State brings hammer down on contractors' finances
Benjamin Thompson is clearly frustrated.
He's a sole proprietor, a finish carpenter who's been a "one-man band" since he became a contractor in 1997. Like many during the Great Recession, Thompson's business took a hit and now his bad credit is coming back to haunt him. Both his own state contractor license and his status as a "qualifier" for another contractor buddy could be in jeopardy because of his shaky personal finances.
"I've had financial difficulty," Thompson admitted. State records show he had about $8,500 in personal debt last year. "But just because I'm struggling doesn't mean I need to be on probation. I don't know why they're coming after me when it's a simple matter of a bad economy and bad times."
Unfortunately, for contractors such as Thompson, the bad times are coinciding with tough policy. State regulators increasingly are putting construction contractors under a microscope, homing in on their ability to manage money not only in their business dealings but also in their personal lives.
An analysis of data collected by The Salt Lake Tribune shows a dramatic increase in the number of disciplinary actions against contractor licenses when it comes to their financial stability. In 2009, the Utah Department of Professional Licensing (DOPL) issued 30 enforcement actions against contractors based on financial responsibility. By 2011, that number ballooned to 111 before tapering off to 80 in 2012. Since 2008, construction-license issues have dominated DOPL's enforcement efforts, totaling 41.1 percent of DOPL's disciplinary workload by 2012.
Putting the squeeze on cash-strapped contractors is a priority and a deliberate policy decision, DOPL Executive Director Mark Steinagel said. He said over the past few years, the department has made a concerted effort to investigate contractor finances in the name of consumer protection.
"It was something that needed to be done to protect the public," Steinagel said.
A focus on finances • Construction fared worse than any other sector in Utah during the Great Recession. According to the Utah Department of Workforce Services, construction-related jobs totaled 103,450 in 2007 but took a nose dive in 2008 and 2009, bottoming out to 65,233 by 2010. The residential sector was especially hard-hit during that time, falling by more than half from 57,155 to 28,032.
Steinagel was hired as DOPL executive director in 2009, about the same time enforcement action numbers started to climb. He credits bureau manager Dan S. Jones for initiating the practice of culling court records to find contractors who were falling behind in paying for supplies such as lumber, electrical wire and pipes.
"[Jones] saw a way that the state could provide some value to consumers, so that's when he started a real emphasis on financial-responsibility issues," Steinagel said.
By state statute, contractors need to apply for a license every two years, which means passing a test, paying a fee and filling out paperwork about their trade experience and financial standing. They also must list someone as the qualifier for the business, basically another experienced licensed contractor who can vouch for the applicant's competence and financial stability.
Sometimes information on these applications raises a red flag for DOPL. But more often than not, license enforcement now comes through checking out court records, not investigating consumer complaints. Bankruptcies, tax liens and judgments result in a revoked license more often than shoddy workmanship or construction delays.
Steinagel stands behind the practice, contending that examining personal credit along with business ledgers is fair game, particularly in small-scale construction where the line between company revenue and personal spending can get blurry.
"A lot of guys are really good at building homes but don't know yet how to run a business," he said. "It's not been our experience that personal obligations stay separate from business obligations on these projects."
But is it fair? • DOPL does not examine credit reports for most other professionals requiring licenses, such as nurses or cosmetologists. The difference, Steinagel said, is that contractors act as fiduciaries, entrusted with handling others' money. He said the same kind of financial scrutiny is in place for real estate brokers and agents.
The practice of reviewing both company books and personal credit in the state licensing process gets mixed reviews from those in the industry. Most interviewed for this story support DOPL's enforcement methods and the intense focus on financial responsibility.
That includes Bob Patterson of Local 140, a labor union with 1,000 active members that represents plumbers and pipe fitters. He said he's a "big proponent" of enforcing financial requirements for contractors. He hasn't heard complaints from his membership about DOPL's focus on finances, and he doesn't expect to.
"We need to be doing [enforcement]," he said. "That way, the public doesn't have a shady guy come in and start working and then leave before they're done."
Builders also seem to appreciate DOPL's hard line on finances. Chris Martineau has been in the business for more than two decades. The owner of custom builder Martineau Homes as well as a member of the Utah Construction Services Commission (the citizen's committee that reviews DOPL enforcement actions), Martineau sees no problem holding contractors accountable in every way.
