A performance audit of the Arizona Registrar of Contractors

              STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
0 f
THE ARIZONA REGISTRAR OF CONTRACTORS
OCTOBER 1979
THE REGISTRAR OF CONTRACTORS HAS NOT
ADEQUATELY PROTECTED THE PUBLIC FROM
INCOMPETENT, UNSCRUPULOUS OR INSOL-VENT
CONTRACTORS.
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 79- 14
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL ,
SUITE 600
112 NORTH CENTRAL AVENUE
PHOENIX, ARIZONA 85004
255- 4385
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL SUITE 820
33 NORTH STONE AVENUE
TUCSON, ARIZONA 85701
882- 5465
October 5, 1979
The Honorable Bruce Babbitt, Governor
Members of the Arizona Legislature
Aaron Kizer, Registrar of Contractors
Transmitted herewith is a report of the Auditor General, A Performance Audit of
the Arizona Registrar of Contractors. This report is i n response t o a
September 19, 1978 resolution of the J o i n t Legislative Budget Committee and a
January 18, 1979 resolution of the J o i n t Legislative Oversight Committee.
A summary of t h i s report is found on the blue pages a t t h e f r o n t of the report.
A response t o t h i s report by the Registrar of Contractors is found on the
yellow pages preceding the appendices of the report.
My staff and I w i l l be happy t o meet with the appropriate l e g i s l a t i v e
committees, individual l e g i s l a t o r s or other s t a t e o f f i c i a l s t o discuss or
c l a r i f y any items i n t h i s report or t o f a c i l i t a t e the implementation of the
recommendations.
Respectfully submitted,
Douglas R. Norton
Auditor General
S t a f f : Gerald A. Silva
Dwight Ochocki
Steve Schmidt
Kim Beck
O F F I C E OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF THE
ARIZONA REGISTRAR OF CONTRACTORS
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 79- 14
TABLE OF CONTENTS
SUMMARY
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDINGS
FINDING I
The Registrar of Contractors1 method o f screening
applicants prior t o licensing is i n e f f e c t i v e .
CONCLUSION
RECOMMENDATION
FINDING I1
A prospective c o n t r a c t o r ' s knowledge or competency
is not e f f e c t i v e l y evaluated by the Registrar of
Contractor's examination process.
CONCLUSION
RECOMMENDATION
FINDING I11
The Registrar of Contractors1 bonding requirements
provide l i t t l e i n the wayt of protection t o the
consumer.
CONCLUSION
RECOMMENDATION
FINDING I V
Improvements are needed i n the procedures employed
by the Registrar of Contractors t o resolve complaints
a g a i n s t c o n t r a c t o r s and punish licensees found guilty
of offenses.
CONCLUSION
Page
1
3
7
RECOMMENDATION
FINDING V
Page
5 6
The R e g i s t r a r ' s annual l i c e n s e renewal process is
not i n compliance with s t a t u t o r y requirements
regarding timely deposits of monies received. In
addition, i n t e r n a l controls over t h e l i c e n s e
renewal process are not adequate t o allow for a
determination t h a t s t a t u t o r i l y prescribed l a t e
f i l i n g penalties are being properly imposed.
CONCLUSION
RECOMMENDATION
FINDING V I
Changes are needed t o improve the efficiency of the
annual l i c e n s e renewal of contractors.
CONCLUSION
RECOMMENDATION
OTHER PERTINENT INFORMATION
Unrelated trade requirements
Licensing Exemption
Numerous contractor c l a s s i f i c a t i o n s
WRITTEN RESPONSE TO THE AUDITOR GENERAL'S REPORT
APPENDICES
APPENDIX I - Selected licensing requirements for those
s t a t e s licensing the majority o f contractors
APPENDIX I1 - S t a t e s requiring licensure for only a
segment of the c o n t r a c t i n g i n d u s t r y
APPENDIX I11 - Utah experience record
APPENDIX I V - Legislative Council Opinion, March 23, 1979
APPENDIX V - Legislative Council Opinion, March 27, 1979
APPENDIX V I - Hawaiian s t a t u t e s pertaining t o recovery fund
APPENDIX V I I - Legislative Council Opinion, May 3, 1979
APPENDIX V I I I - Legislative Council Opinion, May 2, 1979
APPENDIX I X - Professor Jonathan Rose's Report
SUMMARY
The Office o f the Registrar of Contractors ( Registrar) was established by the
Legislature i n 1931. The agency is responsible for the licensing and control
of contractors i n Arizona.
The Registrar has a s t a f f of 63 full- time employees and is funded through the
S t a t e General Fund.
Our review has shown t h a t the Registrar of Contractors has not adequately
protected the public from incompetent, unscrupulous or i n s o l v e n t c o n t r a c t o r s
i n that:
- The R e g i s t r a r ' s methods used t o screen applicants prior t o licensing
are i n e f f e c t i v e a s a means t o e v a l u a t e t h e prospective contractor's
competency. ( page 12)
- The examination procedures of the Registrar, which are designed
ostensibly t o determine the technical competency of prospective
contractors, are not i n compliance with s t a t e law and are not an
e f f e c t i v e method of screening applicants t o protect the public
against incompetent contractors. ( page 24)
- Consumers a r e provided l i t t l e i n the way of protection under the
c u r r e n t c o n t r a c t o r bonding requirements. ( page 33)
- Improvements a r e needed i n the procedures used by the Registrar to
resolve complaints against contractors and punish licensees
found g u i l t y of offenses. ( page 43)
- The annual renewal process is not i n compliance with s t a t u t o r y
requirements. Additionally, i n t e r n a l controls over t h e l i c e n s e
renewal process are inadequate. ( page 56)
- Changes a r e needed i n the annual renewal process t o improve
efficiency. ( page 62)
It is recommended t h a t :
1. Financial statements, l e t t e r s of recommendation and other extraneous
information c u r r e n t l y r e q u i r e d o f a p p l i c a n t s , which serve no useful
purpose i n t h e evaluation of prospective c o n t r a c t o r s , not be required as a
condition of l i c e n s u r e . ( page 23)
2. The forms and procedures used t o evaluate an a p p l i c a n t ' s p r i o r experience
be changed t o allow t h e R e g i s t r a r t o more a c c u r a t e l y evaluate an
a p p l i c a n t ' s t e c h n i c a l q u a l i f i c a t i o n s f o r l i c e n s u r e . ( page 23)
3. The t r a d e examination c u r r e n t l y given t o most a p p l i c a n t s t o determine
t h e i r t e c h n i c a l a b i l i t y be discontinued and r e p l a c e d w i t h a r e v i s e d method
of experience v e r i f i c a t i o n . ( page 32)
4. Additional methods be developed t o educate a p p l i c a n t s for l i c e n s u r e i n
busic business s k i l l s . ( page 32)
5. The recovery fund method of consuqer p r o t e c t i o n be adopted t o remove
i n e q u i t i e s i n t h e present bonding system. ( page 42)
6. The R e g i s t r a r adopt procedures and/ or r u l e s and r e g u l a t i o n s t o reduce t h e
time it takes t o resolve complaints f i l e d a g a i n s t c o n t r a c t o r s . ( page 55)
7. Procedures be adopted t o a s s u r e t h a t c l o s e d a p p e a l s of R e g i s t r a r decisions
be noted i n a timely manner and a p p r o p r i a t e a c t i o n taken by the R e g i s t r a r .
( page 55)
8. S u f f i c i e n t i n t e r n a l c o n t r o l s be implemented t o a s s u r e t h e p r o p r i e t y o f t h e
l i c e n s e renewal process. ( page 61)
9. Changes be made i n t h e annual renewal of l i c e n s e s t o improve e f f i c i e n c y .
( page 64)
INTRODUCTION AND BACKGROUND
I n response t o a September 19, 1978 r e s o l u t i o n of t h e J o i n t L e g i s l a t i v e Budget
Committee and a January 18, 1979 r e s o l u t i o n of t h e J o i n t L e g i s l a t i v e Oversight
Committee, we have conducted a performance a u d i t as a p a r t of the s u n s e t review
of t h e R e g i s t r a r o f C o n t r a c t o r s i n accordance with ARS 41- 2351 through 41- 2374.
The Office o f t h e R e g i s t r a r o f C o n t r a c t o r s ( R e g i s t r a r ) was e s t a b l i s h e d by t h e
L e g i s l a t u r e i n 1931. Over t h e p a s t 48 years 13 R e g i s t r a r s have been appointed
by t h e various Governors, t h e c u r r e n t R e g i s t r a r being Aaron Kizer appointed May
25, 1979.
The agency's s t a t e d goals and o b j e c t i v e s are:
1. To promote and maintain high q u a l i t y c o n s t r u c t i o n throughout t h e
s t a t e , and
2. To provide r e d r e s s f o r i n d i v i d u a l c a s e s o f substandard performance.
To accomplish t h e s e o b j e c t i v e s t h e R e g i s t r a r of Contractors performs t h e
following a c t i v i t i e s :
- Screens and e v a l u a t e s a p p l i c a n t s f o r c o n s t r u c t i o n l i c e n s e s ,
- Administers examinations,
- Licenses s u c c e s s f u l a p p l i c a n t s ,
- Annually renews l i c e n s e s ,
- Processes consumer complaints,
- I n v e s t i g a t e s unlicensed a c t i v i t y ,
- Conducts hearings as p a r t of t h e complaint process, and
- Acts a s a c o n s u l t a n t t o s t a t e , county and municipal governments a s
well as school o f f i c i a l s and c o n t r a c t o r s when considering
c o n s t r u c t i o n programs.
Due t o the rapid increase i n c o n s t r u c t i o n a c t i v i t y throughout Arizona, the
workload of t h e R e g i s t r a r has increased s u b s t a n t i a l l y , primarily i n t h e area of
consumer complaints. Because of t h i s r a p i d i n c r e a s e , the backlog of unresolved
complaints has n e a r l y t r i p l e d from June 30, 1977 t o May 1, 1979, i n c r e a s i n g
from 1,067 t o 3,055, r e s p e c t i v e l y .
Budget information f o r the R e g i s t r a r f o r f i s c a l years 1974- 75 through 1979- 80
is shown i n Table 1. Also shown is a summary of the growth i n the R e g i s t r a r ' s
a c t i v i t y l e v e l during t h e same period.
Regulation Of Contractors
The r e g u l a t i n g of c o n t r a c t o r s a c r o s s the country is highly diverse i n nature.
A s shown in Table 2, as of Septe r! ber 1979, Arizona was one of 20 states, t h a t licenses
a majority of c o n t r a c t o r s , however, some l i c e n s i n g requirements involve l i t t l e
more than mere r e g i s t r a t i o n . An a d d i t i o n a l 17 s t a t e s plus the D i s t r i c t of
Columbia l i c e n s e only a segment of the c o n t r a c t i n g i n d u s t r y . That segment is
generally comprised of e l e c t r i c i a n s and e l e c t r i c a l c o n t r a c t o r s . The remaining
13 s t a t e s have no l i c e n s i n g requirements o f c o n t r a c t o r s at the s t a t e l e v e l .
a
The O f f i c e o f the Auditor General expresses its g r a t i t u d e t o t h e R e g i s t r a r of
Contractors and the a d m i n i s t r a t i v e s t a f f f o r t h e i r cooperation, a s s i s t a n c e and
c o n s i d e r a t i o n during the course of our a u d i t .
TABLE 1
REVENUE, EXPENDITURES AND ACTIVITY LEVELS FOR THE
REGISTRAR OF CONTRACTORS DURING FISCAL YEARS
1974- 75 THROUGH 1979- 80
Estimated
FY 74- 75 FY 75- 76 FY 76- 77 FY 77- 78 FY 78- 79" FY 79-- 80
Revenues
License f e e s , s a l e s and s e r v i c e
Renewals
I n t e r e s t on cash bond fund
Miscellaneous
Total Revenues
Expenditures
ul
Full- time employees
Personal s e r v i c e s ( i n c l .
employee r e l a t e d )
P r o f e s s i o n a l s e r v i c e s
Travel
Other operating expenses
Equipment
Total Expenditures
A c t i v i t y Measurements
New l i c e n s e s issued 1,787 1,958 1,887 2,082 2,127 2,800
Licenses renewed 10,277 10,528 10,880 11,470 11,800 12,694
License examinations 3,337 3,544 3,411 3,94 1 3,929 4,007
Complaints received 5,222 4,053 4,226 5,678 7,509 10,333
Complaints closed 6,078 4,453 4,177 4,504 5,936 8,266
Unresolved complaints a t years end unknown 866 1,067 1,895 3,243 4,000
Total hearings and rehearings 6 30 760 798 742 755 875
C i t a t i o n s and p r o t e s t s issued 1,309 1,163 1,097 1,080 1,426 2,070
* For f i s c a l year 1978- 79 the agency changed from a 90/ 10 agency t o d i r e c t a p p r o p r i a t i o n
** Included i n " License Fees, S a l e s and Service" t o t a l
A COMPARISON OF STATE REGULATION OF CONTRACTORS AS OF SEPTEMBER 1979
Small Segment of
Most Types of t h e Contracting
Contracting Required I n d u s t r y Required No Licensing
S t a t e t o be Licensed* t o be Licensed** Requirement
Alabama
Alaska
ARIZONA
Arkansas
C a l i f o r n i a
Colorado
Connecticut
Delaware
F l o r i d a
Georgia
Hawaii
Idaho
I l l i n o i s
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
M i s s i s s i p p i
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode I s l a n d
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
D i s t r i c t of Columbia
* See Appendix I for more d e t a i l e d information. ** See Appendix I1 f o r more d e t a i l e d information.
SUNSET FACTORS
SUNSET FACTOR: THE OBJECTIVE AND
PURPOSE I N ESTABLISHING THE REGISTRAR
OF CONTRACTORS AND THE REGULATION
OF CONTRACTORS
The Registrar of Contractors was established i n 1931 ( ARS 32- 1101 through ARS
32- 1168) with no e x p l i c i t l e g i s l a t i v e statement of objective or purpose.
Various court cases have s t a t e d t h a t the purpose of t h e R e g i s t r a r of
Contractors is t o protect the public against unscrupulous and unqualified
persons purporting t o have capacity, knowledge o r q u a l i f i c a t i o n of a
contractor.
The agency has s t a t e d its organizational goals and objectives t o be:
" 1. To promote and maintain high q u a l i t y construction throughout the
s t a t e .
2. To provide redress for individual cases of substandard performance. "
SUNSET FACTOR: THE DEGREE TO WHICH
THE AGENCY HAS BEEN ABLE TO RESPOND
TO THE NEEDS OF THE PUBLIC AND THE
EFFICIENCY WITH WHICH I T HAS OPERATED
The Registrar has not f u l l y responded t o the public need i n t h a t the l i c e n s i n g
of contractors currently provides the public with l i t t l e assurance t h a t
contractors are competent or scrupulous. In addition, the present bonding
system f o r c o n t r a c t o r s does not provide consumers with s u f f i c i e n t protection.
( page 33) Further, a l e s s time consuming and more e f f i c i e n t method of
resolving consumer complaints needs t o be developed. ( page 43)
SUNSET FACTOR: THE EXTENT TO WHICH
THE AGENCY HAS OPERATED WITHIN THE
PUBLIC INTEREST
The a c t i v i t i e s of the Registrar of Contractors appear t o be i n the public
i n t e r e s t . The R e g i s t r a r ' s l i c e n s i n g of contractors t o ensure minimum
competency and the processing of consumer complaints are i n the public a
i n t e r e s t .
