The clown in the home improvement suit - the MHIC as a farce to be reckoned with

A few people know my story.  It is one of opportunity and an example of the America spirit.  But at the same time, it is tragic how idiotic lawmakers and well-intentioned bureaucrats have made it more difficult for someone to compete and stay in business.  I am specifically citing the Maryland State regulations pertaining to Home Improvement businesses as being the culprit that makes it more difficult to remain afloat in this economic environment.

Admittedly, I started out as an unlicensed contractor, ignorant to the regulations that existed in the state.  I started painting houses after being financially wiped out when a partner, in an insurance business, walked off with all our corporate cash.  Needing to feed my family of three young children plus a wife, I reverted to a skill I had developed in putting myself through college in the late 70's.  Fortunately, a good friend of mine got me started as a handyman at his estate.  Working out of my family Ford Tempo (sedan), I started passing out business cards to family, friends and paint stores.  The first contract I got was an old Victorian in Lutherville.  The job came with a huge financial loss and a letter from the Home Improvement Commission warning me to become licensed, or I was subject to a $10,000 fine and/or a year in jail.  Needless to say, this surprised me.  I hustled to get my license before I did any more marketing of my new painting business.

I remember the day I was notified that I had obtained my license.  When I opened the door to our house, after a long day at work, my wife had strung a banner across the arch to our dining room that read, "Congratulations, #46541!"  It really was a momentous occasion at our house!

For purposes of understanding, allow me to explain the breakdown of MHIC licenses that are available:
Sales License - allowed to negotiate the contract and collect a deposit, but not allowed to perform any work.  Usually works for a General Contractor license holder
Sub-contractor's license - allowed to do the work, based on reported trade competency, but not allowed to negotiate a contract or handle money from the customer.  Usually works for a General Contractor license holder
General Contractors license - allowed to negotiate a contract directly with the consumer, handle deposits or payments from the consumer and do the work.  May also hire either or both a Sales and Sub-contractor license holder.  I held a GC License for years.
In order to be licensed, I had to study a state manual on business principles and state regulations.  I had to pass an open book test, provide proof of financial viability, knowledge of my industry through references and obtain liability insurance.  I had to provide the home improvement commission with certificates of insurance, proof that I was continually covered, plus workers compensation if I had hired just one person.  It is the law, the regulation to be entitled to be in (a legitimate) business.  And so I abided for years.

I eventually joined my trade association (the PDCA) in an effort to become more professional in my business.  The more I learned about the painting business, the more I learned what I didn't know.  And the more I learned about proper pricing, customer and employee relations, and quality of service.  I tried to put all these things in place, but learned it had to be done a piece at a time.  I hired consultants, but learned that I could only implement what I was competent in.  And found many things I wasn't competent in.

As I would market, and do estimates, on my follow ups, I found many of my competing contractors were unlicensed ones.  Somehow, many of the people I gave estimates to would give me information on what I was competing with.  Perhaps, this just became a sticking point with me.  For approximately a year, I spent time as a sales person for two of the larger paint companies.  I had access to their customer base.  In both instances, I did a personal study of the list of contractor customers of the paint companies and compared them to the list of licensed contractors in the Maryland Home Improvement Commission (MHIC) online data base.  What was discovered was that 2/3rds the customer base of both credit and cash accounts were not licensed through the MHIC.  This became an appalling statistic.  And I began to ask why so many were undetected.  After all, somebody had to have turned me in at an early stage of my business.  Why hadn't these long standing businesses been called out also?

Over the last several years, when asked, the MHIC would say that is the job of the market, the licensed contractor community and the general public, to police the unlicensed contractors.  They said they didn't have the resources and personnel to police the marketplace.  They were too busy handling complaints between customers and contractors.  In addition, they said unlicensed contractors did not pose a significant problem to the public.  They cited their own statistic on that.  By chance, I had the opportunity to meet a person who worked in the executive offices of the MHIC through a mutual friend.  This person told me that they have thousands of complaints against licensed contractors and relatively only a few dozen against unlicensed ones.  Their in house information did not justify policing licensing status in the marketplace.

