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Black Market

Local contractors vent their frustrations about unlicensed, illegal competitors. Here’s why

Steve Dewald, a professional landscaper and owner of Steve's Gardening Service Inc., is proud to be in a dirty business. Shame sets in, however, when customers hire him to redo the shoddy workmanship of unlicensed landscapers. Not only does Dewald feel sorry for his clients, he also is reminded of illegal competitors in the marketplace.

"One lady was in tears, because one unlicensed company showed up and took a deposit of three grand, came the following day, dug and never came back," says Dewald, who celebrates his company's 10-year anniversary this year. "In another case, a customer hired an unlicensed contractor to do a sprinkler job. The irrigation was improperly installed, and the wiring was not done properly. They used substandard material, and we could not salvage what she had. She basically ended up paying twice."

REGULATORY POLICE: The Contractors License Board is the governing body for the local construction industry. At the helm is Verna Oda, executive officer of the professional licensing and vocational licensing division.

Unlicensed contractors - or contractors who operate without workers' compensation, liability insurance and a Hawaii state government-issued license - have been around for decades. "We have been fighting unlicensed contractors for the past 25 to 30 years," recalls Karen Nakamura, executive director for the Building Industry Association. Industry leaders estimate that unlicensed activity comprises as much as 20 percent of the overall construction activity in Hawaii.

"Just because [unlicensed contractors] have their GET [General Excise Tax] license, they think they can do the work," says Audrey Hidano, secretary treasurer of Hidano Construction Inc., a general contracting company that has been in business since 1974. Hidano Construction has completed hundreds of homes over the decades, including the governor's mansion last year.

Benny Smith, the owner of Smith Masonry, gives an example: A typical 10-by-4-foot retaining wall, built by a licensed contractor in the state, would cost about $10,000. Sometimes, unlicensed contractors offer to build the same wall for as little as $6,000. "They would undercut us by at least 30 percent," Benny says. It's a frustration echoed by other licensed, legitimate contractors.

In March 2003, there were 9,054 licensed contractors in Hawaii. About 1,095 are not active, according to the Contractors License Board at the Hawaii Department of Commerce & Consumer Affairs (DCCA). The year prior, there were 9,193 contractors. Roughly 1,211 were inactive.

Not all contracting jobs require licenses. A license is not needed if 1) the job does not need a building permit or 2) the contract price for labor, taxes and materials does not exceed $1,000. The industry refers to the latter as "handyman" jobs. A license is required, however, for all electrical and plumbing jobs that need permits.

Also, homeowners who renovate their own homes don't necessarily need a license. Instead, they are required to register for an owner-builder permit, which allows homeowners to 1) act as their own general contractor or 2) hire licensed contractors. In the case of a major electrical or plumbing job, a permit is always required.

Residential work and "handyman" jobs are the most easily abused by unlicensed contractors, say industry leaders. The system allows unlicensed contractors to cut through fences. "We, as an industry, have not decided whether to repeal the licensing for contractors or repeal the owner-builder law," says Nakamura, of the BIA. The licensing law is designed to protect consumers. On the other hand, it is really not that hard for homeowners to hire unlicensed contractors, she says. On which side of the fence is the grass greener?

It's a question that Jo Ann Uchida faces daily. She is the complaints and enforcement officer for the state's Regulated Industries Complaints Office (RICO), which is the enforcement arm for the Contractors License Board. Of the 55 employees on RICO's staff, two investigators are responsible for regular sting operations and job-site inspections.

Unlicensed Contractors Who May Be In Your Area

• Byron Ayoso, aka Bottom Line, aka A/B Home Improvement and Consultant (Hilo)
• Max Manupule, aka Manupule Mason Co. (Honolulu)
• Gary Okumura, aka Home Cosmetics Consultants (Honolulu)
• Bienvenido Pedro, aka Pedro's Landscaping (Mililani)
• Sikula Taliauli, aka Seagulls Contractor Inc., expired license for landscaping and ornamental jobs (Honolulu)
• Terita Ungounga, aka Terita Ungounga (throughout Oahu)
• Russell Yoshikawa, electrical jobs, (Honolulu)

Note: These people may have acquired the necessary contractor license after this list was released on Aug. 8 by the Professional and Vocational Licensing office.
Check www.ehawaiigov.org/serv/pvl for updated information. All jobs are valued at more than $1,000.

