To delay payment or not pay at all for construction work, often owners will use the excuse that contractors do not meet licensing laws. This occurs in states where proper licensing is a set precondition for compensation from owners. The reason states have this statute is to ensure that contractors comply with licensing laws.
An example of where this could happen to an innocent contractor is when a sole proprietor gets a reissued license in a corporation name after incorporating from a licensed sole proprietorship during a project. To avoid payment, an owner could claim the contractor was not licensed "at all times" but would most likely lose in court. Other examples are when a license may have accidentally lapsed during a project or when the scope of work exceeded licensing limits.
This does not excuse contractors who were knowingly not licensed at the project start date. They may deserve payment forfeiture for taking work away from contractors who abide by the laws. Some states avoid this issue by requiring state building officials to verify licenses before a permit is issued or suffer a misdemeanor fine for failing to do so. They may also require a written contract between the owner and contractor which can protect both sides.
Owners may get around the laws by obtaining a permit as if they were doing the work themselves and then intentionally making changes that exceed the contractors' license so the owners will not have to pay. Even when contractors are able to recover their payments through the courts, astronomical court costs can wipe out profits from the project.
California's state law violates the United States Constitution Commerce Clause as it denies out of state vendors the right to collect payment for materials permanently installed in the state. If a contractor has complied with the law, paid his fees and any licensing penalties, these state restrictions should be irrelevant.
However, owners should be able to reduce payments when they have suffered damages in cases where improper licensing interferes with inspections, delaying certificates of occupancy and moves into the building. The issues should be covered within the contract or damages determined in negotiations, arbitration, and as a last resort in a court of law so owners do not get work done for free.
Knowing that there are always unscrupulous people on both sides of the contract, all should be wary or may find themselves victims suffering the consequences. Research state and local statutes that may affect the outcome and do not be talked into agreeing to any bypassing of the restrictions. Bond claims or liens may be recourse solutions.
This is for information purposes only and not intended as legal advice. Seek professional legal counsel.