Is Construction Arbitrage Legal in Maryland?

Yes. Construction arbitrage is legal in Maryland. Acting as the prime contractor, deploying licensed subcontractors to perform the physical work, and keeping the margin between what the client pays and what the subs cost is entirely legal here. Two compliance layers define the Maryland picture: the MHIC licence for residential work, and the ABC test under the Workplace Fraud Act for every sub you deploy. Get both right and the model runs cleanly.

I built a database of 1,500+ subcontractors running this exact model across multiple countries. Maryland is a state that looks lighter on barriers because there is no statewide GC licence for commercial work - but the MHIC covers almost every residential job you will take, and the Workplace Fraud Act applies specifically to construction with a stricter independent contractor test than most states impose.

Is construction arbitrage legal in Maryland - the direct answer#

Construction arbitrage means holding the prime contract, deploying licensed subcontractors to do the physical work, and keeping the spread between what the client pays and what the subs cost. Some people call it contractor arbitrage or construction dropservicing - same model, different name. It is legal in Maryland.

The compliance question is not whether the model is permitted. It is. The real question is whether your business holds the MHIC licence for residential work, whether your trade subs independently hold the state licences Maryland requires, and whether each subcontract is structured to satisfy the ABC test under the Workplace Fraud Act.

The MHIC licence - Maryland's residential contractor requirement#

The Maryland Home Improvement Commission (MHIC), under the Maryland Department of Labor, licenses anyone who performs, offers to perform, or sells home improvement work on residential buildings of 1 to 3 dwelling units. "Home improvement" is broad: any addition, alteration, conversion, modernisation, remodelling, repair, or replacement of a residential building or adjacent structures and land. Roofing, plumbing tie-ins, electrical, decking, fencing, landscaping adjacent to the structure, solar panels, and pools all fall inside that definition.

There is no minimum dollar threshold. A minor repair on a residential property requires MHIC credentials the same as a six-figure extension does.

What the MHIC licence requires:

• Two years of experience in home improvement, construction, or equivalent education
• Pass the PSI licensing exam (book through PSI Exams, 1-800-733-9267)
• Proof of financial solvency via MHIC's credit review - or a $20,000 surety bond if you do not meet the financial solvency criteria
• $50,000 general liability insurance on file with MHIC at all times, with a 10-day cancellation notice to MHIC required
• Application fee of $281.25 plus a $22.50 processing fee (fee schedule current as of August 2024)
• Guaranty Fund contribution of $100 on the original licence, $175 at each two-year renewal

The licence renews every two years. Letting it lapse while you are actively taking residential jobs is a criminal offence under Maryland law.

New residential construction - building a house from scratch on raw land - falls outside the MHIC definition. That is regulated at the county level, with some counties also requiring registration with the Maryland Home Builder Registration Unit (HBRU). If your jobs are ground-up builds rather than home improvement, MHIC does not apply to you, but local building department registration and HBRU requirements do.

Commercial work: Maryland has no statewide GC licence for commercial projects. If you are running commercial contracts in Maryland - offices, retail, multifamily above 3 units - there is no state-level GC licensing exam or certificate to obtain. Compliance is local: county and city permit and business licensing requirements only. This is an unusual feature of Maryland's licensing landscape and it opens the commercial side of the model to anyone who can satisfy local permit requirements.

Trade licences - what your subs must hold independently#

The MHIC is your licence as the prime contractor on residential work. It does not cover the regulated trades your subs perform. Every trade sub you deploy must independently hold their own Maryland state licence. Your MHIC credential does not extend to cover them.

Electrical: The Maryland State Board of Electricians issues Master Electrician licences statewide. A business contracting to perform electrical work needs a licensed Master Electrician on its roster. The path to Master is 7 years of experience under a licensed Master Electrician (with up to 3 years credit for formal electrical training), plus passing the PSI Master Electrician exam. Insurance required at the Board: $300,000 general liability plus $100,000 property damage - certificates must be filed with the Board, not just held. Verify each electrical sub's active licence through the Board of Electricians online lookup before they pull any permit.

Plumbing: The Maryland Board of Plumbing issues Master Plumber licences statewide, with one important carve-out. Baltimore County and the WSSC service area - Prince George's County and Montgomery County - are not covered by the state Board. They operate under separate licensing regimes and separate plumbing codes. Only a licensed, insured Master Plumber or Gas Fitter may enter into contracts to perform plumbing or gas work. Insurance required: $300,000 liability including completed operations for bodily injury, plus $100,000 for property damage. If your jobs are in the DC suburbs or Baltimore County, your plumbing sub needs the local WSSC or county authorisation rather than the state Board licence.

HVACR: The Maryland Board of Heating, Ventilation, Air Conditioning and Refrigeration Contractors licenses HVACR contractors statewide through a tiered structure - Apprentice, Journeyman, Limited Contractor, Master Contractor. No dollar value exempts HVACR work from the licensing requirement. Several Maryland counties also impose additional county-level HVACR permits on top of the state licence; the HVACR Board lists those counties at labor.maryland.gov/license/hvacr/hvacrcounty.shtml. Check that list before quoting any HVACR job in a new county.

Build active licence verification into your sub onboarding process for every electrical, plumbing, and HVACR job before work starts. Your prime contract does not insulate you from a claim that arises from an unlicensed sub's work.

The Workplace Fraud Act - Maryland's ABC test for construction#

Maryland's Workplace Fraud Act (Business Regulation Article, Title 3, Subtitle 9) applies specifically to the construction and landscaping industries - not all sectors. Within those industries it operates a default presumption: workers are presumed to be employees. The burden is on you to prove otherwise.