SUNSET FACTOR: THE EXTENT TO WHICH
RULES AND REGULATIONS PROMULGATED BY
THE AGENCY ARE CONSISTENT WITH THE
LEGISLATIVE MANDATE
In accordance with ARS 41- 1002.01 the Arizona Attorney General reviews a l l a
r u l e s and regulations proposed by the Registrar of Contractors as t o form and
t o assure t h a t the r u l e is within the power of the agency t o adopt and within
t h e l e g i s l a t i v e standards enacted t o date.
a
After reviewing the r u l e s and r e g u l a t i o n s p e r t a i n i n g t o contractors t h a t have
been promulgated by the Registrar of Contractors, it appears t h a t t h e s e r u l e s
and regulations a r e consistent with ARS 32- 1101 through 32- 1168.
SUNSET FACTOR: THE EXTENT TO WHICH
THE AGENCY HAS ENCOURAGED INPUT FROM
THE PUBLIC BEFORE PROMULGATING ITS
RULES AND REGULATIONS AND THE EXTENT
TO WHICH I T HAS INFORMED THE PUBLIC
AS TO ITS ACTIONS AND THEIR EXPECTED
IMPACT ON THE PUBLIC
Public hearings are held for a l l proposed rules and regulations prior t o t h e i r
adoption. Notices of hearings are posted i n the Registrar of Contractor's
Office and a r e mailed t o a l l groups and individuals who have requested t o be
placed on a mailing list. The public is invited t o attend a l l r u l e hearings and
is given the opportunity t o comment on a l l proposed rules and regulations.
The Registrar also prepares a weekly b u l l e t i n which contains such information
as pending license applications, name changes, suspensions and revocations.
For a small f e e , t h e s e b u l l e t i n s are sent t o individuals or groups who have
requested copies.
SUNSET FACTOR: THE EXTENT TO WHICH
THE AGENCY HAS BEEN ABLE TO INVESTIGATE
AND RESOLVE COMPLAINTS THAT ARE WITHIN
ITS JURISDICTION
During f i s c a l year 1978- 79 the Registrar received over 7,500 complaints f i l e d
a g a i n s t c o n t r a c t o r s i n Arizona. The methods used t o r e s o l v e t h e s e complaints
are i n e f f e c t i v e and i n e f f i c i e n t . ( page 43)
The consumers, f o r the most p a r t , a r e aware of the complaint s e c t i o n of the
Registrar as i l l u s t r a t e d by the f a c t t h a t a survey of persons who had f i l e d
complaints with the Registrar revealed t h a t only 13.2 percent reported any
d i f f i c u l t y i n learning where t o f i l e a complaint against a contractor.
However, of those persons who responded t o the survey, 38.6 percent felt t h a t
the Registrar does not e f f e c t i v e l y p r o t e c t the public against incompetent or
unethical contractors.
SUNSET FACTOR: THE EXTENT TO WHICH
THE ATTORNEY GENERAL OR ANY OTHER
APPLICABLE AGENCY OF STATE GOVERNMENT
HAS THE AUTHORITY TO PROSECUTE UNDER
THE ENABLING LEGISLATION
Arizona Revised S t a t u t e s 32- 1164 s t a t e s t h a t s t a t u t e violations a r e Class 2
misdemeanors. This section, however, does not specify the prosecuting agency
for such violations. Per ARS 32- 1166 the Registrar may, e i t h e r through the
Attorney General or through the applicable county attorney, appeal t o the
Superior Court f o r an injunction against any individual who v i o l a t e s any
provisions of the s t a t u t e s .
SUNSET FACTOR: THE EXTENT TO WHICH
AGENCIES HAVE ADDRESSED DEFICIENCIES
I N THEIR ENABLING STATUTES WHICH
PREVENT THEM FROM FULFILLING THEIR
STATUTORY MANDATE
The R e g i s t r a r of C o n t r a c t o r s h a s been a c t i v e i n submitting and supporting
l e g i s l a t i o n t h a t addressed d e f i c i e n c i e s i n t h e agency's enabling s t a t u t e s . •
The R e g i s t r a r sponsored l e g i s l a t i o n t h a t became law ( ARS 32- 1124.01 and 32-
1152.01) i n 1977 t h a t included a l t e r n a t i v e s t o the cash d e p o s i t such a s
c e r t i f i c a t e s o f d e p o s i t and the provision f o r hearings on p r o t e s t e d l i c e n s e s .
The R e g i s t r a r sponsored l e g i s l a t i o n t h a t became law ( ARS 32- 1125.01 and 32-
1166) i n 1979 t h a t included an i n a c t i v e s t a t u s for l i c e n s e e s and up t o $ 1,000
i n c i v i l p e n a l t i e s f o r unlicensed c o n t r a c t o r s .
SUNSET FACTOR: THE EXTENT TO WHICH
CHANGES ARE NECESSARY I N THE LAWS OF
THE AGENCY TO ADEQUATELY COMPLY WITH
THE FACTORS LISTED I N THIS SUBSECTION
Adoption o f t h e recommended changes contained i n t h i s r e p o r t would r e q u i r e t h e
following s t a t u t e modifications:
1. ARS 32- 1122 B. 3 should be d e l e t e d from the s t a t u t e s . This s e c t i o n
r e q u i r e s the a p p l i c a n t t o submit a f i n a n c i a l statement t o the
R e g i s t r a r when applying for a c o n t r a c t i n g l i c e n s e . ( page 23)
2. ARS 32- 1122 D. 2 should be d e l e t e d from the s t a t u t e s . This s e c t i o n
r e q u i r e s the a p p l i c a n t t o submit two l e t t e r s of recommendation when
applying for a c o n t r a c t i n g l i c e n s e . ( page 23)
3. ARS 32- 1122 A. 3 should be d e l e t e d from the s t a t u t e s . This s e c t i o n
r e q u i r e s t h e R e g i s t r a r t o e s t a b l i s h w r i t t e n examinations for each
c l a s s o f c o n t r a c t i n g . ( page 32)
4. ARS 32- 1 122 F. 2 should be modified t o d e l e t e the r e f e r e n c e t o the
examination t e s t i n g the a p p l i c a n t ' s q u a l i f i c a t i o n i n t h e p a r t i c u l a r
t r a d e . ( page 32)
5. ARS 32- 1122 B. 4 should be modified t o delete the reference t o the
bond required o f contractors. ( page 42)
6. ARS 32- 1152 should be deleted from the s t a t u t e s . This section
pertains t o the bonding requirements. ( page 42)
7. ARS 32- 1152.01 should be deleted from the s t a t u t e s . This section
pertains t o a l t e r n a t i v e s t o the cash deposit form of bond compliance.
( page 42)
FINDING I
THE REGISTRAR OF CONTRACTORS1 METHOD OF SCREENING APPLICANTS PRIOR TO LICENSING
IS INEFFECTIVE.
The R e g i s t r a r of Contractors1 l i c e n s e a p p l i c a t i o n form and other p r e l i c e n s i n g
information requirements have t h e e f f e c t of providing the R e g i s t r a r with
information t h a t is not used and merely s e r v e s t o f r u s t r a t e a p p l i c a n t s i n t h e i r
attempt t o be l i c e n s e d . A s a r e s u l t , t h e mass of information requested of
a p p l i c a n t s provides an i n e f f e c t i v e and i n e f f i c i e n t method of screening
prospective c o n t r a c t o r s . ~ p e c i f i c a l l y , our review revealed t h a t :
1. The R e g i s t r a r ' s l i c e n s e a p p l i c a t i o n form is unnecessarily cumbersome
and should be shortened and s i m p l i f i e d .
2. Financial statements which a r e prepared by a p p l i c a n t s and submitted
t o t h e R e g i s t r a r p r i o r t o l i c e n s u r e a r e inadequate, o f t e n
i n a c c u r a t e , of l i t t l e value i n p r e d i c t i n g an a p p l i c a n t ' s success and
have never been used by t h e R e g i s t r a r .
3 L e t t e r s of recommendation f o r prospective l i c e n s e e s receive only a
cursory review by t h e R e g i s t r a r and appear t o serve no useful
purpose.
4. The R e g i s t r a r ' s current method of evaluating and v e r i f y i n g a l i c e n s e
a p p l i c a n t ' s past experience is i n e f f e c t i v e as a means of determining
the competency of prospective c o n t r a c t o r s .
The Greatest Challenge Encountered
By An Applicant For Licensure A s A
Contractor I n The Licensing Process
Is The Successful Completion Of The
R e g i s t r a r ' s License Application Form
The first step t o obtaining a c o n t r a c t o r ' s l i c e n s e i n Arizona is the completion
and submission of a l i c e n s e a p p l i c a t i o n form which c o n s i s t s o f 19 pages of
i n s t r u c t i o n s and forms. The completed application contains a t l e a s t two
l e t t e r s of recommendation, a f i n a n c i a l statement, experience v e r i f i c a t i o n a
forms, signed i n s t r u c t i o n s h e e t f o r examination, bonding information from
surety ( i f a p p l i c a b l e ) , signed " contemplated volume of workn form, signed and
notarized statement of t r u t h f u l n e s s of application, experience background
form, general information on applicant, background questions, and a signed a
declaration of c l a s s i f i c a t i o n desired. The application packet contains s i x
pages of i n s t r u c t i o n s .
Due t o the s i z e of the application form and the diverse informational require-
( I
ments, only 1/ 3 of the license applicants correctly complete the application
form the first time.
An analysis by the Office o f the Auditor General of completed application forms a
received by mail* during the first quarter of f i s c a l year 1978- 79 revealed t h a t
of the 228 applications submitted f o r the first time, 151 or 66.2 percent were
rejected because they were incomplete o r f i l l e d o u t i n c o r r e c t l y . This is
p a r t i c u l a r l y notable i n view of the f a c t t h a t t h i s first time success r a t e of
4
33.8 percent is s i g n i f i c a n t l y lower than the first time passing r a t e s on the
trade and Construction Business Management examinations ( 64.7 percent and 89.4
percent r e s p e c t i v e l y ) , which a r e administered by the Registrar. ( page 31)
Thus it appears t h a t the successful completion of the R e g i s t r a r ' s l i c e n s e
application form is t h e g r e a t e s t challenge faced by prospective licensees.
The extent t o which t h e f r u s t r a t i o n encountered by license applicants i n
attempting t o complete l i c e n s e applications r e s u l t s i n t h e i r abandoning the
idea of being licensed with r e s u l t a n t increased unlicensed a c t i v i t y cannot be
determined.
* Information on application r e j e c t i o n is maintained only on those mailed
i n t o the agency.
A review of the current 19 page application form and i n s t r u c t i o n sheets
revealed t h a t i f implemented, the recommendations on pages 23, 32 and 42 would
reduce the current 19 page application form t o f i v e or s i x pages.
Financial Statements Submitted By Applicants
To The Registrar A s Part Of The Application
Process Are Not Evaluated By The Registrar
Nor Do They Provide An Effective Means Of
Determining The Applicant's Future Success
O r Failure In The Contracting Business
Arizona Revised S t a t u t e s ( ARS) Section 32- 1122 requires a l l applicants to
submit f i n a n c i a l statements when applying for a c o n t r a c t o r ' s l i c e n s e . However,
the Registrar does not evaluate the f i n a n c i a l statements for propriety,
mathematical correctness, or against any f i n a n c i a l standards. Additionally,
there is no indication t h a t the f i n a n c i a l information submitted provides any
indication of an a p p l i c a n t ' s f u t u r e success or f a i l u r e a s a contractor.
Evaluation Of Statements
The R e g i s t r a r ' s evaluation o f the f i n a n c i a l statements submitted by l i c e n s e
applicants is limited t o verifying t h a t the name of the bank or f i n a n c i a l
i n s t i t u t i o n is shown, the statement is dated, and the signature and t i t l e of
the individual a t t e s t i n g t o the v a l i d i t y of the statement is on the form.
An analysis by the Office of the Auditor General of 120 f i n a n c i a l statements
t h a t were submitted by contractors whose licenses were revoked i n f i s c a l year
1977- 78, revealed t h a t 38 or 31.7 percent contained f l a g r a n t e r r o r s . For
example :
1. Over 75 percent of one a p p l i c a n t ' s net worth, as shown on the balance
sheet submitted with the a p p l i c a t i o n , was a t t r i b u t a b l e t o a non-e
x i s t e n t a s s e t .
2. Sole p r o p r i e t o r s h i p a p p l i c a n t s a r e required t o include a l l a s s e t s
and l i a b i l i t i e s both business and personal when preparing f i n a n c i a l
statements. A s o l e p r o p r i e t o r s h i p a p p l i c a n t ' s only e n t r y on the
statement submitted t o the R e g i s t r a r was $ 1,000 i n cash. No other
a s s e t s , no l i a b i l i t i e s and no net worth were shown.
3. An applicant reported assets t o t a l l i n g $ 1,025,000 and no
l i a b i l i t i e s . The a p p l i c a n t ' s l i c e n s e was revoked by t h e Registrar
ten months a f t e r t h e date on t h e f i n a n c i a l statement and two
complaints a g a i n s t the c o n t r a c t o r were l e f t unresolved, one of which
was f o r f a i l u r e t o pay $ 561.10.
4. Personal a s s e t s of $ 7,000 accounted f o r t h e t o t a l a s s e t s l i s t e d by an
a p p l i c a n t . L i a b i l i t i e s t o t a l e d $ 26,930 and net worth was not shown.
Thus, from the information given, the a p p l i c a n t ' s net worth was a
minus $ 19,930.
5. The f i n a n c i a l statement submitted by an applicant l i s t e d t o t a l
a s s e t s of $ 8,496 and t o t a l l i a b i l i t i e s of $ 21,736, i n d i c a t i n g a net
worth of minus $ 13,240. The applicant however, reported h i s net
worth as $ 8,496, t h e a s s e t t o t a l only. T h i s s t a t e m e n t , l i k e the
o t h e r s , was not questioned by the R e g i s t r a r ' s staff.
According t o Registrar personnel, since no c r i t e r i a have been e s t a b l i s h e d by
which t o evaluate f i n a n c i a l statements, l i c e n s e s a r e never r e j e c t e d because of
t h e f i n a n c i a l information shown. The R e g i s t r a r ' s staff a l s o contend t h a t the
proper evaluation of f i n a n c i a l statements r e q u i r e s a s k i l l not possessed a
by the current staff.
Statements Are Not Adequate
Predictors Of Success
It appears that even if the Registrar had closely examined t h e f i n a n c i a l
information submitted by those contractors whose l i c e n s e s were revoked during
f i s c a l year 1977- 78, t h e v a s t majority would have been issued licenses anyway.
A review of the balance sheets submitted by these licensees revealed t h a t t h e i r
average net worth was high enough t o meet any reasonable c r i t e r i a . For
example, the average net worth of the contractors whose licenses were revoked
were:
General Engineering ( A & A subclasses) $ 57,155.80
General Building ( B & B- 2' s) 103,455.26
Specialty ( C's) 27,810.36
However, by the time these contractors' licenses were revoked i n f i s c a l year
1977- 78, the balance sheets t h a t were submitted with the o r i g i n a l applications
were out dated and no longer useful. For example, the average age of the
balance sheets for these contractors was s l i g h t l y over 4 1/ 2 years a t the time
of l i c e n s e revocation.
