(Written by Ray Gee – NMHBA President – Originally published in the May 2014 Housing Journal)

Pressure for Consumer Protection in Construction

Once again we’re spending much time and effort dealing with consumer protection laws resulting from public pressure to rectify construction disputes. It’s hard to argue against some form of consumer protection. I’m in favor of having our food and medicines subjected to regulation and inspection. But I want that regulation and inspection to be effective. The current discussion involves the rules that will be used to enforce the $10,000 code compliance bond that all licensed contractors are now required to carry. This bond is the latest effort in a long line of laws created by our Legislature to address construction services customers who may have been “wronged”.

Some of you may remember that the bill creating the code compliance bond started out being a consumer protection fund – in essence a pool of money that the courts could hand out to wronged home owners. When the money ran out, CID was to send a bill to all licensed contractors to replenish the fund. NMHBA vigorously opposed that concept but finally agreed with the new code compliance bond concept as a replacement for the former contractor license bond. So, will the new bond finally stop all the problems? The answer is “No”, unfortunately. For instance, the contractor code compliance bond will do nothing to protect consumers from fraud and deceptive practices. I have no doubt that there are code violations that cause damage to residences, and it will help in those cases. But I suspect that shoddy, but code compliant, construction, as well as outright fraud, leads to far more damage.

As I noted, the new bond is the latest effort to protect consumers from bad contractors. Another example of consumer protection is contractor licensing. I’ve always been in favor of contractor licensing, believing that it weeded out the bad contractors and was generally beneficial to professionals and consumers alike. But is that true? I recently read an article from the December 1997 issue of Qualified Remodeler that describes what they called “The Licensing Law Cycle”. This article generally states that the main benefit of licensing laws are the many jobs created to make the regulatory system function; that the whole scheme is never particularly effective, and that, when the laws don’t work, ever-increasing regulation is created in successive attempts to protect consumers from bad construction experiences. Does any of that sound familiar?

The following excerpts are quoted from the article:

“If licensing laws are effective at protecting consumers, you’d expect to find evidence that consumers were happier with contractors in heavily regulated states than they are in states with no licensing. But, this is not the case… Various studies have shown that there is no correlation between the existence or ‘strength’ of licensing laws and customer satisfaction.… Similarly, when regulated states are compared to unregulated states with similar demographics and economies, complaint records are comparable. And when states that had no licensing laws add them, there is no change in complaint levels.… Another factor undermining the licensing laws is that, in general, consumers know from their collective experience that licensing within an industry is a better predictor of price than quality.… This means that consumers are often more willing to support a large group of unlicensed contractors regardless of the legal requirements.… In fact, the more stringent the licensing laws and the higher the costs they impose, the more incentive both consumers and contractors have to operate outside the law.”

Although this article is not new, it still seems quite timely and relevant. And let me be clear. I’m not advocating that we do away with contractor licensing or consumer protection, but rather I want to support only those efforts that lead to the desired outcome and are effective.

This whole subject is on my mind because your NMHBA leadership is deeply involved with Construction Industries Division and Commission in drafting the new rules concerning when and how the contractors code compliance bond can be paid out in response to an uncorrected code violation. And, by the way, some bonds have been called, even without these rules in place.

In the discussions about the new rules, a new issue has come up that we are now debating and trying to resolve. The issue is the question of whose bond would be called when the work in question was completed by a licensed subcontractor working under a general contractor’s permit. Since NMHBA is committed to prevent “stacking”, where multiple bonds are called for one violation, this question must be answered.

But it seems that no matter how you answer it, one of the parties skates on the violation. If the subcontractor performed the work in question, it would seem reasonable to call his bond. In the case where the subcontractor has pulled his own permit, this is not a problem. But what happens when the subcontractor is not required to pull his own permit and is working under the general contractor’s permit? How would CID identify the subcontractor without going through the general contractor? And isn’t the general contractor responsible for all work performed under his permit? If the subcontractor’s bond is called, then the general contractor skates. But, if the general contractor’s bond is called, the subcontractor skates. Is this reasonable since the subcontractor actually performed the work leading to a violation? And what if the general contractor doesn’t perform any of the work with his own employees?

In the end, we need a version of the new rules that balances the interests of contractors and consumers. Which version is most fair for all parties to the project, including the customer? And, we should also remember that these rules are not intended to solve every problem that might arise. Other methods of dispute resolution are always available to the parties to a contract.

What is your opinion? Please feel free to give me a call or an email with your thoughts.