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Licensed Vs. Unlicensed Contractors: What You Need to Know

Licensed Vs. Unlicensed Contractors: What You Need to Know

If you have a home improvement coming up, you might need to hire some outside help. While there are many smaller tasks that you may feel comfortable taking on yourself, perhaps with prior knowledge or just by using the ever-handy abundance of YouTube tutorials, there are other jobs that are just beyond your skillset or comfort zone.

In these instances, it is time to bring on a contractor to do the work for you. And perhaps you were unaware, but when it comes to construction projects, there are licenses at play. You will have the option to hire a licensed or unlicensed contractor, each of whom will come with their own advantages and disadvantages.

So how do you choose? Glad you asked! This post will break down the pros and cons of hiring an unlicensed or a licensed contractor for your next home remodel or renovation project. Hint: the licensed contractors win out. Read on to see why.

What Does Being a “Licensed” Contractor Actually Mean?

If a contractor is licensed, it means that they have a legitimate claim to be a professional in their industry. They are making a legitimate career out of this profession, and are not simply making a quick cash grab.

If a contractor holds a license, it proves that they have met certain industry standards to acquire the license and that they also maintain those standards to uphold their license. Acquiring a license is a costly endeavor for the contractor to achieve and then maintain, which shows their commitment to being certified and legal.

Having a license also shows that the contractor is serious about each job they do, and they won’t cut corners when it comes to their work on your construction project. On the other hand, an unlicensed contractor cannot give you the same assurance.

In fact, because they are unlicensed, they have to cut corners to get the job done. For instance, an unlicensed contractor will not be able to attain any permits that are required on a given job. This might not seem like a big deal — after all, the contractor will be the only one taking on any risk, right?

Unfortunately not. You, the property owner who hires the unlicensed contractor, will assume some risk as well, both in the quality of the work and for legal and financial consequences. If the work is not up to the proper local building codes and your unlicensed contractor did not acquire the proper permits, then your property value could even be negatively impacted. You could even void your homeowner’s insurance policy if a claim arises as a result of the work done by an unlicensed contractor.

This might make you wonder why then would anyone consider an unlicensed contractor in the first place. Well, like so many other things in life, it typically boils down to money.

Licensed vs. Unlicensed Contractor: The Price

Often, the first question you think of when you are considering hiring someone for a renovation job is “how much is this going to cost?” Of course, it’s an important question, since every project has a budget, but it can also be a dangerous one, and here’s why.

Unlicensed contractors are able to give much lower quotes for projects, which makes them an enticing option. Really, it’s the one thing that unlicensed contractors have going for them — they are typically much cheaper than the licensed competition.

However, consider how an unlicensed contractor is able to offer that lower rate. For one, they do not have to pay the somewhat pricey licensing fees. Licensed contractors must pay to maintain their standing, which gives them higher overhead costs than those who are unlicensed. They also do not obtain the proper permits for your work, if required, as well as a bond that protects their work.

And perhaps of greatest concern to you — an unlicensed contractor will not have worker’s compensation or liability insurance. Guess who that means will be held liable if an employee or third party is injured on your work site?

That’s right — it’s you.

So while the lower price is technically an advantage of hiring the unlicensed contractor, you may actually want to file it in favor of the licensed contractor when you consider the potentially devastating financial consequences should something go wrong and you are held liable. The “savings” you get from going with the unlicensed contractor could be gone in an instant.

Licensed vs. Unlicensed Contractor: Liability & Workers Compensation

All licensed contractors will carry two types of insurance: liability and worker’s compensation. They are required to have both to maintain their license. Unlicensed contractors — you guessed it — do not. And so they don’t, because they can’t.

Unlicensed contractors are unable to attain liability insurance and worker’s compensation because — you guessed it again — they are unlicensed! It’s a bit of cause and effect.

But do you really need a contractor with both liability insurance and worker’s compensation? If you’re lucky, you won’t need to have it in place. But if you are unlucky and something does go wrong, you’ll definitely be thankful you do. It just isn’t something you want to take a chance on.

Let’s take a deeper look.

Liability insurance is there to protect you in the event that your contractor causes damage to your home. So let’s say during a kitchen remodel your contractor installs the sink incorrectly and it causes water damage to your home. Your homeowner’s insurance policy will not cover you unless you specifically purchased coverage for in-home employees.