It appears t h a t i n order t o properly evaluate prospective and current
contractors with regard t o f i n a n c i a l condition contractors would have t o submit
" c e r t i f i e d " f i n a n c i a l statements* on an annual basis. Such a procedure seems
impractical i n t h a t it would place a f i n a n c i a l burden on contractors,
p a r t i c u l a r l y small contractors and would c r e a t e an enormous workload problem
f o r the Registrar of Contractors considering t h a t there are approximately
12,000 licensed contractors. In our opinion the submission of f i n a n c i a l
statements by prospective licensees should be discontinued as a p r e r e q u i s i t e t o
licensure. It is i n e f f e c t i v e as currently administered and it is impractical
t o administer e f f e c t i v e l y .
* C e r t i f i e d f i n a n c i a l statements are statements containing an opinion by a
Certified Public Accountant o r Public Accountant.
Letters of Recommendation, Which
Are Required Of A l l License Applicants,
Are I n e f f e c t i v e A s A Means of Evaluatinq
An Applicant's Character And Their Only
Discernable Impact Is To Increase The
License Application Rejection Rate
Arizona Revised S t a t u t e s Section 32- 1122 requires t h a t each applicant:
"... submit l e t t e r s from two reputable c i t i z e n s of the
county i n which he r e s i d e s , who are not members of his
immediate family, t h a t he is of good character and
reputation and with a recommendation t h a t t h e l i c e n s e be
granted."
To comply with the s t a t u t e , the Registrar has included the following
requirements under paragraph three of the n i n s t r u c t i o n f o r f i l i n g applicationv
sheet:
" 3. TWO LETTERS OF RECOMMENDATION - These l e t t e r s are
Character Recommendations, not proof of experience.
Each l e t t e r must be addressed t o the REGISTRAR OF
CONTRACTORS, 1818 WEST ADAMS, PHOENIX, AZ. 85007 and
INCLUDED with t h e a p p l i c a t i o n for contractor1 s
license. Letters must bear d a t e w r i t t e n within the
l a s t 90 days and show address of writer, i f not on a
l e t t e r h e a d .
Letters of recommendation must be from reputable
c i t i z e n s of the county i n which he or she r e s i d e s , and
who are not members of h i s or her immediate family.
The writer of each l e t t e r must recommend the PERSON
and, based on his or her character and s t a t u s i n the
community, also recommend t h a t Person f o r the
c l a s s i f i c a t i o n number and t i t l e of l i c e n s e for which
he or she is applying. Individual Owner - and
qualifying employee, i f any, each require two
character l e t t e r s .
I f the APPLICANT is a corporation, partnership or
joint venture, there must be TWO LETTERS OF
RECOMMENDATION with EACH APPLICATION covering EACH of
the following: the PRESIDENT of a corporation; each
INDIVIDUAL PARTNER of a partnership; and the
QUALIFYING PARTY on ' any application where the
qualifying party is not the President of a
corporation or a partner of a partnership or owner of
a s o l e proprietorship."
The l e t t e r s of recommendation received by the Registrar of Contractors with
applications are checked t o determine:
1. That they are addressed t o Registrar of Contractors,
2. The date of l e t t e r ,
3. The address of w r i t e r ,
4. I f t h e a p p l i c a n t is recommended, and
5. I f the applicant is recommended for a s p e c i f i c l i c e n s e
c l a s s i f i c a t i o n number and t i t l e .
However, l e t t e r s of recommendation are not checked t o determine i f the
individual recommending the applicant does i n f a c t e x i s t or t h a t any of the
information contained i n l e t t e r s of recommendation is accurate. The limited
review t h a t is performed for l e t t e r s of recommendation is f o r form not
substance. Thus, those l e t t e r s of recommendation t h a t a r e r e j e c t e d are not
rejected f o r substantive reasons such as a f i c t i t i o u s reference but f o r minor
reasons such as the l e t t e r not being dated. In our opinion, these
r e j e c t i o n s unnecessarily add t o the already high l i c e n s e application r e j e c t i o n
r a t e . In addition, even i f the Registrar v e r i f i e d information i n l e t t e r s of
recommendation, it is questionable whether two references from friends provide
an adequate p r o f i l e of an a p p l i c a n t ' s character. According t o Registrar of
Contractor personnel, the requirement f o r l e t t e r s of recommendation are of no
value i n the licensing process. It should be noted t h a t only two other s t a t e s
( Hawaii and Nevada) require t h i s type of general l e t t e r of recommendation.*
* See Appendix I & I1 for a summary of requirements by the various s t a t e s .
The Method Used By The Registrar O f
Contractors To Evaluate And Verify An
Applicant's Prior Technical Experience
Is I n e f f e c t i v e A s A Means O f Determining
The Competency O f Prospective Contractors
A s a part of t h e a p p l i c a t i o n process for a c o n t r a c t o r ' s l i c e n s e , the applicant
must complete an experience record d e t a i l i n g h i s or her experience within the 0
scope of the type of contractor license being sought. Generally, four years of
I
experience during the past ten years is required of an applicant. . In addition
t o the experience record, the applicant is required t o furnish forms verifying
the experience shown on the experience record. These experience v e r i f i c a t i o n
forms must be a t t e s t e d t o by t h i r d p a r t i e s such as former employees, customers,
and contractors, dated within 90 days of a p p l i c a t i o n , and are not t r a n s f e r a b l e
t o any other l i c e n s e application.
The Registrar occasionally checks the information on the experience
v e r i f i c a t i o n form by attempting t o contact the t h i r d party a t t e s t i n g t o the
experience. However, i f the t h i r d party cannot be contacted or does not
respond t o the Registrar no f u r t h e r a c t i o n is taken. a
Our review of the Registrar s method of verifying an applicant ' s experience
revealed that: a) the experience record form does not provide s u f f i c i e n t
information t o evaluate t h e a p p l i c a n t ' s experience, b) many of the t h i r d ( I
p a r t i e s a t t e s t i n g t o the applicant's experience have a vested i n t e r e s t i n the
applicant being licensed, and c) the Registrar is unnecessarily requiring
persons t o complete duplicative forms when there is a change i n a person's
l i c e n s e s t a t u s . a
Inadequate Experience Records
The experience record c u r r e n t l y i n use by the R e g i s t r a r does not d i s t i n g u i s h
between part- time work and full- time o r between constant employment and
sporadic work during the dates shown on t h e record. A s a r e s u l t , part- time o r
sporadic employment can be and is counted as f u l l - t i m e or continuous employment
f o r purposes of meeting the minimum experience requirements. The following
case i l l u s t r a t e s how t h i s may occur.
I n 1977, a formerly l i c e n s e d c o n t r a c t o r a p p l i e d for a new l i c e n s e . H i s
previous l i c e n s e had been revoked by t h e R e g i s t r a r i n 1973. The experience
record submitted with t h e a p p l i c a t i o n spanned t e n years, however, it was
d i f f i c u l t t o determine how much time was a c t u a l l y devoted t o the jobs l i s t e d .
For example, s e v e r a l of t h e l i s t e d j o b s overlapped and some minor jobs spanned
l o n g p e r i o d s of time. One remodeling job covered f i v e years while another job,
involving the c o n s t r u c t i o n of a house and shed, a l s o covered t h e same f i v e
years. According t o R e g i s t r a r personnel, it was not p o s s i b l e t o determine i f
the a p p l i c a n t had met t h e four- year experience requirement based upon t h e
information submitted on t h e experience record.
It should be noted t h a t a more d e t a i l e d experience record form is c u r r e n t l y
being used by t h e Utah Department of Contractors." I n a d d i t i o n t o r e q u i r i n g
the name and address of former employers or customers and t h e type of work
done, t h e Utah experience record form r e q u i r e s t h e a p p l i c a n t t o i n d i c a t e a ) the
l e v e l of r e s p o n s i b i l i t y at which t h e a p p l i c a n t worked, b) whether t h e work was
steady and continuous, and c ) the a c t u a l amount of time worked during t h e
period i n d i c a t e d . I n our opinion such a form would be an improvement over t h e
form c u r r e n t l y being used by t h e R e g i s t r a r and would avoid s i t u a t i o n s such as
the one shown above.
* See Appendix I11 f o r a copy of t h e Utah experience record.
Biased V e r i f i c a t i o n s
An a n a l y s i s of 88 randomly s e l e c t e d experience v e r i f i c a t i o n forms by t h e Office
of t h e Auditor General revealed t h a t 35 percent of t h e experience v e r i f i c a t i o n s
were a t t e s t e d t o by t h i r d p a r t i e s t h a t had a vested i n t e r e s t i n t h e a p p l i c a n t
being l i c e n s e d . These vested i n t e r e s t t h i r d p a r t i e s included employees,
s u p p l i e r s , s u b c o n t r a c t o r s and insurance a g e n t s o f the a p p l i c a n t s .
For example, one a p p l i c a n t submitted t h r e e experience v e r i f i c a t i o n forms t h a t
were accepted by t h e Registrar as s u f f i c i e n t support f o r t h e f o u r y e a r minimum
experience requirement. The first v e r i f i c a t i o n a t t e s t e d t o " . . . c a r p e n t r y ,
remodeling, and r e p a i r work. .,. off and on during t h e year 1976." This
a t t e s t a t i o n was signed by an occupant of the house where t h e work t o o k p l a c e .
The second a t t e s t a t i o n was worded exactly t h e same as t h e first and was signed
by t h e owner of the same house. The t h i r d a t t e s t a t i o n was submitted by the
a p p l i c a n t ' s f a t h e r and was a general r e f e r e n c e t o h i s son's c o n s t r u c t i o n
a b i l i t y .
Based on t h i s information, the R e g i s t r a r i s s u e d t h e a p p l i c a n t a l i c e n s e i n
1977. It should be noted t h a t t h e above c o n t r a c t o r is now scheduled f o r two
d i s c i p l i n a r y hearings because he has been charged with abandonment of c o n t r a c t ,
f a i l u r e t o complete a c o n t r a c t and poor workmanship.
The Utah Department of C o n t r a c t o r s u s e s a procedure which e l i m i n a t e s t o a l a r g e
e x t e n t t h e problem of r e c e i v i n g experience v e r i f i c a t i o n s from biased
i n d i v i d u a l s . The Utah Department of Contractors r e q u i r e s a p p l i c a n t s t o submit
f i v e stamped envelopes addressed t o t h e t h i r d p a r t i e s a t t e s t i n g t o the
a p p l i c a n t ' s experience r e c o r d . The Department then contacts t h e s e t h i r d
p a r t i e s d i r e c t l y and confirms t h e experience a t t e s t a t i o n . I n our opinion, the
R e g i s t r a r should adopt a s i m i l a r procedure i n Arizona.
Completing Additional Forms
Currently, when a q u a l i f y i n g party* e l e c t s t o o b t a i n a s e p a r a t e l i c e n s e or when
a l i c e n s e e changes its business s t r u c t u r e from a s o l e p r o p r i e t o r s h i p t o a
corporation, the R e g i s t r a r r e q u i r e s t h e s e persons t o submit new experience
v e r i f i c a t i o n forms. However, t h e s a n e i n f o r m a t i o n may already be on file at
t h e R e g i s t r a r ' s on Proof of Experience i n f o r m a t i o n s h e e t s p r e v i o u s l y submitted.
According t o t h e R e g i s t r a r , l1Since they ( t h e Proof of Experience information
s h e e t s ) a r e c e r t i f i e d t o be t r u e under p e n a l t y o f p e r j u r y they a r e not
t r a n s f e r a b l e t o other a p p l i c a t i o n s . l l
An opinion from the Arizona L e g i s l a t i v e Council on t h i s s u b j e c t s t a t e d i n
p a r t : **
" However, we f a i l t o s e e a reason why a v e r i f i c a t i o n of an
i n d i v i d u a l ' s experience cannot be used i n a subsequent
a p p l i c a t i o n f o r the sarne c l a s s i f i c a t i o n . The requirement
i n s e c t i o n 32- 1122, subsection F, paragraph 1, Arizona
Revised S t a t u t e s of four years1 p r a c t i c a l or management
t r a d e experience f o r t h a t c l a s s i f i c a t i o n would a l r e a d y
have been c e r t i f i e d as t r u e i n t h e previous v e r i f i c a t i o n
form. l1 ( Emphasis added)
It appears t h a t an unnecessar- y burden f o r l i c e n s e e s would be eliminated i f the
R e g i s t r a r allowed previously q u a l i f i e d i n d i v i d u a l s t o t r a n s f e r experience
v e r i f i c a t i o n s t a t e m e n t i n f o r m a t i o n from one l i c e n s e t o another r e l a t e d
l i c e n s e . Such a policy would be c o n s i s t e n t with t h e R e g i s t r a r ' s c u r r e n t policy
o f a c c e p t i n g examination scores f o r t h e same i n d i v i d u a l f o r s i m i l a r l i c e n s e
c l a s s i f i c a t i o n s f o r up t o f i v e years without r e q u i r i n g r e t e s t i n g .
CONCLUSION
The method used by t h e R e g i s t r a r o f C o n t r a c t o r s i n screening a p p l i c a n t s p r i o r
t o l i c e n s i n g is i n e f f e c t i v e .
* The q u a l i f y i n g party is the i n d i v i d u a l who q u a l i f i e s the company f o r the
l i c e n s e by t a k i n g t h e exam and submitting the required proof of
experience. ** See Appendix I V f o r a complete t e x t of the L e g i s l a t i v e Council Opinion.
RECOMMENDATION
It is recommended that:
- The information required of applicants by the Registrar should be
limited t o t h a t a c t u a l l y needed t o evaluate the competency of the
prospective contractor.
- Financial statements and l e t t e r s of recommendation should not be
required as a condition of licensure as they serve no useful purpose. a
- The experience record be revised t o allow the Registrar t o more
accurately evaluate the a p p l i c a n t ' s prior experience. - - Experience v e r i f i c a t i o n forms be discontinued and a method of d i r e c t
confirmation with an applicant1 s prior employers, customers or a
associates should be adopted by the Registrar.
- Licensees be allowed t o t r a n s f e r experience v e r i f i c a t i o n statement
information from one l i c e n s e t o another r e l a t e d l i c e n s e .
FINDING I1
A PROSPECTIVE CONTRACTOR'S KNOWLEDGE OR COMPETENCY IS NOT EFFECTIVELY
EVALUATED BY THE REGISTRAR OF CONTRACTOR'S EXAMINATION PROCESS.
I n order t o be licensed as a contractor i n Arizona an individual normally must
pass two examinations which are administered by the Registrar of Contractors.
Our review of the examination procedures of the Registrar of Contractors
revealed t h a t t h e t e s t i n g of prospective p a r t i c i p a n t s i n the contracting
industry by t h e R e g i s t r a r does not provide an e f f e c t i v e method o f screening
applicants as a means t o protect the consuming public against incompetent
contractors. Our review determined t h a t :
1. The Registrar is not i n compliance with Arizona s t a t u t e s t h a t require
the Registrar t o e s t a b l i s h written examinations for a l l classes of
contracting, and
2. The written examinations t h a t have been established by the Registrar
do not c o n s t i t u t e a valid means of t e s t i n g t h e q u a l i f i c a t i o n s or
knowledge of the applicant.
Non- Compliance With Arizona
Revised S t a t u t e s Section 32- 1122
Arizona Revised S t a t u t e s ( ARS) section 32- 1122 s t a t e s , i n part:
'' A. A contractor's l i c e n s e s h a l l be issued only by a c t of
the Registrar o f Contractors. The Registrar s h a l l :
1. Classify and qualify applicants f o r a l i c e n s e .
2. Conduct such i n v e s t i g a t i o n s as he deems
necessary.
3. Establish written examinations applicable t o
each c l a s s of contracting. . . .
