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.

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."

Value of Private Building Construction Authorizations (in $ thousands)

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

Number of private Authorizations