Do I Need a Contractor License to Enter Into a Development Management Agreement?

Whether a developer is required to obtain a contractor license to enter into a development management agreement ("DMA") must be viewed through a state-specific (and in some instances, a county- and/or municipality-specific) lens. The short answer is … it depends.

Washington

This question is of particular importance in Washington since contractors can sue owners to recover compensation or for breach of contract only "if the contractor is properly registered, and the contractor holds the burden to allege and prove their registration." Coronado v. Orona, 137 Wash. App. 308, 311, 153 P.3d 217 (2007).

Under RCW 18.27.010(1)(a), a contractor includes any "person, firm, corporation, or other entity who or which, in the pursuit of an independent business undertakes to, or offers to undertake, or submits a bid to, construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement attached to real estate or to do any part thereof including the installation of carpeting or other floor covering, the erection of scaffolding or other structures or works in connection therewith, the installation or repair of roofing or siding, performing tree removal services, or cabinet or similar installation; or, who, to do similar work upon his or her own property, employs members of more than one trade upon a single job or project or under a single building permit except as otherwise provided in this chapter." (emphasis added). Although the definition specifically includes persons who "develop," the analysis does not end there. Further, section (1)(b) also defines a contractor as "a consultant acting as a general contractor."

RCW 18.27.010(1)(c) also includes as a contractor "any person, firm, corporation, or other entity covered by this subsection (1), whether or not registered as required under this chapter or who are otherwise required to be registered or licensed by law, 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. A person, firm, corporation, or other entity is not a contractor under this subsection (1)(c) if the person, firm, corporation, or other entity contracts with a registered general contractor and does not superintend the work." (emphasis added).

Based on RCW 18.27.010(1)(c), the analysis here is whether a development manager is overseeing or "superintend[ing]" the work. Generally speaking, development managers affirmatively oversee the work covered by a DMA, regardless of whether they hired a licensed general contractor. Even if the development manager is not explicitly required to "superintend" the project in its DMA, it is likely that an "at-risk" development manager would be considered a "consultant acting like a general contractor" under the 1(b) definition of "contractor."

Lastly, Washington courts have construed the statute liberally, holding that the "legislature's choice to include not only those who are engaged in the business of contracting but also those acting in the capacity of a contractor indicates the legislature's intent to capture those who do the type of work described under .010(1)(a) both formally and informally." Dobson v. Archibald, 523 P.3d 1190, 1194 (Wash. 2023).

Thus, when entering into a DMA in Washington state, it is important to ensure that a developer is not completing any work that falls under RCW 18.27.010, particularly superintending the work, unless the developer obtains a contractor license.

California

As in Washington, an unlicensed contractor is prohibited from bringing or maintaining an action to recover compensation in any court in California, pursuant to Bus. & Prof. Code, § 7031.

Under Bus. & Prof. Code, § 7026, a contractor includes "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, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement…" (emphasis added). However, a construction manager need not be licensed as a contractor. 57 Op.Atty.Gen. 421, 8-23-74.

When determining whether a person or entity is performing services "in the capacity of a contractor," the fact that a developer "subcontracted with licensed contractors to provide the actual labor, equipment and materials to construct the infrastructure improvements is irrelevant." Vallejo Dev. Co. v. Beck Dev. Co., 24 Cal. App. 4th 929, 943, 29 Cal. Rptr. 2d 669, 674 (1994). Under Bus. & Prof. Code, § 7026, both the person who provides construction services himself and one who does so "through others" qualifies as a "contractor." "California courts have also long held that those who enter into construction contracts must be licensed, even when they themselves do not do the actual work under the contract." Id. at 675 (citing Currie v. Stolowitz, 169 Cal.App.2d 810, 815–816, 338 P.2d 208 (1959) and Hollywood T.C. Co. v. Structural P.C. Bd., 95 Cal.App.2d 56, 58–59, 212 P.2d 278 (1949)). Further, the court in Vallejo found that "applying the contractor licensing requirement to master developers…is consistent with public policy…" Id. The court ultimately held that the developer acted in the capacity of a contractor when it entered into an agreement and undertook to improve property for others, including the completion of infrastructure improvements, grading of building pads, installation of storm drains, sanitary systems, streets, sidewalks, curbs, gutters, street lighting, and utilities.

However, in The Fifth Day, LLC v. Bolotin, 172 Cal. App. 4th 939, 950, 91 Cal. Rptr. 3d 633, 641 (2009), the court took a more nuanced approach to this analysis by looking at the specific scope of work under the plaintiff's DMA to determine whether it acted in the capacity of a contractor. The court held that whether a developer's actions bring it within the definition of a "contractor" is a question of fact. In its analysis, the court found that plaintiff did not act in the capacity of a contractor since the scope of services under its DMA only required it to 1) coordinate the activities of various workers, 2) maintain records, 3) keep the project owner apprised of the project status, 4) respond to on-site issues as they arose, and 5) act as the owner's general agent; in addition, the project owner contracted directly with a licensed general contractor to perform and/or supervise all construction, and that contractor hired all of the subcontractors who worked on the project.

Finally, it is important to note that if a developer is "at risk," meaning it is responsible for providing a finished project for a specific price, it will undoubtedly fall within the definition of contractor under Bus. & Prof. Code, § 7026.

Takeaway

Developers should consult counsel familiar with the contractors licensing laws and regulations in the jurisdiction where the development is located to determine whether it is required to obtain a contractor's license to enter into a DMA.