F. Prior t o issuance o f a l i c e n s e , t h e q u a l i f y i n g p a r t y ,
i n addition t o meeting the requirements provided i n
subsection C of t h i s section, s h a l l :
" 2. Successfully show, by written examination,
q u a l i f i c a t i o n i n the kind of work for which the
applicant proposes t o c o n t r a c t , h i s general knowledge
of the building, s a f e t y , health and l i e n laws of the
s t a t e , administrative principles of the contracting
business and of the r u l e s and regulations promulgated
by the Registrar of Contractors pursuant t o t h i s
chapter, i n addition t o such other matters as may be
deemed appropriate by the Registrar t o determine t h a t
the q u a l i f y i n g p a r t y meets the requirements of t h i s
chapter. "
A s of June 30, 1979, the Registrar of Contractors had not e s t a b l i s h e d w r i t t e n
" traden examinations for 20 classes o f contracting. These classes of
c o n t r a c t i n g a r e :
A- 1 Airport Runways C- 33 Terrazzo
A- 7 Piers and Foundations C- 43 Service Station Equipment
C- 3 Awnings, Canopies,
Carports & Patio Covers
C- 12 Elevators
C- 18 Furnaces and Burners
C- 19 Sidings ( other than wood)
C- 22 House Moving
C- 23 I n s t i t u t i o n a l Equipment
C- 24 Ornamental Metals
C- 30 Marble
Tanks & Tank Renovating
Venetian Blinds, Window Shades
Water Proofing
Weather Stripping
Welding
Wrecking
Gunite
Wood Floor Laying & Finishing
In a d d i t i o n , c o n t r a c t i n g classes AE, BE, C- 5, C- 29 and E contain approximately
500 subclasses of contracting. The Registrar has established only 11
examinations for these approximately 500 subclasses of contracting. These
subclasses include f a l l o u t s h e l t e r s , erection of s t e e l buildings, t r e e
trimming and removal for u t i l i t y l i n e s only, parking l o t and highway s t r i p i n g
only, and folding doors and p a r t i t i o n s .
According t o the Arizona Legislative Council the f a i l u r e of t h e R e g i s t r a r t o
e s t a b l i s h written examinations for the above classes of contractors is i n
violation of ARS 32- 1122. In a March 27, 1979 opinion the Legislative Council
s t a t e d , i n part*:
". . . To the extent t h a t any applicant for a c o n t r a c t o r ' s
l i c e n s e is not given a written examination on
' q u a l i f i c a t i o n i n the kind of work for which the applicant
proposes t o c o n t r a c t , ' the r e g i s t r a r of contractors is i n
violation of the provisions of section 32- 1122, subsection
F, paragraph 2, Arizona Revised Statutes."
O f f i c i a l s a t t h e R e g i s t r a r of Contractors concede t h a t c e r t a i n classes of
contractors are not given the " traden portion of the written examination.
According t o these o f f i c i a l s trade examinations have not been established i n
a l l cases because a ) the nature of the work t o be performed, i n some cases,
does not warrant t e s t i n g , and b) it would take approximately ten s t a f f years
t o prepare examinations for a l l of the contracting classes not currently
t e s t e d .
Those Written Examinations That
Have Been Established By The
Registrar Are Not A Valid Means
Of Testing The Q u a l i f i c a t i o n s
O r Knowledge Of The Applicants
According t o a May 31, 1978 report prepared for the California Department of
Consumer Affairs e n t i t l e d " The Problem of Occupational Regulation i n
Perspective," the purpose of occupational licensing examinations was s t a t e d as
follows:
* Appendix V contains a f u l l text of the March 27, 1979 Legislative Council
Opinion.
" The examination of a p p l i c a n t s is a means by which t h e
S t a t e is able t o measure t h e f i t n e s s of an applicant t o
pursue a given occupation i n a manner c o n s i s t e n t with t h e
demands of the public welfare. I n theory, t h e need f o r
examinations is t o protect the public from the dangers
posed by the unskilled and i g n o r a n t , ...."
The r e p o r t goes on t o comment on t h e need f o r t e s t i n g the competency of
a p p l i c a n t s .
" As t o the need f o r t e s t i n g competency, it has been
observed t h a t t e s t s of the knowledge or p r a c t i c a l s k i l l s
of an occupation a r e only j u s t i f i a b l e as ' necessary' i f
t h e incompetent p r a c t i c e of the occupation would cause
i r r e p a r a b l e harm t o the p u b l i c ' s h e a l t h and s a f e t y .
Medicine, f o r instance may be such a f i e l d . And yet many
others may not be."
In order t o be licensed as a c o n t r a c t o r i n Arizona an i n d i v i d u a l is usually
required t o pass two examinations, t h e Construction Business Management
Examination ( CBME) which is designed t o t e s t t h e a p p l i c a n t ' s knowledge of
c o n t r a c t i n g laws, r u l e s and r e g u l a t i o n s and g e n e r a l b u s i n e s s p r a c t i c e s and a
" trade" examination which is designed t o t e s t the a p p l i c a n t ' s q u a l i f i c a t i o n s
and t e c h n i c a l knowledge.
Our review of the examination procedures of the Registrar of Contractors
revealed t h a t passage of the t r a d e examination does not ensure an i n d i v i d u a l ' s
competency o r t e c h n i c a l proficiency i n t h a t a ) the cumulative pass r a t e is
nearly 93 percent f o r the various t r a d e examinations and i n excess of 97
percent f o r the CBME, and b) t h e r e appears t o be no c o r r e l a t i o n between the
ease with which an applicant passes t h e t r a d e examination and subsequent
success or f a i l u r e i n the c o n t r a c t i n g business.
High Pass Rates
Very few l i c e n s e a p p l i c a n t s f a i l t o pass the examination f o r a c o n t r a c t o r ' s
l i c e n s e . The high pass r a t e s on the Registrar of Contractor's examination a r e
due primarily t o t h e f a c t t h a t an applicant t h a t f a i l s the examination is
allowed a ) two a d d i t i o n a l t r i e s t o pass the same examination and b) t o review
h i s or her previous examination p r i o r t o r e t a k i n g the examination.
e
On the average, t h e r e a r e approximately 102 questions on the t r a d e examinations
of which 37 percent a r e t r u e / f a l s e and t h e o t h e r s p r i m a r i l y m u l t i p l e choice.*
The CBME contains 166 t r u e / f a l s e and multiple choice questions. The age of the
t r a d e examinations ranges from f i v e months t o 118 months while the average age
for a l l t r a d e examinations is approximately 38 months.
Examinations a r e given weekly i n Phoenix and Tucson by the R e g i s t r a r . The
examinations a r e given very i n f r e q u e n t l y i n o t h e r l o c a t i o n s within the s t a t e .
Applicants prepare f o r the CBME by studying a " S t a t u t e s and Rules and
Regulationsv pamphlet prepared by the Registrar and a 23 page booklet e n t i t l e d
" Business Management f o r Contractors." The applicant is generally n o t i f i e d of
t e s t r e s u l t s within seven days a f t e r taking the examinations. If the a p p l i c a n t
has f a i l e d e i t h e r o r both of the examinations f o r t h e first or second time a
r e t a k e i n 30 days is automatically scheduled, however, upon the request of an
applicant the retake w i l l be scheduled sooner. An applicant who has f a i l e d an
examination may make an appointment with t h e R e g i s t r a r t o review the
examination any time between the n o t i f i c a t i o n of f a i l u r e date and the scheduled
r e t a k e date. A t the time of the review the missed questions a r e c l e a r l y
i d e n t i f i e d on the examination. When the a p p l i c a n t r e t a k e s the examination the
exact same examination is given.
Table 3 summarizes the p a s s / f a i l percentages on examinations administered by
the agency during f i s c a l year 1977- 78.
* Based on a random s e l e c t i o n o f 17 examinations.
TABLE 3
SUMMARY OF PASS/ FAIL PERCENTAGES ON
EXAMINATIONS ADMINISTERED BY THE
REGISTRAR OF CONTRACTORS DURING
FISCAL YEAR 77- 78
1 s t Attempt 2nd Attempt* 3rd Attempt*
Type of Nunber of Drop Drop
Examination Examinees - Pass - F a i l - Pass - F a i l - Out - Pass - F a i l - Out
Trade 1562 64.7% 35.3% 84.4% 14.5% 1.1% 92.8% 4.0% 3.2%
CBME 1466 89.4% 10.6% 95.8% 3.5% .7% 97.2% 1.2% 1.6%
* Cumulative
Table 3 i l l u s t r a t e s t h a t the cumulative pass r a t e during f i s c a l year 1977- 78
was n e a r l y 93 percent f o r t h e t r a d e examinations and i n excess of 97 percent
f o r t h e CBME. It should be noted t h a t the above cumulative percentages a r e
not exact and t h a t the pass r a t e s a r e c o n s e r v a t i v e l y estimated.
On t h e s u b j e c t of t i g h t e r l i c e n s i n g requirements, a May 1978 Review of the
C a l i f o r n i a Contractors S t a t e Licensing Board s t a t e d :
" Tougher w r i t t e n examinations would favor the well-educated,
not n e c e s s a r i l y t h e most s k i l l e d . "
A s shown i n the following s e c t i o n , the ease with which an a p p l i c a n t passes the
examination is no i n d i c a t i o n of f u t u r e success o r f a i l u r e . Therefore, i f
examinations were t o be made more d i f f i c u l t or d i f f e r e n t examinations given for
r e t a k e s , t h e r e s u l t would i n v a r i a b l y be an i n c r e a s e i n t h e f a i l u r e r a t e . The
a d d i t i o n a l f a i l u r e s would come from those who c u r r e n t l y have d i f f i c u l t y with
t h e examination ( passing on t h i r d a t t e m p t ) , however, members o f t h i s group a r e
no more l i k e l y t o f a i l as c o n t r a c t o r s than those passing on the first attempt.
No Apparent C o r r e l a t i o n Between The
Ease With Which An ADDlicant Passes
The Examination And Subsequent
Success/ Failure I n The
Construction I n d u s t r v
Applicants t h a t pass t r a d e examinations on t h e first attempt a r e no more l i k e l y
t o succeed o r f a i l i n t h e c o n t r a c t i n g business or have t h e i r l i c e n s e s r e v o k e d
than those a p p l i c a n t s t h a t pass the examination on t h e second or t h i r d attempt.
Therefore, it does not appear t h a t the t r a d e examination is a v a l i d p r e d i c t o r
o f an a p p l i c a n t ' s subsequent success or f a i l u r e i n t h e c o n t r a c t i n g i n d u s t r y .
During the period January 1, 1978 t o June 30, 1978, t h e R e g i s t r a r revoked 59
c o n t r a c t o r l i c e n s e s . An a n a l y s i s of t h e c o n t r a c t o r s who had t h e i r l i c e n s e s
revoked during t h i s period revealed t h a t 70.3 percent had passed the t r a d e
examination on t h e i r first attempt, 21.6 percent on t h e i r second attempt and
8 . 1 p e r c e n t on t h e i r t h i r d attempt. O f p a r t i c u l a r i n t e r e s t is the s t r i k i n g
s i m i l a r i t y between these percentages and t h e percentage of a l l l i c e n s e d
a p p l i c a n t s t h a t passed t r a d e examinations on t h e i r first, second or t h i r d
attempts during f i s c a l year 1977- 78. Table 4surnmarizes the percentage of
c o n t r a c t o r s t h a t had t h e i r l i c e n s e s revoked during t h e period January 1, 1978,
t o June 30, 1978, t h a t passed t r a d e examinations on t h e i r first, second or
t h i r d attempt and t h e percentage of a l l l i c e n s e a p p l i c a n t s t h a t passed t r a d e
examinations during f i s c a l year 1977- 78 on t h e i r first, second o r t h i r d
attempt.
TABLE 4
SUMMARY OF THE PERCENTAGE OF CONTRACTORS THAT HAD
THEIR LICENSES REVOKED DURING THE PERIOD JANUARY 1, 1978,
TO JUNE 30, 1978, THAT PASSED EXAMINATIONS ON THEIR
FIRST, SECOND OR THIRD ATTEMPT; AND THE PERCENTAGE OF ALL
LICENSE APPLICANTS THAT PASSED EXAMINATIONS DURING
FISCAL YEAR 1977- 78 ON THEIR FIRST, SECOND
OR THIRD ATTEMPT
Percentage of A l l
Percentage of C o n t r a c t o r s License Applicants
Number of Attempts That Had T h e i r L i c e n s e s Revoked That Passed
Required t o Pass During t h e Period Examinations During
Examinations January 1, 1978 t o June 30, 1978 F i s c a l Year 1977- 78
Trade CBME Trade - CBME
F i r s t Attempt 70.3% 81.6% 69.7% 91.9%
Second Attempt 21.6 15.8 20.7 6.7
Third Attempt
Total
A s shown i n Table 4 t h e r e does not appear t o be any c o r r e l a t i o n between t h e ease
with which a p p l i c a n t s pass t r a d e examinations and subsequent success o r f a i l u r e
i n the c o n t r a c t i n g i n d u s t r y . I f t h e r e were such a c o r r e l a t i o n t h e percentage
of c o n t r a c t o r s t h a t passed t r a d e examinations on t h e t h i r d attempt would a
r e p r e s e n t a higher r e l a t i v e percentage of those c o n t r a c t o r s t h a t had t h e i r
l i c e n s e s revoked. For example, i f 9.6 percent of all l i c e n s e d c o n t r a c t o r s
required t h r e e attempts t o pass t r a d e examinations but t h a t some group
represented a d i s p r o p o r t i o n a t e l y l a r g e percentage ( such as 30 percent) of the
c o n t r a c t o r s t h a t had t h e i r l i c e n s e s revoked, it could be argued t h a t an
a p p l i c a n t ' s performance on t h e t r a d e examination was a v a l i d p r e d i c t o r of t h a t
a p p l i c a n t ' s f u t u r e success i n t h e c o n t r a c t i n g business. However, because such
a d i s p r o p o r t i o n a t e r e p r e s e n t a t i o n does not e x i s t , it appears t h a t an a p p l i c a n t a
t h a t passes the examination on t h e f i r s t attempt has the same chance of having
h i s or her l i c e n s e revoked as an a p p l i c a n t t h a t passes on t h e t h i r d attempt.
There - is however, a s l i g h t c o r r e l a t i o n between t h e d i f f i c u l t y a p p l i c a n t s
e x p e r i e n c e w i t h t h e CBME and subsequent success o r f a i l u r e i n the c o n t r a c t i n g
i n d u s t r y . A s shown i n Table 4 t h e d i f f e r e n c e i n t h e number passing the CBME on
t h e first attempt t h a t subsequently had t h e i r l i c e n s e s revoked - is over t e n
percent lower than t h a t of a l l l i c e n s e a p p l i c a n t s . Therefore, those
c o n t r a c t o r s who subsequently f a i l e d as a c o n t r a c t o r demonstrated a weakness i n
business management s u b j e c t s .
