further, the dissent argued that "requiring licensing of construction managers who undertake to supervise the work of licensed construction professionals is consistent with the Contractor's State License Law," the purpose of which "is to protect the public from incompetence and dishonesty in those who provide building and construction services."

Lessons Learned

The Fifth Day case creates a bright-line contractor licensing requirement for those construction managers who contractually agree to undertake construction work, such as in the case of at-risk construction managers, even if the actual, physical construction work is to be performed by others that are properly licensed as contractors.  However, in those cases where the construction manager is acting only as the owner's agent, and does not actually perform construction work or agree to undertake such work through others, the construction manager does not need to be a licensed contractor so long as the subject project is a private project.

It is important for private project owners to know that the construction manager they may hire as their agent is not required to be licensed, meaning that there is no regulatory framework to ensure that the construction manager has a threshold level of knowledge and experience concerning the construction management services that it will be providing.  Accordingly, private project owners must be cautious in selecting construction managers to make sure the construction manager they are considering has the requisite level of expertise necessary for the particular project at hand.

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