Don’t Forget Contract Clauses When Beginning Work in New States

Contract, legal and business considerations should be part of the checklist for new out-of-state work.
By Eric J. Meier
October 31, 2022

The National Football League continues to grow in popularity and the economics are staggering. For 2021-2022, the Green Bay Packers (the only team to publicly share earnings) reported a record $570 million in revenue. Part of the NFL’s growth is due to playing games abroad. This year, the NFL set up five international games—in London, Munich and Mexico City.

Much like the NFL’s model, many contractors have found growth opportunities in “abroad” (out-of-state) markets. As NFL teams must adjust their internal clocks to account for time differences, construction companies must also account for different business requirements in other states.

While there are many similarities in working across state lines, here are some important contract, legal and business considerations that should be part of the checklist for new out-of-state work.

Liens: Are Preliminary Notices Required?

Liens are a powerful tool to protect contractors, subcontractors and suppliers’ rights to payments because they allow for a claim against a property to secure a debt. All liens have the common element of a legal right to have a debt satisfied by the forced sale of the property, but the process of establishing a lien varies greatly across the country.

When construction contractors go to other states, it is important to evaluate whether preliminary notices are required. Certain states require preliminary notices with deadlines tied to the occurrence of events, such as the timing of first performing work, and the requirements are different depending on whether the company is a prime contractor, subcontractor or material supplier.

Other lien considerations include whether work is in a state that prohibits advance waivers of lien rights and whether a state requires the use of specific forms.

State and Local Business Requirements: Is Registration Required?

Many states require businesses to be registered before performing any construction work. Often, eligibility to perform work is conditioned on this registration. States such as Alaska and Arizona require that the state registration number be included in any construction contract above a de minimis dollar value.

Even if there is not a state-level licensing requirement, construction companies may still be subject to local municipality requirements. Illinois handles much of its construction licensing at the local level (e.g., City of Chicago licensing falls under the scope of the City’s Building Department).

Interestingly, some states that require contractors to carry licenses will not grant lien rights to unlicensed contractors. Often the licensing requirements are broken down between general contractor’s licenses (for anyone entering into the prime contract on a construction project) and subcontractor’s licenses. License requirements depend on the type of work being performed (distinguishing between commercial and residential work) and the dollar amount of projects. In Alabama, for example, general contractors (and subcontractors) must obtain a commercial license for projects larger than $50,000.

If contractors are lucky, the state in which they are going to perform work has reciprocity for the license requirements. While this does not relieve all requirements, reciprocity often removes obligations such as additional education or tests.

Payment Details Depend on Role and Type of Project

Almost every state has a version of the Prompt Pay Act. The specific timing of payments and other details, such as interest and prevailing party attorneys’ fees and costs, are prescribed by statute. Details vary widely across states and whether the project is public versus private as well as between owner-to-prime and prime-to-subcontractor payments.

Relatedly, there are rules and restrictions tied to retainage ranging from obligations in Texas for owners to retain 10% on private construction projects to New Mexico’s ban on retainage altogether. Other states, such as Arizona and New York, only comment that retainage must be “reasonable.”

It is important that contractors know what the local requirements are and adjust what may otherwise be standard contracts accordingly.

Prevailing Wages: Which Law Applies?

Many states require construction companies that contract for public construction work (whether at the state, county or municipal level) to pay workers the hourly wage and fringe benefits paid to the majority of workers in the applicable geographic area for similar work.

Keep in mind that even if a state does not have a prevailing wage law on the books, there may still be state requirements for prevailing wage. For example, the 2017-2019 state budget repealed Wisconsin’s prevailing wage law. As a result, prevailing wage rates applicable to state agencies are those tied to the Davis-Bacon Act.

Evaluate and Manage Risks

When construction companies follow clients into other markets, it’s exciting and usually a compliment for great work done in their home state.

While moving to new geographies can be financially lucrative, it carries risks that must be evaluated and managed. It is important to know where to look for obligations and then incorporate them into contracts and business practices.

Doing this the right way can lead to the type of outcome that NFL fans hope for when their teams go to Europe and elsewhere.

by Eric J. Meier
Eric J. Meier is a Milwaukee, Wisconsin-based partner with Husch Blackwell LLP and serves as a leader of the firm’s Construction Academy team. He represents construction and business clients from contracting through litigation and every point in between. 

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