The C r e d i t S e r v i c e s D i v i s i o n of Dun and B r a d s t r e e t , Inc. a f t e r analyzing
numerous c o n t r a c t o r f a i l u r e s nationwide made t h e following observations and
s u g g e s t i o n s r e g a r d i n g t h e f a i l u r e s :
" In most i n s t a n c e s , no s i n g l e cause f o r a c o n s t r u c t i o n
f a i l u r e is r e a d i l y apparent; more o f t e n t h e r e is a
combination of f a c t o r s . Ten apparent causes of f a i l u r e
include: 1 1 overextension, 2) unsophisticated
accounting procedures 3) l a c k of managerial know- how 4)
inadequate p r o f i t margins 5) inexperience 6) s p e c u l a t i n g
i n o u t s i d e ventures 7) i n t r i n s i c hazards 8) inadequate
i n v e s t i g a t i o n of resources of the c l i e n t 9 ) personal
t r a i t s 10) personal weaknesses
The following suggestions may have merit as p r e v e n t a t i v e
measures a g a i n s t f u t u r e c o n t r a c t o r f a i l u r e s : promoting
methods of educating younger and s m a l l e r c o n t r a c t o r s i n
t h e basic p r i n c i p l e s of business management such as cost
a n a l y s i s , budgeting, e s t i m a t i n g weekly cash flow and
organization of a simple system f o r f i n a n c i a l record
keeping - e s p e c i a l l y s u b s i d i a r y records such as job
schedules, j o b c o s t s and c o s t s involving overhead,
a d m i n i s t r a t i o n and s a l a r i e s . "
CONCLUSION
The examinations administered by t h e R e g i s t r a r of Contractors do not
e f f e c t i v e l y evaluate an a p p l i c a n t ' s knowledge and competency i n the areas of
t e c h n i c a l s k i l l s and business management.
RECOMMENDATION
It is recommended t h a t ARS 32- 1122 be amended t o eliminate t h e t r a d e
examination as a l i c e n s i n g requirement and t h a t r e l i a n c e be placed on a r e v i s e d
method of experience v e r i f i c a t i o n ( a s recommended i n t h e Licensing Sect- ion of
t h i s r e p o r t ) t o evaluate an a p p l i c a n t ' s t e c h n i c a l a b i l i t y . The R e g i s t r a r
should develop a more thorough method of educating a p p l i c a n t s i n business
management s k i l l s t h a t may or may not r e q u i r e t h e u s e o f examinations.
FINDING I11
THE REGISTRAR OF CONTRACTORS' BONDING REQUIREMENTS PROVIDE LITTLE I N THE WAY
OF PROTECTION TO THE CONSUMER.
In Arizona, Contractor bonds are required by the Registrar of Contractors as a
means t o idemnify consumers against contractor insolvency. Our review revealed
t h a t the current contractor bonding system does not e f f e c t i v e l y protect
consumers i n that:
1. The bonding system protects those who are familiar with t h e l e g a l
processes involved, and generally not the consumer; and
2. Revenues generated by the bonding system, t o a l a r g e extent, a r e not
available t o reimburse those who s u f f e r f i n a n c i a l l o s s e s i n dealing
with contractors.
Further, an a l t e r n a t i v e form of consumer protection, the recovery fund, would
provide s u b s t a n t i a l l y more protection t o consumers.
The Current Bonding System Provides
Some Protection To Those Who Are
Familiar With The Legal Processes
Involved. For Those Unfamiliar With
The Process, Normally The General Public,
The Current System Provides Very
L i t t l e I n The Way O f Protection
Prior t o the issuance of a contracting l i c e n s e i n Arizona an applicant must
provide a bond f o r the protection of those he or she deals with i n case of
insolvency. The amount of the bond depends on the type of l i c e n s e applied for
and the anticipated volume of work. Bonds vary from $ 1,000 t o $ 15,000.
Compliance with the bonding requirement can be accomplished i n one of three
ways: a) through a surety, b) by depositing the required bond amount i n cash
with the S t a t e Treasurer, and c) by assigning a c e r t i f i c a t e of deposit i n the
required amount t o the Registrar of Contractors.
The bond must be maintained by the contractor and the amount required is
subject t o change as anticipated business volume changes.
Our review of t h e c u r r e n t bonding system revealed t h a t it g e n e r a l l y b e n e f i t s
those who bypass the Registrar of Contractor's complaint process and seek
r e l i e f d i r e c t l y from the j u d i c i a l system. Those persons who bypass the
Registrar are normally s o p h i s t i c a t e s who are familiar with the processes
involved. Those persons are g e n e r a l l y n o t consumers.
For example, an analysis of cash bond payments made during f i s c a l year 1977- 78,
revealed t h a t the consuming public's share of bond d i s t r i b u t i o n s was
exceptionally small when compared t o t h e s h a r e received by other groups. Table a
5 shows the recovery percentages of the various groups from the cash bond fund
during f i s c a l year 1977- 78.
TABLE 5
SUMMARY OF CASH BOND PAYMENTS MADE
TO CONSUMERS AND OTHER GROUPS DURING
FISCAL YEAR 1977- 78
Group
Percentage of
Cash Bond
Payments Received
Consumers 18.7%
Suppliers and contractors 58.0
Unions, Employees & Trustees 23.3
Total
A s shown i n Table 5, consumers received only 18.7 percent of the cash bond
payments paid out.
It should be noted t h a t the process for the recovery of damages is similar
between the cash bond fund and surety bonds. Therefore it seems logical t o
assume t h a t the cash bond recovery percentages shown i n Table 5 approximate
t h a t for surety bonds as well.
Two primary reasons f o r t h e low percentage of bond d i s t r i b u t i o n s t o consumers
are:
1. The consumer, according t o R e g i s t r a r personnel, is g e n e r a l l y the
last t o know t h a t the c o n t r a c t o r is i n t r o u b l e . Those who have d a i l y
b u s i n e s s d e a l i n g s with t h e c o n t r a c t o r , such as s u p p l i e r s and other
c o n t r a c t o r s , a r e i n a b e t t e r p o s i t i o n t o evaluate t h e impending
insolvency and a r e the first t o take a c t i o n a g a i n s t the bond.
The consumer, u n l i k e t h o s e who deal i n t h e bonding process on a d a i l y
b a s i s , w i l l , i n most cases, f i l e a complaint with t h e R e g i s t r a r .
Unfortunately, by t h e time t h e complaint- filing consumer l e a r n s t h a t
monetary s a t i s f a c t i o n w i l l not be obtained through the complaint
process, it is generally too l a t e t o f i l e s u i t a g a i n s t t h e bond. For
example, 60 percent o f t h e consumers shown i n Table 5 f i l e d
complaints with t h e R e g i s t r a r p r i o r t o proceeding a g a i n s t t h e bond.
However, only 10 percent o f those who recovered t h e v a s t majority of
the a v a i l a b l e bond funds f i l e d complaints with t h e R e g i s t r a r .
F u r t h e r , an Auditor General survey of persons who had f i l e d complaints with t h e
R e g i s t r a r a g a i n s t c o n t r a c t o r s who went out of business and l e f t complaints
unresolved revealed t h a t 66.7 percent subsequently f i l e d a c t i o n s a g a i n s t the
bond. However, only f i v e percent o f t h o s e f i l i n g a c t i o n s received any money
from the bond.
Of the remaining 33.3 percent of complainants t h a t did - not f i l e a g a i n s t the
bond, 75 percent s t a t e d t h a t it was because the bond was already exhausted or
t h a t too many c r e d i t o r s had already f i l e d a c t i o n s a g a i n s t the bond.
The following cases, which were taken from f i s c a l year 1977- 78 complaint
records and Auditor General surveys of complainants, i l l u s t r a t e the problems
with the current bonding system.
Case 1
On April 16, 1978, t h e R e g i s t r a r of Contractors revoked the l i c e n s e of a
p a i n t i n g and wall covering c o n t r a c t o r . From J u l y 28, 1977 t o September 1,
1978, 43 complaints were f i l e d a g a i n s t the c o n t r a c t o r , 42 of which went
unresolved. Ofthese 42complainants, 40 were consumers, one was a s u p p l i e r and
one was an employee.
The c o n t r a c t o r had obtained a $ 1,000 s u r e t y bond f o r the p r o t e c t i o n of those
with whom he d e a l t . The bond was paid i n May 1978 t o a s u p p l i e r , who - had - not
f i l e d a complaint with t h e R e g i s t r a r . I n a survey of those f i l i n g complaints
a g a i n s t t h i s c o n t r a c t o r , it was determined t h a t t h e average l a s s suffered by
these complainants was s l i g h t l y over $ 2,000. Thus, t h e aggregate l o s s suffered
by t h e s e complainants, was over $ 86,000 from a c o n t r a c t o r who was required t o
provide only a $ 1,000 bond f o r t h e p u b l i c ' s p r o t e c t i o n .
Case 2
On March 22, 1978, t h e l i c e n s e of a swimming pool c o n t r a c t o r was revoked
l e a v i n g 24 unresolved complaints. Of these 24 complainants, 18 were consumers,
four were sub- contractors and two were s u p p l i e r s . None of these 24
complainants received any money from t h e $ 10,000 cash bond posted by the
c o n t r a c t o r because seven other claimants had exhausted the bond.
Based on an Auditor General survey of complainants, the average unrecovered
l o s s was $ 1,638, o r over $ 39,000 f o r t h e s e 24 complainants.
Case 3
A r o o f i n g c o n t r a c t o r whose l i c e n s e was revoked by t h e R e g i s t r a r l e f t 15
unresolved complaints. An Auditor General survey of these unresolved
complaints revealed t h a t the average i n d i v i d u a l l o s s was $ 1,176 o r an aggregate
l o s s of $ 17,640. The c o n t r a c t o r was required t o post only a $ 1,000 bond.
The above cases r e p r e s e n t only a small segment of the unresolved complaints
f i l e d a g a i n s t c o n t r a c t o r s who a r e no longer i n business. For example, an
estimated 400 complaints were closed by t h e R e g i s t r a r during f i s c a l year 1977-
78 because t h e c o n t r a c t o r ' s l i c e n s e had been revoked. Approximately 260 of *
t h e s e complaints were f i l e d by consumers who s u f f e r e d an average l o s s of $ 1,500
o r an aggregate l o s s of $ 390,000.
An Auditor General survey of complainants who had suffered f i n a n c i a l l o s s e s
because contractors had gone out of business without s u f f i c i e n t bonding
revealed widespread consumer d i s s a t i s f a c t i o n with the current system. The
following complainant quotations i l l u s t r a t e t h a t d i s s a t i s f a c t i o n :
" State does not require the contractor t o have enough i n
bond money.
I f bankrupt contractor has more than 1 claim as t h i s one
did, then a l l c i t i z e n s lose and bear the brunt of False
Misrepresentation.' Bonded with Statev1'
" 1 thought t h a t any complaints or charges against the
company were supposed t o be made through the Registrar of
Contractors. l1
" 1 f i l e d a complaint with the Registrar but it was my
understanding I would have t o f i l e another form for the
money. l1
When I called the department, I was told they were licensed
and bonded. No one ever informed us t h a t t h e bond was only
$ 1000 for a l l l i a b i l i t y while the job was $ 5000. This is
fraud on your part. Because you i n f e r r e d they were covered
by - not t e l l i n g us t h a t the law only requires a $ 1,000 bond.
- You should be i n j a i l . "
". . . we were aware t h a t a l l the s t a t e requires is a l i c e n s e
bond for minimal amounts. The general p u b l i c t h i n k s t h a t
' Licensed & Bonded1 gives protection for performance i n
the amount of the contract. In a sense the s t a t e is a
party t o f a l s e advertising."
" 1 found h i s bond had already been attached, it was very
inadequate only $ 1,000 - then he f i l e d bankruptcy and was
informed there was nothing more I could do t o recover my
money. l1
" 1 was 4th i n l i n e for h i s bond. F i r s t 3 came t o roughly
$ 10,000. Bond was $ 1,000 - a joke!"
l l . . . did not r e a l i z e t h a t the d o l l a r amount of the bond was
so minimal t h a t it could hardly cover a s i n g l e complaint . I1
" Representative of Registrar of Contractors inspected
house and agreed verbally with my complaints but gave me no
hope o f obtaining r e s t i t u t i o n . "
With regard t o the inadequacy of bond amounts cited above it should be noted
t h a t the bond amount a contractor is required t o post is dependent upon license
c l a s s i f i c a t i o n and anticipated annual volume of business. The contractor is
allowed t o estimate gross volume of work on Registrar license applications.
However, the Registrar does not verify the accuracy of these estimates. The
following case i l l u s t r a t e s t h a t some c o n t r a c t o r s u n d e r s t a t e anticipated gross
v o l u ~ eo f business and as a r e s u l t do not post s u f f i c i e n t bonds.
In ~ a~ of 1976 a General Building Heavy Construction l i c e n s e was issued t o a
Phoenix home builder. The contractor estimated its annual gross volume of work
for f i s c a l years 1975- 76, 1976- 77 and 1977- 78 t o be $ 150,000. A s a r e s u l t , the
contractor was r e q u i r e d t o post a $ 3,000 bond. However, a review of subsequent
complaints f i l e d against t h i s contractor revealed t h a t the c o n t r a c t o r t s annual
gross volume of work f o r f i s c a l years 1975- 76 through 1977- 78 was a t a minimum
as follows:
F i s c a l year 1975- 76 $ 1 89,595
Fiscal year 1976- 77 554,142
Fiscal year 1977- 78 456,362
Based on the above gross volumes of work, the c o n t r a c t o r ' s bond should have
been three times the $ 3,000 a c t u a l l y posted. The contractor went out of
business and h i s license was revoked i n 1978 leaving at l e a s t nine unresolved
complaints.
The Revenues Generated By The
Bonding System To A Large Extent
Are Not Available To Reimburse
Those Who Suffer Financial Losses
In Dealinn With Contractors
Arizona contractors pay annually, premiums oC approximately $ 2,200,000 t o
s u r e t i e s t o f u l f i l l these bonding requirements." However, of t h a t $ 2,200,000
received by s u r e t i e s only an estimated $ 688,600 is paid out annually t o those
who have obtained judgments against contractors.** Thus, s u r e t i e s receive
approximately $ 1,500,000 more from contractors than they pay out annually.
In a d d i t i o n , c o n t r a c t o r s have the option o f posting cash bonds with t h e S t a t e
Treasurer as a means of f u l f i l l i n g t h e i r bonding requirements. The S t a t e
Treasurer invests these cash bonds i n order t o earn i n t e r e s t income. However,
any i n t e r e s t income earned from these cash bonds belongs t o the S t a t e General
Fund and is not available for d i s t r i b u t i o n t o claimants against contractors.
During f i s c a l year 1978- 79, the cash bonds deposited with t h e S t a t e Treasurer
earned approximately $ 235,000 i n i n t e r e s t .
A s a r e s u l t , during f i s c a l year 1978- 79, approximately $ 2,435,000 was e i t h e r
paid by contractors t o s u r e t i e s or earned a s i n t e r e s t on cash bonds deposited
with the S t a t e Treasurer, but only $ 756,800 was paid t o claimants against
contractors1 bonds as shown below.
* Based on responses obtained i n a survey of 500 contractors. ** Based on a survey of bonding companies, it was determined t h a t losses
averaged 31.3% of premium d o l l a r s .
Bond Premiums Paid By Contractors
To Sureties
I n t e r e s t Earned On Cash Bonds Deposited
With The S t a t e Treasurer
Bond Distributions Paid To Claimants Against
Contractors:
Surety Judgments $ 688,600
Cash Bond Fund Judgments ( Fiscal
Year 1977- 78) 68,200 756,800 - 3 1
Bond Premiums or Cash Bond I n t e r e s t Earnings
Retained By Sureties O r The General Fund
A s shown above, only 31 percent of the annual bond premiums paid t o s u r e t i e s
and i n t e r e s t earned on cash bonds are d i s t r i b u t e d t o claimants against
contractors. It should be noted t h a t those claimants a r e the ones the bonding
system is designed t o p r o t e c t a g a i n s t f i n a n c i a l l o s s .