It wasn't until many years later, I found out why there may be more complaints against licensed contractors versus unlicensed ones. 

Here are some issues that exist with the MHIC for legitimate contractors:

1. MHIC rules promote extortion.  As in my case, I had a customer who found another cheaper contractor to do their work after I had already started the job with a significant deposit ($3000 against a $9000 job), received as allowed by MHIC regulations.  Coupled with delays due to weather and having to postpone at a very inopportune time of the repair process, the customer got justifiably concerned over the progress of the job (as I was due to the unforeseen delays...I had guys who wanted to work).  This customer threatened to take me to the MHIC if I did not return all of the deposit money and cancel the contract.  We had completed over half the job and had run up approx $5000 in billable work at that point.  But they still demanded that I return their deposit, and they turned me in, with a complaint to the MHIC.  Yes, I had everything documented as to our progress including pictures, but I didn't want the blemish to appear on my then perfect MHIC record.  So, I agreed to a $1000 payoff for the customer to drop their complaint.  The customer basically blackmailed me and extorted funds from me.  In short summary, the MHIC regulations allow unruly and unethical consumers the opportunity to extort funds from legitimate contractors.  
2. MHIC identifies and promotes opportunities for retaliation.  In the past, before I was licensed, a person could turn in an unlicensed contractor and remain anonymous.  Today, the name of the accuser or originator of the complaint must accompany the formal complaint.  Who, in their right mind, as a permanently documented and visible person, wants to report someone who may or may not be of criminal mentality while they are still free and loose in society?  That's not to say that all unlicensed contractors have criminal mentality, but that's like saying not all the chambers have bullets in them, so it would be OK to pull the trigger.  This policy is ill-advised.  Complaints or reports about unlicensed contractors should always carry anonymity.
3. MHIC relies on other people to do their jobs.  The MHIC now openly admits to rely on licensed contractors to turn in unlicensed ones.  How foolish is this policy?  Do I want my tires slashed in retaliation to turning in an unlicensed contractor?  Or would it be better for me to just tend to the difficulties of business instead of wasting my valuable time in filling out complaint forms?  (Instead, am I wasting my time blogging about it?)  And remain vulnerable to retaliations?  Suppose we are in a war, and the sonar room was setup at headquarters. It would be as if the battleships were told to be on the lookout for enemy submarines. And HQ's requirement is: "Just let us know, and we'll take care of making sure the enemy is fired upon. We're too busy cleaning our instruments, and we had to hire too many people to do THAT, we can't look in the water for you!"
4. MHIC rules are inequitable.  The MHIC regulations pertain to doing any kind of work on a residence.  It does not pertain to commercial or industrial work.  So, the MHIC rules pertain to businesses like mine that centered around working on residential buildings.  Even though it is a fact that many commercial and industrial contractors are privately asked to perform work at the homes and residences of their commercial and industrial customers, they do so without an MHIC license and abiding by it's stipulations.  However, because I am required to have an MHIC license, with resulting quality requirements, my per man hour and production costs start out higher and can not compete in the commercial or industrial market.  But they can compete in the residential market, price wise (perhaps not quality wise).  Selective application of the MHIC licensing is another inept, unfair and unjust policy.
5. The MHIC does a horrible job at properly educating the public.  Many unlicensed contractors know that the state will not police their businesses for proper MHIC licensing.  But will police for business licenses.  So, many contractors will say that they are "licensed" when in fact, they only hold a business license and NOT an MHIC license, which is additionally required.  If a customer asks, "are you licensed?"  The contractor, meaning he holds a business license, will say, "Yes."  The consumer does not know enough to ask if they hold an MHIC license, for the most part.  Since there are no reciprocal arrangements between licensing agencies in the state of Maryland, no checking is done to ensure that contracting companies hold the proper licensing requirements.  And consumers are not aware of the differences between a simple business license and an MHIC one.
6. The MHIC license does not always equate to quality work.  There are many unlicensed painting contractors out there who provide high quality work and high caliber service.  They may be upstanding, good people.  But the fact remains that they are still unlicensed and thereby operating illegally.  The MHIC test does not test for competency in the trade.  Although the application asks for 2 years of experience in the trade, it is supposed to be verified by employment records.  And as a license holder, I am "regulator-ily" qualified to offer any new Home Improvement service to the consumer, regardless of my competency in that service or product.  Much of the public does not care about proper licensing, either.  They may, in fact, actually hire unlicensed contractors because they want a cheaper price, or they know the person by reputation, or by referral.  The public does not always care about whether a small contractor is licensed or not.  They usually care about quality of character.  There is no requirement for the consumer to hire a licensed contractor either.
7. An MHIC license does not assure an up to date, educated contractor.  There are no ongoing requirements to become proficient in my trade or business once I obtain an MHIC license.  All I have to do is maintain credit worthiness and pay my license renewal fee (tax) every other year.  There are no continuing educational issues like being informed on update legislative issues as laws change, or ethics requirements, or proficiency of trade tests.  There are no ongoing courses on business management requirements, on updating knowledge of accounting principles, or environmental issues (although the Federal EPA is now requiring separate requirements on these issues).  Of course requiring these updates of any licensee would only widen the divide between the legitimate contractor versus the black market contractor.  One would have to seriously consider "going underground." based on costs and profits alone.
8. There's no protection for improper referrals.  Many of my Realtor friends have cards from unlicensed contractors in their portfolios.  My question is why are these (Maryland licensed) entities allowed to promote and refer unlicensed, illegal entities?  I understand the ramifications of liability associated with referring out bad contractors, but why isn't there a universal application of licensing regulations applied to referrals.  Why does one licensed entity get to refer an unlicensed entity, when there is a requirement for that entity to be licensed?  Shouldn't there be a requirement that if you were a licensed entity in the state of Maryland, then you would be required to promote and protect the licensing requirements throughout the state as it applies to all businesses?  Shouldn't it be just as illegal for licensed entities to refer unlicensed entities, as it is for unlicensed entities to exist?  Aren't the licensed entities promoting illegal behavior through referring and promoting unlicensed contractors?  I say, if you are going to have licensing of contractors at all, then the same penalties should apply to those who promote these illegal operations.