"[A credit check] means basically that you're paying your bills," he said. "It doesn't mean you have to show a profit every year, but you have to be clean from liens, from judgments, from financial lawsuits. If you have problems doing that, then you're not financially responsible."
Mike Morley, chief executive of Springville-based firm M-13 Construction Inc. and a former state representative, agrees. If he had his way, he'd scrap state licenses for contractors altogether, suspecting that the requirement is just a revenue stream for the state. But if licenses are here to stay and if state code mandates financial stability from contractors, he said DOPL should enforce the rules. Not checking out a contractor's total financial package as part of the licensing process, he argues, creates a false sense of security for consumers.
"If we're going to have licensure, it should mean something," Morley said. "Saying 'I'm a licensed contractor' should instill confidence."
Not everyone agrees. Critics say contractors with bad personal credit shouldn't be punished. Jason Anderson, vice president of Peterson Builders based in Eden and president of the Utah Homebuilders Association, believes one's livelihood shouldn't be jeopardized because of personal troubles.
"I do think there should be a distinction between the personal and the business finances," Anderson said. "I personally think that if they [contractors] are truly able to keep clean and pay their [business] bills, there should be a distinction between those two."
Dave Hinckley, vice president of Hinckley Construction Services in Provo, wants customers to judge his business on the strength of his bid and the quality of workmanship as vouched for by references.
"From a business perspective, you should base things off of what the business is doing and how the business is performing, and not on personal issues," he said.
Does it matter? • Many consumers don't even know that a contractor's personal credit rating could affect their license, and, frankly, don't seem to care. At the recent Salt Lake Tribune Home Show at the South Towne Expo Center in Sandy, Philip Burnett of West Point said he's starting to look for contractors to install a new oversized jetted tub in his downstairs bathroom.
"I'm hiring them to lay tile," he said. "I'm not hiring them for their bad credit."
But keeping on top of bills is a crucial skill to have in construction because it's so easy for project costs to spiral out of control, explained Steven Peterson, chairman of the Parson Construction Management Technology Program at Weber State University. For example, the billing cycle for construction projects is usually 45 days as opposed to the 30-day cycle of most enterprises, so contractors need more reserve cash on hand. And unlike building the same sandwich or model of car over and over, builders are given a unique task with every project, which make giving accurate estimates for construction projects difficult; one mistake during installation can result in further delays, which means extra unanticipated labor costs.
"For a contractor, you can easily be floating a project for two months and that can take quite a bit of cash," Peterson said.
Melaine and Adam Webster of Stansbury Park saw the perils of construction finance firsthand at their former condo complex. They saw two builders declare bankruptcy, resulting in an unfinished basement project.
"We had a miracle getting out of there, but yeah, we sold it," Adam said.
The young couple now own a home, and with three kids and another on the way, they're contemplating a $100,000 home addition, complete with an expanded kitchen, family room and new basement. As they screen contractors, they say they don't care if it's a large construction firm or a small builder. What matters to them is the contractor's financial strength.
"We'll definitely be doing some background checking," Melaine said.
Meanwhile, Thompson, the finish carpenter, remains on probation with DOPL because of his personal financial woes. He welcomes due diligence by consumers such as the Websters, but he still doesn't believe the state should hold his license hostage because of bad personal credit.
"It's ridiculous," he said. "I'm just trying to make a living."
DOPL's Steinagel stresses that the state is not trying to put contractors out of business and that the department makes every effort to work with people as they put their financial houses in order. But they're certainly not cutting contractors any slack. The four-year review of DOPL enforcements by The Tribune shows that of nearly 309 contractors sanctioned for not meeting financial responsibility requirements, 155 of those licenses were revoked and 146 were put on probation, with few reinstated. For the 153 reprimanded for failing to maintain a financial qualifier or if that qualifier was censured for misconduct, nearly all were revoked, as required by law.
Computer-assisted reporting editor Tony Semerad contributed to this story.
Looking for a contractor?
• Get three written bids to compare.
• Check at least three references of former customers.
• Require a written contract.
• Don't make a large down payment and don't make the final payment until the job is done.
Source • Utah Department of Commerce