The Recovery Fund Method O f
Consumer Protection Has Been
Found To Provide S u b s t a n t i a l l y
More Protection To Consumers
An a l t e r n a t i v e form of consumer p r o t e c t i o n has been developed and is c u r r e n t l y
i n use by the Hawaiian Contractors Board. The method adopted i n Hawaii f o r
consuner p r o t e c t i o n is a Recovery Fund t o which a l l l i c e n s e d c o n t r a c t o r s
c o n t r i b u t e . The f u l l t e x t of the applicable Hawaiian s t a t u t e s is located at
Appendix V I ; however, the p e r t i n e n t f e a t u r e s of the Recovery Fund a r e as
follows:
1. For an o r i g i n a l l i c e n s e each c o n t r a c t o r pays $ 150 i n t o the fund.
2. Each c o n t r a c t o r pays $ 50 i n t o the fund upon renewal each biennial
renewal period.
3. The fund's l i a b i l i t y does not exceed $ 10,000 f o r damages sustained
by any consumer.
4. The fund's l i a b i l i t y does not exceed $ 20,000 f o r any licensed
contractor.
5. Consumers a r e l i m i t e d t o " owners or l e s s e e s o f p r i v a t e residences,
including condominium or cooperative u n i t s , who have contracted with
a duly l i c e n s e d c o n t r a c t o r f o r t h e c o n s t r u c t i o n of improvements or
a l t e r a t i o n s t o t h e i r own p r i v a t e residences. ll
6 . Upon payment from the fund the c o n t r a c t o r ' s l i c e n s e is automatically
terminated u n t i l the amount of payment is repaid i n f u l l .
7. Contractors may still be required t o post bonds at t h e d i s c r e t i o n of
the board based on the experience and f i n a n c i a l c o n d i t i o n o f the
l i c e n s e e or a p p l i c a n t .
When Hawaii f i r s t e s t a b l i s h e d its Recovery Fund i n 1973, it was not l i m i t e d t o
consumers. A s a r e s u l t , heavy f i n a n c i a l pressures were placed on t h e resources
o f t h e fund. Hawaii amended the s t a t u t e s t h a t e s t a b l i s h e d the Recovery Fund i n
1976 t o l i m i t access t o the Recovery Fund t o consumers. Thus, persons such a s
s u p p l i e r s , unions and other c o n t r a c t o r s may not f i l e claims a g a i n s t t h e
Recovery Fund. According t o t h e Executive Secretary of t h e Hawaii Contractor's
Board, the Recovery Fund is operating very w e l l .
An Auditor General survey of 500 l i c e n s e d c o n t r a c t o r s revealed t h a t 52.7
percent preferred the Recovery Fund method of consumer protection t o the
current bonding system.
CONCLUSION
The c u r r e n t c o n t r a c t o r bonding system does not e f f e c t i v e l y protect consumers i n
that: •
- The bonding system protects those who are f a m i l i a r with t h e l e g a l
processes involved, generally not the consumer, and
- Revenues generated by the bonding system, t o a large extent, are not
available t o reimburse consumers who s u f f e r f i n a n c i a l l o s s e s i n •
dealing with contractors.
An a l t e r n a t i v e form of consumer protection, the Recovery Fund, would provide
s u b s t a n t i a l l y more protection t o consumers.
RECOMMENDATION
The Registrar of Contractors should adopt the recovery fund method of consumer
protection s i m i l a r t o t h a t now i n use by the Hawaii Contractor's Board. The @
adoption of the recovery fund would n e c e s s i t a t e amending ARS 32- 1152 and 32-
1152.01 which pertain t o t h e c u r r e n t bonding requirements.
FINDING I V
IMPROVEMENTS ARE NEEDED I N THE PROCEDURES EMPLOYED BY THE REGISTRAR OF
CONTRACTORS TO RESOLVE COMPLAINTS AGAINST CONTRACTORS AND PUNISH LICENSEES
FOUND GUILTY OF OFFENSES.
Arizona s t a t u t e s require the Registrar t o resolve complaints f i l e d by consumers
a g a i n s t l i c e n s e d c o n t r a c t o r s and t o impose d i s c i p l i n e a g a i n s t c o n t r a c t o r s when
appropriate. Our review of the R e g i s t r a r ' s complaint review process revealed
t h a t t h e time required t o resolve complaints is excessive and the Registrar is
not i n compliance with s t a t u t o r y requirements regarding complete and accurate
records of a l l l i c e n s e revocations and suspensions.
The Time Required To Resolve
Complaints Is Excessive
Arizona Revised S t a t u t e s 32- 1155 through 32- 1159 prescribe the procedures t o
be followed i n resolving complaints and s t a t e i n part:
1132- 1155. F i l i n g of complaint; service of notice; f a i l u r e
t o answer.
A. Upon the f i l i n g of a v e r i f i e d complaint with the
Registrar charging a licensee with the commission,
within two years prior t o the date of f i l i n g the
complaint, of an a c t which is cause f o r suspension or
revocation of a l i c e n s e , t h e Registrar a f t e r
i n v e s t i g a t i o n may issue a c i t a t i o n or upon w r i t t e n
request of the complainant s h a l l issue a c i t a t i o n
directing the l i c e n s e e , within ten days a f t e r s e r v i c e
of the c i t a t i o n upon him, t o appear by f i l i n g with the
Registrar h i s v e r i f i e d answer t o the complaint
showing cause, i f any, why h i s l i c e n s e should not be
suspended or revoked.
32- 1156. Notice of hearing.
A. Uponthe f i l i n g o f a n a n s w e r b y a l i c e n s e e s e r v e d w i t h
a complaint under section 32- 1155, the Registrar
s h a l l f i x a time and place f o r a hearing and s h a l l
give the licensee and the complainant not less than
five days notice thereof.. . .
B. With the notice t o complainant there s h a l l be
attached or enclosed a copy of the answer....
" 32- 1157. Hearing.
A. Upon the hearing, the Registrar s h a l l hear a l l
relevant and competent evidence offered by the
complainant and the l i c e n s e e , and may continue the
hearing from time t o time when he deems it necessary
and proper.
B. After the hearing is concluded and the matter
submitted, the Registrar s h a l l , within f i f t e e n days,
give h i s decision i n writing, e i t h e r suspending or
revoking the l i c e n s e or dismissing the complaint,
with a b r i e f statement of h i s reasons therefor.. ..
C. A decision by the Registrar suspending or revoking a
l i c e n s e s h a l l not take e f f e c t u n t i l twenty days a f t e r
service of n o t i c e t h e r e o f .
32- 1158. Rehearing.
A. Within twenty days a f t e r service of notice of the
decision of the Registrar suspending or revoking a
l i c e n s e or the dismissal o f a c i t a t i o n and complaint,
the licensee or complainant may apply for a rehearing
by f i l i n g with the Registrar h i s p e t i t i o n i n writing
therefor. Within f i v e days a f t e r f i l i n g such
p e t i t i o n , t h e Registrar s h a l l have notice thereof
served upon the complainant by mailing a copy of the
p e t i t i o n t o him i n the manner prescribed i n section
32- 1156 for notice of hearing. The f i l i n g of a
p e t i t i o n f o r rehearing s h a l l be a condition precedent
t o any r i g h t of appeal as prescribed pursuant t o
section 32- 1159.
B. The f i l i n g of a p e t i t i o n f o r rehearing s h a l l suspend
the operation of the R e g i s t r a r ' s a c t i o n i n suspending
or revoking t h e l i c e n s e and permits licensee t o
continue t o do business as a contractor pending
denial or granting of the p e t i t i o n , and i f the
p e t i t i o n is granted, s h a l l suspend operation of such
action pending the decision o f the Registrar upon the
rehearing.
C. In h i s order granting or denying a rehearing, the
Registrar s h a l l include a statement of the p a r t i c u l a r
grounds and reasons for h i s action.;..
Within ten days a f t e r submission of the matter upon
rehearing, the Registrar s h a l l render his decision i n
writing and give notice thereof i n the same manner as
i f a decision rendered upon an o r i g i n a l hearing.
" D. If an order denying a rehearing or a decision given
upon a rehearing r e s u l t s i n immediate suspension or
revocation of a l i c e n s e , then operation o f such order
or decision s h a l l be suspended u n t i l ten days a f t e r
service of n o t i c e t h e r e o f .
32- 1159. Appeal.
An action t o review a f i n a l administrative decision
of the Registrar of Contractors s h a l l be pursuant t o
T i t l e 12, Chapter 7, A r t i c l e 6, except t h a t the
Registrar of Contractors s h a l l have t h i r t y days t o
prepare and f i l e with the court a t r a n s c r i p t of the
proceedings before t h e r e g i s t r a r . "
The time required t o resolve complaints as prescribed above is excessive. An
analysis of 324 complaints t h a t were closed during the period July 1, 1978 t o
December 31, 1978 revealed the time required for each s t e p i n the complaint
process. Table 6 summarizes the r e s u l t s of t h i s analysis.
TABLE 6
Steps i n t h e
Complaint Process
SUMMARY OF TIME REQUIRED FOR EACH
STEP I N THE COMPLAINT PROCESS AS
PRESCRIBED I N ARS 32- 1155 THROUGH 32- 1159
Complaint Rejected*
Complaint Accepted But Resolved
Between Complainant And Contractor
P r i o r To The R e g i s t r a r I s s u i n g A
C i t a t i o n
C i t a t i o n Issued But Resolved
Between Complainant And
Contractor P r i o r To The Hearing
Being Held
Resolved A t Hearing
Resolved A t Rehearing
Appealed To And Resolved A t
Superior Court
Percentage
of Complaints
Analvzed
Average Elapsed
Time i n Days Cumulative Elapsed
t o Complete Step Time i n Days
40
* Rejected f o r l a c k of j u r i s d i c t i o n , complaint exceeded i n d u s t r y standards or
complainant refused help from c o n t r a c t o r . ** Case f i l e s destroyed i n f i r e at the R e g i s t r a r ' s on January 14, 1979, case
reopened o r complainant taking c i v i l a c t i o n .
A s shown i n Table 6 , most complaints are resolved between t h e complainant and
the c o n t r a c t o r p r i o r t o a c i t a t i o n being issued by t h e R e g i s t r a r . However,
even those complaint s e t t l e m e n t s t a k e an average of 70 days. Those complaints
t h a t go beyond the c i t a t i o n s t a g e r e q u i r e s i g n i f i c a n t l y more time t o resolve.
For example, complaints resolved a f t e r a c i t a t i o n has been issued but p r i o r t o
the hearing d a t e r e q u i r e 194 days f o r r e s o l u t i o n and complaints resolved a t a
hearing r e q u i r e 246 days f o r r e s o l u t i o n .
It should be noted t h a t those complaints t h a t a r e resolved prior t o a hearing
are usually resolved as a r e s u l t of c o n t r a c t o r a c t i o n . That is, a contractor
takes appropriate action regarding a complaint- then the complaint process
stops. However, under current procedures, contractors have l i t t l e incentive t o
take appropriate action expeditiously. For example, a contractor can wait
u n t i l the day before a complaint is scheduled for hearing t o take appropriate
action and s t i l l avoid a hearing. A s a r e s u l t , contractors a c t u a l l y have an
incentive t o delay taking action as long as possible under the current system.
The following statement by a home b u i l d e r ' s association t o its members a t t e s t s
t o t h a t fact:
" If you receive a complaint on a block fence not being
complete, request a hearing. Hopefully, you w i l l be able
t o complete the block fence before the hearing date comes
( Emphasis added)
This lack of contractor incentive t o resolve complaints expeditiously is a
primary cause f o r the current lengthy complaint process. One by- product of
such a lengthy complaint process is t h a t it jeopardizes other consumers. This
occurs because a contractor continues t o be licensed u n t i l the Registrar
suspends or revokes the contractor's l i c e n s e . Thus, while one complaint
against a p a r t i c u l a r contractor is being processed additional complaints may be
f i l e d by other consumers against the same contractor. However, i f the
Registrar revokes the contractors l i c e n s e based upon the i n i t i a l complaint, any
subsequent complaints f i l e d against t h a t contractor by other consumers are
dismissed. The Registrar no longer has j u r i s d i c t i o n over the contractor a f t e r
the Registrar has revoked the c o n t r a c t o r ' s l i c e n s e . The following cases
i l l u s t r a t e how a lengthy complaint process works t o the disadvantage of
consumers.
Case I
On July 28, 1977, a complaint was f i l e d against a painting & wall covering
contractor. This complaint r e s u l t e d i n the revocation of the contractor's
l i c e n s e on April 16, 1978, nine months l a t e r . During the nine- month period
from the f i l i n g of the complaint t o the revocation, 44 other complaints were
f i l e d .
Case 2
A roofing c o n t r a c t o r ' s l i c e n s e was revoked on February 12, 1978 because of a
complaint f i l e d . September 29, 1977. During the f i v e and one- half months
between the f i l i n g of the complaint and revocation, 15 additional complaints
were f i l e d with the Registrar.
Case 3
On March 22, 1978, a swimming pool c o n t r a c t o r ' s l i c e n s e was revoked due t o a
complaint f i l e d October 28, 1977. A t the time of l i c e n s e revocation, 28
complaints had been f i l e d with the Registrar against t h i s contractor.
An Auditor General survey of individuals and firms t h a t had f i l e d complaints
with the Registrar t h a t were closed from January 1, 1979 t o June 30, 1979,
disclosed that:
- 39.6 percent f e l t t h a t the delay i n processing the complaint resulted
i n a hardship ( f i n a n c i a l or otherwise).
- 32.9 percent f e l t t h a t the Registrar was not useful i n resolving
t h e i r complaint.
- 38.6 percent f e l t t h a t the Registrar of Contractors is not useful i n
protecting the public from incompetent or unethical contractors.
In addition, those persons that responded t o the survey frequently expressed
anger and f r u s t r a t i o n a t the length of the complaint process and the apparent
i n a b i l i t y of t h e R e g i s t r a r t o e f f e c t i v e l y regulate contractors such as:
" The contractor knows he can go a l l the way up t o the
hearing without performing a t the expense of the home
buyer since most individuals won't pursue the matter t h a t
f a r due t o time, d o l l a r s , f r u s t r a t i o n and although not
mandatory, cost of lawyer fees for being represented a t
the hearing. Even i f ( t h e ) case is ruled against the
contractor, he performs without penalty. There is no
incentive for the contractor t o perform u n t i l a f t e r ( t h e )
hearing. "
" My husband was. . . overseas and I had t o handle t h i s myself - became physically ill and mentally upset due t o long
drawn out procedures..
My contractor ignored me and a l s o the Registrar, for
awhile he was unobtainable and got away with it."
" Completely reorganize or eliminate department. Existing
s i t u a t i o n is completely useless and I 1 m sure a waste of
tax- payers money.
" Inspector called on contractor REPEATEDLY, contractor
tended t o ignore whomever he pleased."
" The builders don't seem upset i n the l e a s t when you go
( t o ) t h e Registrar of Contractors. Perhaps they don't
have enough power over the builders."
" The Registrar showed complete indifference t o my problem - the complaint s a t for over 6 months without anything
happening - I called many times and was t o l d ' This a l l
takes time'."
" A s f a r a s I ' m concerned you should change the name t o
Registrar FOR Contractors - I was t o l d t h a t they would not
inspect my roof.. . I was also t o l d t h a t I could request a
hearing which might be scheduled i n four t o s i x months.