RICO clamps down on unlicensed activity using two methods. 1) Investi-gators respond to complaints about unlicensed contractors in a particular area. Often, the tips are via telephone. The investigators then scour the job site or business. If there is unlicensed activity, the offending individual or company is issued a citation, similar to a traffic ticket. The penalties are statutory. 2) If RICO is informed that an unlicensed job is already completed, it opens an unlicensed case and examines the completed evidence. Then a lawsuit may be filed in Circuit Court and a judgment may be set. Again, each is conducted on a case-by-case basis.

"It is really hard to eliminate unlicensed contractors totally," says Verna Oda, executive officer of the professional licensing and vocational licensing division of the DCCA. "Especially if there are homeowners who get quotes from an unlicensed person, who is really cheap. The homeowner might take the risk and go with that unlicensed person. And that keeps them working."

The number of unlicensed contractors in Hawaii is up in the air. However, the following numbers provide insight about unlicensed activity: RICO received 125 complaints against unlicensed contractors and 106 against contractors with licenses between July 1, 2002, and June 30, 2003. A total of 108 actions were filed. Seventy-one of those actions were targeted at unlicensed people.

The year prior, RICO received 129 complaints about licensed contractors, and 132 against those without licenses. Sixty-one actions were filed, and 38 were against unlicensed people.

Complaints to RICO come from all over the state. In addition to its investigators on Maui, Kauai, Hilo and Kona, RICO regularly flies one of its two Oahu-based investigators to the Neighbor Islands to conduct periodic sweeps for unlicensed activity. In a recent sweep, RICO investigators scoured the Yellow Pages for possible illegal contractors and investigated and prosecuted about a dozen businesses. The trade: glass tinting. "It was difficult to tell from the way the ads were written if they were unlicensed contractors," she says.

She's right. Unlicensed contractors easily can hide behind phone-book advertisements. The situation ticks off licensed contractors, who pay thousands of dollars in annual fees to comply with laws.

Take the case of Smith, owner of Smith Masonry, a 2-year-old company that employs seven. In addition to providing workers' compensation and health insurance for his employees, Smith holds a C31 masonry license and a category B general contractors license. The multiple licenses allow his company to be a one-stop shop.

However, sometimes those multiple licenses are meaningless. "It's extremely difficult to bid in what we call an 'open market,' and we seldom compete in that," Smith says. When his company chooses to compete in the open market, Smith and his team draw up designs and offer price packages that reflect the cost of his business. "But all it takes is for one unlicensed contractor [to underbid], and before you know it, we're nonexistent in the bidding market." He doesn't bid in the open market much these days. Instead, his company has been busy working for major developers, such as Schuler Homes, which is building Kapolei Knolls in west Oahu (400 units) and Leolani in Hawaii Kai (60 units). The business agreement is a win-win situation for both Schuler Homes and Smith Masonry.

FROM THE GROUND UP: Steve Dewald, owner of Steve's Gardening Service, shares the market with unlicensed landscapers. His company has been in business for 10 years.

In fact, Schuler periodically compiles its own list of 100 pre-qualified contractors and subcontractors. Frank Payne, vice president of operations for Schuler says, "We sit down, meet with them [prequalified contractors] and get references. We make sure they are licensed, insured and don't have any judgments against them." Careful screening of subcontractors is important, especially as Hawaii's housing boom continues. Schuler Homes' introductory homeowners manual also advises homebuyers to only work with licensed contractors. But "no matter what we tell them [new homeowners], it's still up to them," Payne says.

Price is always a consideration for homeowners. The average price of a home remodeling job, according industry people, is about $15,000. It's no wonder the lure of using unlicensed contractors is great. If there's any incentive for a homeowner to use a licensed contractor, it is the state's Contractors Recovery Fund, a program that reimburses homeowners for damages - caused by licensed contractors only. The recovery fund is comprised of the fees collected from licensed contractors, and as of May 30, 2003, there was a total of $491,000 in the fund (see sidebar on page 31).

Homeowners are allowed to claim up to $12,500 per contract; the fund pays up to $25,000 for all claims against the same contractor. In 2002, homeowners made 10 claims. The total amount taken out of the fund that year: $96,199. The year prior, three claims, totaling $35,151, were made.

It's a safety net for homeowners who hire licensed workers. Nakamura, of the BIA, puts it plainly: "Many people won't complain [if an unlicensed contractor causes damage], because they know they got a deal, and there is no recovery either. But when you use a licensed contractor, you have access to the recovery fund. There is no hope with an unlicensed person."