The licensed contractor’s liability will protect you in such an instance and will cover the cost of damages and repairs. Since an unlicensed contractor does not have liability insurance, in this same scenario it would be you who has to pay out of pocket to fix the issue. And since you likely don’t have a bond for the work (more on this later) with an unlicensed contractor, if you need them to make the repairs, they won’t do it free of charge.

As for workers compensation, your contractor must have it both for themselves and their employees. This insurance will protect you, the homeowner, in case someone gets hurt on the job. Why would you need to be protected if someone else gets injured?

Because if no workers compensation is in place, you, the homeowner, can be held responsible for the injury, and it is likely that you may be sued by the unlicensed contractor or the injured worker to pay their medical bills. This can make your relatively affordable renovation come at a much higher cost. Sometimes, we’re talking tens of thousands of dollars when you factor in medical bills, legal fees, and compensation for lost wages.

But how is that your responsibility?

When your contractor is licensed and hires subcontractors to help on a job, those workers will be covered by their worker’s compensation insurance policy. So if one of those workers is hurt, their worker’s compensation will cover any medical expenses that result from the injury. Your licensed contractor is therefore the general contractor for the job, who assumes all responsibility in such an event.

However, if you hire an unlicensed contractor who then brings on subcontractors, it is actually you who is the general contractor. This means you are responsible for any injury that occurs on the work site, because you are technically the employer, so it is your responsibility to have workers compensation. And since you don’t have it, you’ll be paying for the injured worker’s bills. Just imagine how much they can add up if the worker is hurt bad enough they are unable to work for a year or more.

It’s a tricky bit of legality that can really put you, the property owner, in a bad spot should something go wrong.

Licensed vs. Unlicensed Contractor: Bonding

Hiring a contractor who is not bonded is another risk you don’t want to take.

Bonding is similar to but different than insurance. In a bond, the contractor pays a fee to a bond company, and if they don’t complete the project as agreed, the money is given to the client, being you, the homeowner.  

The bond acts as a guarantee that your contractor will perform the work to the specifications you each agreed to. The secured money within the bond will be distributed to the homeowner if the contractor fails to uphold their end of the agreement. However, it does not get the work finished.

For example, if you’re contractor installs a cabinet improperly and it falls off the wall a few weeks later, pulling off some of your drywall in the process, the bond would cover that loss. Without one, it’s an additional expense for you to have the repairs done. The bond will also cover you in the instance that an employee steals a personal item from your home.

A bond, or “surety bond,” is actually required by each state. You should never take your contractor’s word that one is in place, but rather ask for proof and make sure you understand exactly what it covers. Should something go wrong during the project, or if the work isn’t to your satisfaction or to the agreed specifications, you can go after the bond.

How to Verify a Licensed Contractor

When the time comes to hire a contractor for a home renovation or bathroom remodel project, make sure you verify that they are licensed. When you do your research online, you may find that most will say they are licensed on their websites, but this is not enough. You need to verify that they are licensed by checking with your state’s licensing board.

In California, visit the Contractors State License Board’s website and search for your contractor. For other states, simply search for contractor license [your state] and your local licensing authority should be the first result to pop up. You should be able to view your contractor’s actual license and see if there have been any complaints filed against them.

If your contractor has too many complaints, they could lose their license, so you want to make sure their license is active. Too many complaints should be an obvious red flag regardless, and likely a sign that you should seek other options.

When you meet with your contractor in person, you should ask to see their license, proof of their liability insurance and workers compensation, as well as reading through the bond. This is the best way to make sure you are in the know on every detail of your project. You shouldn’t feel bad for asking for any of this information — it’s all part of the business, and any good, licensed contractor won’t be offended, and will actually respect you for asking and being informed on the process.

Summary

As you can see, when it comes to deciding between a licensed vs. unlicensed contractor, there is a clear winner: always go with the licensed contractor. If you decide to cut corners just like your unlicensed contractor, you could be putting yourself in a very dangerous situation should something go wrong. You are much better off paying a bit more to ensure that your job will be done properly and that you won’t be held liable for any damages or injury.

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