After the hearing I would have t o f i l e another s u i t i n
order t o get my money or get the roof fixed. The estimated
cost of going t h i s f a r would have been prohibitive. l1
" Shouldn't let so much time elapse between time of
complaint and completing it ( t h e work). This case took
over a year."
If Considering the service rendered ( lack thereof) t o me,
the Registrar of Contractors may j u s t as w e l l not exist."
" 1 obtained no s a t i s f a c t i o n or encouragement from the
Registrar of Contractors and believe it t o be an impotent
powerless part of our bureaucracy."
One means of shortening the complaint process would be t o provide the Registrar
with the authority t o f i n e contractors i f valid consumer complaints are not
resolved by the contractor within a specified time. Such a process could be c)
implemented as follows:
- When a complaint is f i l e d with the Registrar, the contractor is given
a specified time t o t a k e appropriate a c t i o n .
- If the contractor t a k e s appropriate action within the a l l o t t e d time,
the complaint is dismissed.
- If the contractor does not t a k e appropriate a c t i o n , - t h e normal
complaint process is i n i t i a t e d .
- The Registrar would impose a f i a e on the contractor f o r all valid
complaints not resolved within t h e a l l o t t e d time.
The advantages of the above procedure over the current one is t h a t it a)
provides the contractor with an incentive t o take appropriate action within a a
reasonable time, and b) would reduce the number of complaints requiring
Registrar action.
The concept of giving contractors a s p e c i f i c amount of time t o resolve valid
complaints or face d i s c i p l i n a r y a c t i o n regardless of whether or not the
complaint was eventually resolved was discussed by the Office o f the Auditor
General with a representative of the Central Arizona Homebuilders Association,
a l a r g e Phoenix homebuilder, and Registrar of Contractor personnel. A l l
p a r t i e s agreed t o the concept, however, some expressed concern regarding the
establishment of a f a i r amount of time t o resolve the complaint.
In addition, an Auditor General survey of 500 contractors revealed widespread 0
support f o r the concept of e s t a b l i s h i n g r u l e s f o r t h e timely settlement of
complaints and fining contractors who v i o l a t e established time l i m i t s . The
s p e c i f i c questions asked of contractors and t h e i r responses are as follows:
Do you f e e l t h a t the Registrar of Contractors should promulgate r u l e s
for the timely settlement of complaints?
Yes 86.6%
No 13.4%
lJould you favor the Registrar of Contractors having the power t o levy
f i n e d p e n a l t i e s against those who exceeded a specified time period
i n resolving a complaint ( assuming the complaint was v a l i d ) ?
Yes 70.0%
No 30.0%
It should be noted t h a t complaints a r e currently being received by the
Registrar i n excess of 600 a month. The number of complaints received during
f i s c a l years 1976- 77 through 1978- 79 and the projected f i s c a l year 1979- 80
v o l u ~ ei s shown below:
Percent Increase
Fiscal Over F i s c a l Year
Year Number of Complaints 1976- 77 Base Year
4204
5725
7509
9453 ( Estimated
Due t o the lack of personnel t o handle the increasing number of complaints
received and the current procedures used t o resolve complaints, the backlog has
been s t e a d i l y increasing. A s of May 1, 1979, there were 3055 unresolved
complaints f i l e d with the Registrar. The increase i n unresolved complaints is
shown below.
Number of Unresolved Percent Increase
Date Complaints Over 1977 Base Year
May 1, 1977
May 1, 1978
May 1, 1979
In our opinion, it is e s s e n t i a l t h a t some method be established t o s h o r t e n t h e
R e g i s t r a r ' s complaint process. This need w i l l become even more severe as the
number of complaints f i l e d wit'h the Registrar and unresolved complaints 0
increases.
The Registrar Is Not I n Compliance
With Statutory Requirements Regarding
Complete And Accurate Records O f A l l
License Revocations And Suspensions
Arizona Revised S t a t u t e s 32- 1104 r e q u i r e s t h e Registrar t o maintain complete
and accurate records of a l l contractor l i c e n s e revocations and suspensions and
s t a t e s i n part:
" Powers and duties.
A. The Registrar, i n addition t o other duties and r i g h t s
provided for i n t h i s chapter, s h a l l :
2. Maintain a complete indexed record of all
applications and l i c e n s e s issued, renewed,
terminated, cancelled, revoked or suspended under
t h i s chapter.
3. Furnish a c e r t i f i e d copy of any l i c e n s e issued or an
a f f i d a v i t t h a t no l i c e n s e e x i s t s , or the cancellation
or suspension thereof, upon r e c e i p t of a fee of three
d o l l a r s , and such c e r t i f i e d copy s h a l l be received i n
a l l courts and elsewhere as prima f a c i e evidence of
t h e f a c t s s t a t e d therein."
Our review of t h e R e g i s t r a r ' s records revealed t h a t complete and accurate
records a r e not being maintained i n t h a t adequate follow- up is not made of
Registrar suspensions and revocations t h a t a r e appealed t o the Superior Court.
A s a r e s u l t , some contractor l i c e n s e suspensions and revocations t h a t should be
r e f l e c t e d on contractor records are not.
For example, as o f April 1979, the Registrar considered 22 suspensions and
revocations as being appealed t o the Superior Court when i n f a c t t h e Court had
already rendered a f i n a l decision. The importance of t h i s omission is t h a t an
appealed suspension or revocation is not r e f l e c t e d on a c o n t r a c t o r ' s l i c e n s e
u n t i l the decision is upheld by the Court. Thus, i n those cases where the
R e g i s t r a r ' s decision was sustained by the Court, the Registrar's records would
be incomplete .
An analysis of the 22 appealed decisions t h a t were a c t u a l l y closed a s of April
1979 revealed t h a t t h e R e g i s t r a r ' s decision was upheld i n eight cases. The
following two cases are examples.
Case 1
The R e g i s t r a r ' s decision and order suspending the contractor f o r 30 days was
appealed t o Maricopa County Superior Court. Because the licensee f a i l e d t o
properly pursue the appeal it was placed on the inactive calendar and
subsequently dismissed without prejudice f o r lack of prosecution on
December 24, 1971. The dismissal i n e f f e c t upheld the R e g i s t r a r ' s order of a
30- day suspension. Because the Registrar regarded the appeal as open, the
contractor's record was never changed t o r e f l e c t the suspension and t h e r e is no
indication t h a t the contractor ever performed the 30- day suspension. The
licensee is still an a c t i v e contractor.
Case 2
A contractor whose l i c e n s e had been revoked by the Registrar obtained a s t a y
order from the Superior Court dated April 7, 1973. The granting of the stay
order was contingent upon the posting of a $ 500 bond by the contractor. The
$ 500 bond was never posted by the contractor and the stay never went i n t o
e f f e c t . A s a r e s u l t , the R e g i s t r a r ' s order became e f f e c t i v e i n April 1973
revoking the c o n t r a c t o r ' s l i c e n s e . The revocation does not appear on the
contractor's record a t the Registrar. The contractor allowed h i s l i c e n s e t o
lapse on June 30, 1973. In 1977, the c o n t r a c t o r r e a p p l i e d for a l i c e n s e . The
new l i c e n s e was issued by the Registrar on April 18, 1977. A t present, the
contractor is scheduled f o r two hearings where he has been charged with f a i l u r e
t o complete, abandonment of contract and poor workmanship.
. Two possible consequences of the Registrar not following up on appealed
d i s c i p l i n a r y a c t i o n s are a ) when the imposition of d i s c i p l i n e is delayed for
an unreasonable time, the Registrar may be precluded from subsequently imposing
any penalty, and b) consumers may have a negligence claim a g a i n s t t h e
a
Registrar i f they suffered harm because they r e l i e d on f a u l t y contractor
information provided by the Registrar. The Legislative Council, i n opinions
dated May 2, 1979% and May 3, 19799, s t a t e d :
" The equitable defense of laches may be available t o a
contractor against enforcement of a decision and order of
the Registrar i f a lengthy period of time elapses a f t e r
appeal and before implementation of the l i c e n s e suspension
or revocation."
'' Arizona case law is unclear as t o whether a person may have
a negligence claim against the Registrar of Contractors
for f a i l u r e t o include the existence of a prior license
suspension or revocation on the records of a current
licensee. However, an argument can be made t o the e f f e c t
t h a t a misrepresentation of f a c t occasioned by a f a i l u r e
t o comply with a s p e c i f i c s t a t u t o r i l y imposed
recordkeeping duty would be an action which narrows the
R e g i s t r a r ' s general duty t o the public i n t o a s p e c i a l duty
t o an individual, thus s a t i s f y i n g the duty requirement for
a negligence claim i n Arizona... The other elements of
negligence would still need t o be shown, including
evidence t h a t the misrepresentation of f a c t by the
Registrar was the proximate cause of the p l a i n t i f f ' s
i n j u r i e s . "
In our opinion the Registrar should adopt procedures t o ensure t h a t contractor a
records r e f l e c t t h e d i s p o s i t i o n of appealed d i s c i p l i n a r y decisions.
* Appendices V I I and V I I I contain a f u l l t e x t of these opinions.
CONCLUSION
Improvements are needed i n complaint procedures i n that:
- The time t o resolve complaints is excessive, and
- The Registrar is not i n compliance with s t a t u t o r y requirements
regarding complete and accurate records of a l l l i c e n s e revocations
and suspensions.
RECOMMENDATIONS
It is recommended that:
- The Registrar be given the authority t o f i n e contractors who exceed a
specified period of time t o resolve valid complaints, and
- The Registrar should adopt procedures t o ensure t h a t contractor
records accurately r e f l e c t court decisions t h a t uphold d i s c i p l i n a r y
decisions.
FINDNG V
THE REGISTRAR'S ANNUAL LICENSE RENEWAL PROCESS IS NOT I N COMPLIANCE WITH
STATUTORY REQUI8EMENTS REGARDING TIMELY DEPOSITS OF MONIES RECEIVED. I N
ADDITION INTERNAL CONTROLS OVER THE LICENSE RENEWAL PROCESS ARE NOT ADEQUATE TO
ALLOW FOR A DETERMINATION THAT STATUTORILY PRESCRISED LATE FILING PENALTIES ARE
BEING PROPERLY IMPOSED.
Contractors are required t o renew t h e i r licenses with the Registrar of
Contractors annually before June 30, t o avoid paying a l a t e f i l i n g penalty."
Our review of the R e g i s t r a r ' s annual l i c e n s e renewal process revealed t h a t it
is not i n compliance with s t a t u t o r y requirements regarding timely deposits of
aonies received and the i n t e r n a l controls over the process are not adequate t o
allow for a determination t h a t s t a t u t o r i l y prescribed l a t e f i l i n g penalties are
being properly imposed.
Arizona Revised S t a t u t e s ( ARS) section 35- 146 requires a l l s t a t e budget u n i t s ,
including the Registrar, t o promptly remit monies received t o t h e S t a t e
Treasurer and s t a t e s :
" 35- 146. Deposit of receipts by budget units
A l l monies received by any o f f i c e r or employee of any
budget u n i t s h a l l be promptly remitted t o the account of
the s t a t e t r e a s u r e r and no monies s h a l l be held, used or
deposited i n any personal or special bank account
temporarily or otherwise by any agent or employee except
as expressly provided by t h i s chapter.''
* The f i s c a l year 1978- 79 renewal deadline was delayed 31 days by a court
order t o allow additional time for contractors t o comply with a change i n
the R e g i s t r a r ' s Rules and Regulations which increased the bond amount for
a p a r t i c u l a r c l a s s o f contractor. Although a r e l a t i v e l y few contractors
were affected by the r u l e change, the 31 day postponement i n the renewal
deadline applied t o a l l licensees.
Our review i d e n t i f i e d s e v e r a l i n s t a n c e s o f t h e R e g i s t r a r not depositing checks
received from c o n t r a c t o r s with t h e S t a t e Treasurer u n t i l weeks o r months had
passed. For example, one check was a p p a r e n t l y r e c e i v e d by t h e R e g i s t r a r on a
June 6, 1978 but n o t r e m i t t e d t o t h e S t a t e ' T r e a s u r e r u n t i l August 25, 1978, 80
days l a t e r .
The S t a t e of Arizona Accounting Manual prepared by t h e Department of Finance a
s t a t e s , i n p a r t ( s e c t i o n IV- 8):
" Checks should be r e s t r i c t i v e l y endorsed immediately upon
r e c e i p t . When r e c e i p t of monies is i n c i d e n t a l t o an
agency's o p e r a t i o n s , a formal method of recording such
r e c e i p t s is not necessary, b u t s u f f i c i e n t documentation
should be r e t a i n e d i n t h e agency's f i l e s t o allow an a u d i t
trail ." ( Emphasis added)
The R e g i s t r a r does not, however, have s u f f i c i e n t documentation i n its f i l e s t o
allow f o r an a u d i t t r a i l f o r monies received. Thus it cannot be determined how ( I
pervasive o r severe a r e r e m i t t a n c e d e l a y s s u c h , a s the one c i t e d above.
A t p r e s e n t , t h e r e is no control e s t a b l i s h e d o r a u d i t trail developed f o r monies
received from c o n t r a c t o r s u n t i l t h e i r renewal a p p l i c a t i o n s a r e accepted by the
R e g i s t r a r , even though these monies may have been i n i t i a l l y received by the
R e g i s t r a r weeks e a r l i e r . Renewal f e e s should be deposited immediately with the
S t a t e Treasurer. Such deposits should be recorded i n a Suspense Account upon
r e c e i p t by t h e R e g i s t r a r and t r a n s f e r e d from the Suspense Account t o the
General Fund upon acceptance o f t h e l i c e n s e renewal a p p l i c a t i o n by the
R e g i s t r a r .
Additionally, ARS 32- 1 125 and 32- 1 126 provide f o r an annual renewal of
c o n t r a c t o r l i c e n s e s and f o r a penalty t o be imposed upon those c o n t r a c t o r s t h a t
f i l e t h e i r l i c e n s e renewals l a t e . The s t a t u t e s s t a t e :
1132- 1 125. Renewal of l i c e n s e s
A. Licenses issued under t h i s chapter s h a l l be suspended
on June 30 each year by operation of law. An a p p l i c a t i o n
for renewal of any c u r r e n t c o n t r a c t i n g l i c e n s e addressed
t o the r e g i s t r a r , with a v a l i d bond or cash deposit on f i l e
with t h e r e g i s t r a r , accompanied by the required f e e and
received by the r e g i s t r a r or deposited i n t h e United
S t a t e s mail postage prepaid on or before J u l y 1, s h a l l
authorize the l i c e n s e e t o operate as a c o n t r a c t o r u n t i l
a c t u a l i s s u a n c e o f the renewal l i c e n s e f o r t h e ensuing
f i s c a l year.
B. A l i c e n s e which has been suspended by o p e r a t i o n o f l a w
for f a i l u r e t o renew may be r e a c t i v a t e d and renewed within
one year of its suspension by f i l i n g the required
a p p l i c a t i o n and payment of a fee i n double the amount
provided f o r renewal i n t h i s chapter. When a l i c e n s e has
been suspended f o r one or more f i s c a l years f o r f a i l u r e t o
renew, a new a p p l i c a t i o n f o r l i c e n s e must be made and a new
l i c e n s e issued i n accordance with t h i s chapterr1.
( Emphasis added)
3 Annual renewal f e e f o r general engineering
c o n t r a c t i n g , general building heavy c o n s t r u c t i o n
c o n t r a c t i n g and the branches or any d i v i s i o n s thereof of
general engineering c o n t r a c t i n g and g e n e r a l b u i l d i n g
c o n t r a c t i n g , n o t more than one hundred ten d o l l a r s .
