Do Developers Need Contractor Licenses to Develop Renewable Energy Projects? Posted on Apr 10, 2019

Each state has a different set of laws governing the licensing of contractors. Developers must navigate these laws to avoid liability under state law. For instance, in California, only licensed contractors can enter into contracts involving construction activities. In California the licensed contractor must "own" any contract with a property owner (“Owner”) to the extent that the contract includes construction activities, including renewable energy property improvements. (See Cal. Bus. & Prof. Code Section 7026) This rule also applies to using subcontractors. As a result, Developers of renewable energy projects in California cannot subcontract through licensed contractors to avoid the requirement that the licensed contractor must be the one entering into all contracts with the Owner for any labor, equipment, and materials on the renewable energy project.

Since Developers in California are prohibited from contracting directly with Owners for construction activities, when unlicensed Developers create renewable energy projects in California they must ensure that the Owner signs all of the construction contracts directly with the contractors. However, these unlicensed Developers can still originate renewable energy projects, select vendors, obtain development fees and require exclusivity from the Owners through the use of an Energy Development Services Agreement. This type of agreement provides that the Owner does not pay the Developer for its work. Instead, the agreement provides that the development fees will be paid by the contractors directly to the Developer once the contractor is hired by the Owner.

In states such as California where a contractor license is required for construction activities, unlicensed Developers should ensure that their services fall under the definition of what qualifies as an exemption from the contractor licensing requirements. These Developers must remain vigilant that they do not provide services for which a contractor license is required as the penalties for violating contractor licensing laws can be steep.

In California, the general rule 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 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, Developers operating in states like 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.

In sum, Developers in California and other states that require a contractor license for construction activities can still develop renewable energy projects if they are careful about what types of services they provide and they use contracts like an Energy Development Services Agreement to develop the projects. Energy Development Services Agreement require that the Owner include development fees in all contracts that it executes for construction activities related to the renewable energy project and the Developer has exclusivity while it puts together the project (eg., selects all suppliers, financiers, and vendors). To the extent necessary due to state law, the agreement's scope of work should be modified to ensure the Developer is not providing any services for which a contractor license is required. As the renewable energy project proceeds and the Owner enters into agreements, such as EPC Agreements or Commercial Solar Installation Agreements with licensed contractors, the Developer will receive its fees directly from those contractors and other vendors on the project. This type of business model allows unlicensed developers to successfully operate without a contractor license when developing renewable energy projects and makes for happy customers who do not need to pay upfront for the Developer's services.