In conclusion, in the state of Maryland, if I want to maximize my profits in order to grow, it is better for me to fly UNDER the radar by not being licensed than to be licensed.  But I can not grow as an unlicensed contractor because I then start flying into the radar. It starts looking better to be a small contractor, with personal connections and no license.  I can not, however, succumb to that temptation because of my high visibility in this industry.  I couldn't help but think that some bureaucrat would want to make an example of me.  So, it is better to go out of business than to start up operations again and create new jobs.  Regulations are strangling opportunities to develop my business and grow new jobs.

What should the legislature do? 

• Expand the MHIC regulations to more businesses?  As a Republican, I abhor this as more bureaucratic costs.  Although it would bring in more money to the coffers of the state, this simply increases costs more to an ever shrinking till for each business. 
• Remove the regulations altogether?  Now, I like THAT idea!  But in our ever liberal lawmakers' twisted mentality, that will never happen...to remove protection of the consumer. 
• Perhaps a better defined regulation should be enacted.  Perhaps applying MHIC type licensing to contracts only over a certain size (like $1500), or to contractors who have a total of 5/10/15 or more employees or subcontractors.  This would allow the guy who is simply out of work to work for his generous neighbors to help him out.  This would allow the little guy some relief of regulations and expenses associated with running his/her business.  The market will take care of those who fail the test of business ownership.  And membership in and participation in trade association educational functions can ensure a better qualified contractor for the public to choose from. 

Government protection has failed.  And it removes accountability of incompetent contractors allowed to exist through ineffective laws and regulations.  Let's get it right, or get rid of it.