4. Annual renewal fee f o r t h e branch or any d i v i s i o n
thereof of s p e c i a l t y c o n t r a c t i n g , n o t more than eighty-f
i v e d o l l a r s .
C. The penalty f o r f a i l u r e t o apply f o r renewal of a
l i c e n s e within t h e time prescribed by t h i s chapter s h a l l
be doubled the annual renewal fee prescribed i n t h i s
section." ( Emphasis added)
A d d i t i o ~ a l l y , t h e R e g i s t r a r ' s Rules and Regulations p e r t a i n i n g t o renewals
s t a t e , i n p a r t :
" R4- 9- 16 LICENSE RENEWAL
A. It is the s o l e duty and r e s p o n s i b i l i t y o f t h e
l i c e n s e e t o timely renew h i s l i c e n s e on f u l l y and
accurately completed forms as prescribed by the R e g i s t r a r .
Incompleted and i n a c c u r a t e l y completed renewal forms s h a l l
be r e j e c t e d . Neither the need f o r a d d i t i o n a l time t o
accurately complete renewal forms as prescribed by the
Registrar nor f a i l u r e t o r e c e i v e renewal forms i n the mail
w i l l be a j u s t i f i a b l e excuse f o r the l a t e renewal of a
l i c e n s e without payment of the double fee."
The i n t e r n a l controls over the Registrar's l i c e n s e renewal process are so
inadequate and the documentation of the system so i n s u f f i c i e n t t h a t it cannot
be determined i f the l a t e f i l i n g penalties prescribed i n ARS 32- 1125 and 32-
1126 a r e i n f a c t being imposed. For example, on August 25, 1978 ( 25 days a f t e r
t h e l i c e n s e renewal deadline), $ 1,790 i n l i c e n s e renewal fees were sent by the
Registrar t o the S t a t e Treasurer. None of the 19 contractors t h a t paid these
renewal fees were assessed l a t e f i l i n g penalties. However, it cannot be
determined from the available documentation i n the R e g i s t r a r ' s Office whether
l a t e f i l i n g penalties should have been assessed.
The R e g i s t r a r ' s current procedure for reviewing contractors licenses provides a
f o r the contractors t o submit a two- part l i c e n s e renewal form along with the
l i c e n s e renewal fee t o the Registrar. The Registrar date- stamps the renexal
application and it is reviewed f o r propriety. If the renewal is i n order a two-part
prenumbered receipt is prepared and the renewal f e e s e n t t o the S t a t e a
Treasurer. If, however, the l i c e n s e renewal application is rejected by the
R e g i s t r a r , t h e a p p l i c a t i o n and the renewal fee a r e both returned t o the
contractor.
0
The above procedures lack adequate controls and s u f f i c i e n t documentation i n
t h a t the only means of e s t a b l i s h i n g d a t e c o n t r o l over l i c e n s e renewal
applications is t h e R e g i s t r a r ' s date stamp. However, t h i s date stamp is
routinely back- dated by Registrar personnel when stamping l i c e n s e renewal
applications. Such a practice completely destroys the i n t e g r i t y o f the date
stamp as a control mechanism. The practice of back- dating t h e d a t e stamp is
p a r t i c u l a r l y prevalent when the volume of l i c e n s e renewals is highest a t June
30, and when problems a r i s e with renewal a p p l i c a t i o n s , as demonstrated i n the
following cases:
CASE 1
A contractor submitted a l i c e n s e renewal application on June 28, 1978. The
Registrar rejected the application on July 21, 1978, because the c o n t r a c t o r l s
bond was i n s u f f i c i e n t . The contractor resubmitted the application on
August 15, 1978. The Registrar date- stamped t h e a p p l i c a t i o n as having been
accepted on July 31, 1978," and no l a t e f i l i n g penalty was imposed.
CASE 2
A contractor submitted a l i c e n s e renewal application on July 27, 1978, and the
Registrar rejected the application on August 7, 1978. The contractor
resubmitted the application on August 21, 1978. The Registrar date- stamped the
application as having been accepted on July 31, 1978,* and no l a t e f i l i n g
penalty was imposed.
CASE 3
A contractor submitted a l i c e n s e renewal application on July 3, 1978. The
Registrar rejected the application on July 25, 1978. The application was
resubmitted on July 31, 1978 but was again r e j e c t e d on August 8, 1978. The
contractor again resubmitted the application some time a f t e r August 29, 1978.
The Registrar date- stamped the application as having been accepted on July 31,
1978," and no l a t e f i l i n g fee was imposed.
A s shown i n the above cases, the date stamp as it is currently used by the
Registrar does not provide a valid indication as t o when l a t e f i l i n g fees
should be imposed. For example, 19 problem l i c e n s e renewals were all dated
July 31, 1978, but the l i c e n s e fees were not deposited with the S t a t e Treasurer
u n t i l August 25, 1978. In addition, l i t e r a l l y hundreds of l i c e n s e renewal fees
were deposited with t h e S t a t e Treasurer between July 31, 1978 and August 25,
1978. However, because of i n s u f f i c i e n t documentation it cannot be accurately
determined how many of t h e s e a p p l i c a t i o n s were a c t u a l l y f i l e d l a t e but did not
have a l a t e f i l i n g fee imposed.
* See footnote on page 56 regarding extensions i n f i l i n g deadline.
The use of a r e c e i p t s log, f i l l e d out immediately upon receipt of a license
renewal application, would provide increased i n t e r n a l control and an audit
t r a i l t o document the processing of l i c e n s e fees from i n i t i a l receipt t o f i n a l a
disposition. In addition, t h e p r a c t i c e of back- dating t h e d a t e stamp should be
discontinued i f it is t o have any i n t e g r i t y as an i n t e r n a l control mechanism.
It should be noted t h a t the f a i l u r e t o properly impose s t a t u t o r i l y prescribed 4
l a t e f i l i n g fees can r e s u l t i n s i g n i f i c a n t monetary l o s s e s t o t h e S t a t e i n view
of the following:
- Approximately 12,000 contractors annually renew t h e i r licenses with
the Registrar.
- License renewal fees are e i t h e r $ 85 or $ 110.
- The l a t e f i l i n g fee is double the annual renewal fee.
CONCLUSION
The R e g i s t r a r ' s annual l i c e n s e renewal process is not i n compliance with
s t a t u t o r y requirements regarding timely deposits of monies received. In
addition, i n t e r n a l controls over the l i c e n s e renewal process a r e not adequate
t o allow for a determination t h a t s t a t u t o r i l y prescribed l a t e f i l i n g penalties a
are being properly imposed.
RECOMMENDATION
It is recommended that: a
- License renewal fees be deposited immediately with the S t a t e
Treasurer.
- The Registrar adopt the use of a r e c e i p t s log t o document the
processing of l i c e n s e f e e s from i n i t i a l r e c e i p t t o f i n a l •
disposition.
- The practice of back- dating the date stamp be discontinued.
FINDING V I
CHANGES ARE NEEDED TO IMPROVE THE EFFICIENCY OF THE ANNUAL LICENSE RENEWAL OF
CONTRACTORS.
Our review of t h e R e g i s t r a r of Contractor's annual renewal process has shown
t h a t t h e e f f i c i e n c y could be improved with the following changes:
1. Implement a more streamlined system of l i c e n s e renewal; and
2. Implement a staggered renewal system t o spread the renewal workload
more evenly throughout the year.
The Need To Streamline The
Current Sys tem Of Renewinq
Contractor Licenses
The annual license renewal of the approximately 12,000 contractors currently
licensed by the Registrar involves the following steps ( not necessarily i n
sequential order):
1. The l i c e n s e e ' s master f i l e is retrieved from the f i l e room upon
receipt of the renewal form ( generally t h e c l e r k w i l l r e t r i e v e t e n t o
12 f i l e s at a time).
2. The two- part renewal form is date- stamped indicating the date
received ( see Finding V for exceptions).
3. Determine t h a t form has been signed i n three places as required.
4. Compare signature of q u a l i f y i n g p a r t y ( Q. P.) on renewal form t o t h a t
contained on i n i t i a l application t o determine t h a t the Q. P. did i n
f a c t sign the renewal as required.
5. Determine t h a t the form has been properly notarized.
6. Note any changes made by licensee such as address corrections or
o f f i c e r a d d i t i o n s o r d e l e t i o n s ( i f corporation).
7. Compare the gross volume of work reported on the renewal form for the
ensuing year against the bond schedule t o determine i f the current
bond is appropriate f o r the expected l e v e l of a c t i v i t y .
8. Verify t h a t the proper amount has been remitted f o r the renewal and
t h a t the check has been signed.
9. Complete two- part prenumbered receipt i f renewal is accepted.
10. Attach renewal form t o l i c e n s e e ' s master f i l e .
11. Stamp outside cover of l i c e n s e e ' s f i l e with year t o i n d i c a t e renewal.
12. Refile l i c e n s e e ' s f i l e i n f i l e room.
The second copy of the renewal form is sent t o the data processing section of
the Department of Administration ( D. O. A.) where the computer f i l e is updated t o
r e f l e c t the l i c e n s e renewal of the contractor and a l s o t o p r i n t the
c o n t r a c t o r ' s renewal receipt and " pocket card."
The need for streamlining the renewal process is evidenced by the discrepancy
between Registrar s t a f f estimates of the time a renewal should take and the
amount of time renewals actually take. The average of the estimates given by
Registrar s t a f f is 3.2 minutes per renewal, however, the average time over the
past three renewals based on part- time s t a f f hired for renewals is 13.4 minutes
per renewal. If the time it takes t o process a renewal could be reduced t o t h a t
estimate provided by Registrar personnel an annual savings of approximately
$ 8,000 could be realized.
One aspect of the renewal process t h a t would r e s u l t i n an efficiency savings i f
deleted would be the removal and r e f i l i n g of the contractor master f i l e . A l l
of the renewal steps l i s t e d above, except f o r the comparison of the qualifying
p a r t y ' s signature ( f 4 ) , could be v e r i f i e d from the microfiche provided by
D. O. A. The data processing section of D. O. A. prepares the microfiche on a
weekly basis so t h a t the Registrar may have an e a s i l y r e t r i e v a b l e source of
information on a l l contractors.
During the licensing renewals f o r f i s c a l year 1978- 79, Registrar s t a f f s t a t e d
t h a t approximately s i x cases of signature problems were detected, however, a
s p e c i f i c case could not be r e c a l l e d . Registrar s t a f f contend t h a t the
signature v e r i f i c a t i o n is done t o " keep the agency out o f l i t i g a t i o n . " The
R e g i s t r a r ' s l i a b i l i t y appears to be non- existent i n t h i s matter, however, and
the need t o verify each signature does not seem warranted.
Additionally, a f t e r the renewal process, the f i l e s of those contractors who did
not renew t h e i r l i c e n s e could be removed from the a c t i v e l i c e n s e section and
a l l other f i l e s stamped t o r e f l e c t the renewal. The renewal forms could be
f i l e d alphabetically i n a separate f i l e thus eliminating the need to
individually f i l e i n the contractors master f i l e .
A Staggered Renewal System
Would Spread The Workload
More Evenly Throughout The
Year
Each year the Registrar s t a f f processes an increasing number of renewals.
Renewals f o r f i s c a l year 1980- 81 are expected t o number approximately 12,700.
The renewal process creates a backlog of work during May, June and July each
year and has caused the Registrar t o h i r e additional part- time c l e r i c a l help
annually during t h i s renewal period.
One means of reducing the year- end s t r a i n on the s t a f f would be t o implement a
staggered renewal system. The renewals could be staggered on a monthly or
quarterly basis. The e f f e c t of staggering the renewals would be t o even out
the workload throughout the year.
CONCLUSION
Efficiency of the renewal process could be improved i f unneeded s t e p s i n the
process were eliminated. Further, the implementation of a staggered renewal
system would even out the renewal workload.
RECOMMENDATION
Renewal procedures should be modified t o eliminate unneeded steps and ARS 32-
1125 should be amended t o allow f o r the renewal of contractor l i c e n s e s on a
staggered basis.
OTHER PERTINENT INFORMATION
The following information is pertinent t o the operations of t h e R e g i s t r a r of
Contractors and the regulation of t h e c o n t r a c t i n g i n d u s t r y i n Arizona.
Unrelated Trade Requirements -
General Building Contractors
A t the present time a general building contractor cannot contract t o do a job
t h a t involves l e s s than three unrelated trades. This prohibition is contained
i n the Arizona Revised S t a t u t e s ( ARS) and a l s o i n the Rules and Regulations
promulgated by the Registrar of Contractors.
Arizona Revised S t a t u t e s 32- 1 102 regarding the c l a s s i f i c a t i o n of contractors
s t a t e s i n part:
" For the purpose of c l a s s i f i c a t i o n , t h e contracting
business s h a l l include:
1. General building contracting. A general building
contractor is a contractor whose principal contracting
business is i n connection with any s t r u c t u r e b u i l t , being
b u i l t , or t o be b u i l t f o r t h e support, s h e l t e r and
enclosure of persons, animals, c h a t t e l s or movable
property of any kind requiring i n its construction the use
of more than two unrelated construction trades or
c r a f t s . . . . " ( Emphasis added)
Rule 4- 9- 01 pertaining t o d e f i n i t i o n s i n the Registrars Rules and Regulations
s t a t e s i n part:
" F. General Building Contractors: This includes both
Class B and B- 2 contractors and requires the use of more
than two unrelated trades or c r a f t s i n the pursuit of any
s i n g l e contract." ( Emphasis added)
Jonathan Rose, an A. S. U. law professor and an a u t h o r i t y on a n t i t r u s t as it a
a p p l i e s t o occupational l i c e n s i n g , s t a t e d i n a r e p o r t t o t h e Attorney General's
Office: *
" The purpose and e f f e c t of t h i s provision c l e a r l y seems t o
be t o i n s u r e t h a t general c o n t r a c t o r s do not compete with
s p e c i a l t y c o n t r a c t o r s on c e r t a i n types of jobs. Moreover,
t h i s e f f e c t is aggravated by the p a r t i c u l a r i n t e r p r e t a t i o n
t h a t the R e g i s t r a r has adopted a s a matter of policy. I n
s e v e r a l s i t u a t i o n s t h a t appear t o involve more than two
unrelated t r a d e s , t h e R e g i s t r a r has taken t h e p o s i t i o n
t h a t they b a s i c a l l y involve only one t r a d e and t h a t t h e
other work is i n c i d e n t a l and supplemental t h e r e t o . . . .
A s a r e s u l t of t h i s i n t e r p r e t a t i o n , t h e R e g i s t r a r has
concluded t h a t general c o n t r a c t o r s may n o t b i d under t h e i r
general c o n t r a c t i n g l i c e n s e on such work. Another problem
t h a t occurs a s a r e s u l t of t h e R e g i s t r a r ' s i n t e r p r e t a t i o n
of the ' more than two t r a d e s ' language is t h a t the
i n t e r p r e t a t i o n is vague and not t h e s u b j e c t of any
r e g u l a t i o n , but is only a p o l i c y of the R e g i s t r a r
p e r t i n e n t t o a p p l i c a t i o n of t h e s t a t u t e . A s a r e s u l t , t h e
R e g i s t r a r ' s a u t h o r i t y i n t h i s a r e a is p o t e n t i a l l y s u b j e c t
t o abuse, f o r decisions may be manipulated on an ad hoc
b a s i s f o