To treat a sub as an independent contractor, you must satisfy all three prongs of the ABC test:

• A - Control: The worker is free from your direction and control over how the work is performed, both in the contract terms and in practice.
• B - Business: The worker is customarily engaged in an independent trade, occupation, or business of the same nature as the work being contracted.
• C - Course of business: The work performed is either outside the usual course of your business, OR is performed outside your permanent places of business.

Prong C is where operators get caught. If you are the prime contractor on a bathroom renovation and your "sub" is someone who exclusively works for you, shows up when you call, and has no other clients or business presence, that looks like employment in Maryland's eyes.

A sub who satisfies the ABC test has: their own registered business entity, their own Federal Employer Identification Number, their own tools and equipment, their own insurance, their own clients outside the work you send them, and a fixed-price contract with a defined scope. The contrast is a sole worker you direct hour by hour who has no independent business outside your jobs - that is a misclassification risk.

Penalties: An unintentional misclassification not cured within 45 days of notice costs up to $1,000 per affected worker. Knowing misclassification costs up to $5,000 per worker. A prior violation on record doubles the penalty.

The Workplace Fraud Act is enforced by Maryland's Division of Labor and Industry. It is not a dormant statute.

Workers' compensation in Maryland#

Maryland requires workers' compensation for every employer with one or more employees. Full-time or part-time - one employee means one WC policy is required from day one. There is no construction exemption and no small-employer grace period below that threshold.

Maryland operates a competitive private insurance market. Over 100 insurance groups are authorised to write workers' comp in the state. Chesapeake Employers' Insurance Company (CEIC) is the state's designated residual market carrier - any Maryland employer who cannot obtain private coverage can access CEIC. Private market options are competitive and premiums for construction vary by trade classification.

Sole proprietors and partners are not required to personally enrol in workers' comp, but they must cover any employees they have from the moment those employees begin work.

Penalty for non-compliance: Up to $25,000 per violation. Corporate officers can be held personally liable for the business's failure to carry required workers' compensation.

For the arbitrage model, the IC classification question and the WC question are directly linked. Subs who satisfy the Workplace Fraud Act ABC test and operate as genuine independent businesses do not count toward your WC headcount. Get the ABC test wrong and what you treat as an IC is legally your employee - which means your WC coverage was insufficient and you face both the $25,000 per-violation penalty and the liability for any uncovered claim.

Local layers - four markets that add requirements#

State licences get you into most of Maryland. Four of the state's most active construction markets add registration requirements on top:

Baltimore City requires additional permit registration and city-level contractor licensing for electrical, mechanical, gas, and plumbing work beyond MHIC and the state trade boards. Check the Baltimore City Department of Housing and Community Development before pulling permits in the city.

Montgomery County requires registration with the Montgomery County Office of Consumer Protection for home improvement work, in addition to the MHIC licence. Plumbing in Montgomery County falls under WSSC (Washington Suburban Sanitary Commission) jurisdiction - your plumbing sub needs WSSC authorisation, not a state Board of Plumbing licence.

Prince George's County also uses WSSC for plumbing. Additional county contractor registration layers apply on top of MHIC.

Baltimore County has its own plumbing licensing programme, separate from the state Board of Plumbing, plus additional contractor registration requirements for home improvement work.

Before bidding a project in any of these four jurisdictions, contact the local building department to confirm exactly what local registration is required. Operating without the correct local authorisation can void permits, expose you to local penalties, and leave you without a contractual right to enforce payment on the job.

Nonresident contractor withholding#

If you use out-of-state subcontractors, one more compliance point applies. Maryland requires the paying party to withhold 3% of contract payments on any real property improvement contract worth $50,000 or more, where the contractor receiving payment is a nonresident - meaning they have no permanent office, factory, or established workspace in Maryland. A temporary project site office does not count.

This withholding obligation applies down the chain: if you as prime contractor pay a nonresident sub on a $50,000+ job, withhold 3% and hold it for 30 days after the sub requests a Tax Clearance Certificate from the Maryland Comptroller. If the Comptroller confirms no Maryland tax is owed before 30 days, the funds release early.

On larger jobs with out-of-state trade subs, build this 3% hold into your payment terms and sub contract so there are no surprises at final payment.

How to run the model cleanly in Maryland#

The practical compliance checklist:

1. Hold an active MHIC licence for any residential home improvement work. Keep the $50,000 GL insurance current and on file with MHIC at all times. Do not let the licence lapse while taking residential jobs.
2. Before deploying any electrical, plumbing, or HVACR sub, verify their active state licence through the relevant Maryland Board's online lookup. For Baltimore County and the WSSC area, confirm the correct local authorisation instead.
3. Check the HVACR Board's county permit list before quoting any HVACR job in a new county.
4. Structure every subcontract to satisfy the ABC test: fixed price, defined scope, the sub's own tools and insurance, their own business entity with a FEIN, and ideally their own client base outside the work you send them.
5. Carry workers' compensation from the moment you have a first employee.
6. Before bidding in Baltimore City, Montgomery County, Prince George's County, or Baltimore County, check the local registration requirements with the relevant building department.
7. On contracts of $50,000 or more involving nonresident subs, withhold 3% pending a Tax Clearance Certificate from the Maryland Comptroller.

The construction arbitrage model runs well in Maryland when structured correctly. The MHIC enforcement record - 75 criminal trial appearances per month - makes it clear that the residential licence is not optional. Commercial work, by contrast, has no state GC licence, which lowers the entry bar on that side considerably. Get the MHIC right, structure your subs under the Workplace Fraud Act, and you are operating a clean, legally compliant business in one of the East Coast's strongest construction markets.

For the full mechanics of the model, see how construction arbitrage works. For vetting your subcontractors, see how to vet subcontractors. For the insurance picture, see what insurance you need for construction arbitrage. For the broader US compliance picture, see is construction arbitrage legal in the US.

Last checked: 9 September 2026.