The Last Resort

What happens when a homeowner is dissatisfied with the work of a licensed contractor, or if a licensed contractor defaults on an agreement with the homeowner? The Hawaii State Contractors License Board offers a service called the Contractors Recovery Fund. The fund — comprised of fees collected from licensed contractors — allows homeowners to recover up to $12,500 per contract on any judgment declared against a licensed contractor.

Here is how it works: The homeowner files a court action against the licensed contractor. Then he or she contacts the license board about the court action. If a judgment is filed against the licensed contractor, and he does not have the means to pay off the judgment, the homeowner files a claim against the Contractors Recovery Fund. The license board will pay up to $25,000 for claims against the same licensed contractor. If payments exceed more than $25,000, the license board may issue a pro-rata payment.

In the past four years:
2002 a total of 10 claims were made, totaling $96,199.
2001 three claims were made for $35,151.
2000 12 claims were made for $97,469.
1999 13 claims were made for $125,016.

The recovery fund is the last resort, and, oftentimes, the homeowner and the licensed contractor settle on the dispute themselves. Still, the fund is another reason homeowners should hire a licensed contractor.

SOURCE: Department of Commerce & Consumer Affairs, Contractors License Board

 

Value of Private Building Construction Authorizations (in $ thousands)

 

How To Hire A Contractor
PREQUALIFY A BIDDER
Review at least three written bids or estimates after providing drawings and plans to the contractors. Be wary if a bid is significantly less than other bids. It could mean that the contractor did not include all of your requested work. Do background checks and talk to references before hiring the winning bidder. Before signing any contract and applying for a building permit, be sure that the contractor is licensed in the proper category.

SIGN THE CONTRACT
Insist on a written contract. The contract should reflect the lien rights of all parties involved; the percentage of work that will be subcontracted; the contractor’s classification and license number; and whether or not the contractor is bonded. The contract also should reflect: the exact dollar amount that you agreed to pay the contractor; the date that the work should begin and the number of days for completion; the materials to be used; the percentage of work to be subcontracted; a statement of the risk of loss of any payments made to the contractor. Carefully review your contract. If you still have concerns, consult an attorney to clear up any questions. If the job is big, consider a completion or performance bond. It guarantees that your construction job will be completed.

AFTER SIGNING THE CONTRACT
Have complete plans showing exactly what will be built, and a complete set of specifications related to the drawn plans. You may want to have a licensed engineer or architect look at the documents. Keep a file of all work related to your project. Check your records against lien releases from subcontractors or material suppliers. Keep changes to contracts or specifications to a minimum, but if you do change orders, make sure they are written.

THROUGHOUT THE PROCESS
Regularly review the contractor’s work as it nears completion. Do a final assessment. To file a complaint about licensed and unlicensed contracting work: Consumer Resource Center (808) 587-3222, press 2 rico@dcca.state.hi.us To hear a complaint history about a specific contractor, or to find out if the contractor is licensed: (808) 587-3222, press 1

OWNER-BUILDER PERMITS
Homeowners who wish to build or renovate their own homes need to register for an owner-builder permit at their nearest county building office. The permit allows homeowners to be their own general contractor and oversee the work of hired subcontractors. As acting employers, homeowners must provide temporary disability, unemployment and workers’ compensation insurance, and they also must follow employment-tax laws. The hired subcontractors must be licensed, of course. For information about Building Permits and Owner-Builder agreements: OAHU (808) 523-4505 KAUAI (808) 241-6655 MAUI (808) 270-7250 BIG ISLAND (808) 961-8331

SOURCE: The Contractors License Board, the Regulated Industries Complaints Office (RICO), Hawaii Department of Commerce & Consumer Affairs

 

Estimated Value of Completed Construction, New Private Building Authorizations, and Government Contracts Awarded (in $ millions)

 

The ABC’s of Licensing
The licensing process is administered by the Contractors License Board, a 13-member group that operates under the DCCA. Licenses are renewed by Sept. 30 of every even year and range anywhere from $160 to $275. New applicants must submit their request for a license by the 20th of every month. They also must pay $50 for the application, an exam fee of $60, plus license fees that range anywhere from $255 to $545.

There are three types of licenses in Hawaii:

A: General engineering contracting. This license is for builders of harbors, tunnels, water, power and highways.

B: General building contracting. This allows contractors to build structures that require two or more unrelated specialties, such as signage and lighting.

C: Specialty contracting. There are more than 80 specialty categories. They run the gamut from window tinting and landscaping to tiling and carpet laying.

 

Number of private Authorizations

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