Tennessee Contractors must register with the state Board of Licensing Contractors, but not all contractors need to be bonded. For those that do, these bonds can be purchased quickly and easily.
Tennessee Code Title 62 Chapter 6, known as the Contractors Licensing Act of 1994 requires contractors to register and be licensed with the state licensing board.
“Any person, firm or corporation engaged in contracting in this state shall be required to submit evidence of qualification to engage in contracting, and shall be licensed as provided in this part.”
However, whether a Tennessee contractor license bond is needed is more complicated.
Any contractor seeking a new license with the state must provide a financial statement prepared by an independent Certified Public Accountant (CPA). Depending on the amount of revenue performed, the contractor will need to provide either a CPA Reviewed Statement or a CPA Audited Statement.
Any contractor renewing an existing license may use a CPA Compiled Financial Statement, in-house statement, or CPA Review to continue their license.
Each contractor in Tennessee is required to have working capital and equity of at least 10 times (10x) the monetary limits they are seeking. The lesser of the two is the determining factor. For example, a Tennessee contractor wishing to obtain a monetary limit of $1,000,000 will need to show at least $100,000 of BOTH working capital and equity.
Tennessee will allow a contractor to supplement working capital with a line of credit. The state will allow 100% use of a line of credit, so long as the contractor’s working capital or equity are not deficit. In that case, only 50% of the line of credit will be allowed. For example, if the contractor has $800,000 of working capital and a $200,000 unused line of credit, that contractor could qualify for a $1,000,000 monetary limit based on working capital, so long as the equity meets the requirements. A line of credit may not be used to increase equity, however.
Contractor’s may use a Guarantee Agreement to add equity. A Guarantee Agreement provides indemnity from either a parent company, or the personal assets of a company owner. When using this option, either a personal financial statement, or a financial statement on the parent will need to be obtained. This requirement is in addition to the company’s statement.
A Guarantee Agreement will be taken at 50% value. For example, a contractor has equity of $800,000 and provides a personal financial statement. The personal statement shows $400,000 of equity. By signing a guarantee agreement, the contractor could qualify for the $1,000,000 monetary limit of equity. This is calculated by adding the company equity ($800,000) and the personal equity ($400,000 x 50%). This equals $1,000,000 in equity.
If the Tennessee Contractor cannot meet the requirements of the working capital and net worth through financial statements, guarantee agreements and a line of credit, they may post a Tennessee Contractor License Bond to qualify.
When using a Tennessee Contractor License Bond to qualify for the state financial requirements, the minimum amount of the bond is $500,000. This limit is for contractors wanting Monetary Limits of $1,500,000 and less.
For contractors seeking Monetary Limits greater than $1,500,000 a $1,000,000 contractor license bond will be required.
A Tennessee Contractor License Bond guarantees that the contractor will uphold and comply with the rules and regulations of the contractor licensing law and all provisions of Title 62. The bond protects the public by guaranteeing that the contractor will not breach a construction contract or breach a contract for the furnishing of labor, materials or professional services to construction undertaken in the performance of a construction contract.
Tennessee Contractor License Bonds of $500,000 can be purchased online in minutes. They only require a simple personal credit check of the business owner. They can then be purchased and printed.
$1,000,000 Tennessee Contractor License Bonds required additional information. The contractor will need to provide financial statements for the company, and in many cases the owner(s)’ personal financial statement(s) as well. We will also need a completed application and reasoning for the bond. In many cases, the reason is simply that the company does not want to share its financial statements with the state.
Tennessee Contractor License Bonds may provide adverse selection. When contractors cannot qualify for working capital and equity with the state, they may also have a difficult time qualifying with a surety bond company. For this reason, some bond companies do not write these bonds.
We find that in many cases, adverse selection does not exist though. Sometimes contractors do not want to share their information with the state for various reasons. Other times, the contractor may have significant financial strength, but chooses not to pay for a CPA Reviewed or Audited Statement. In these cases, these bonds can be very easily obtained.
Most parties will pay about 1% for Tennessee Contractor License Bonds. This amount is due each year the bond is in place. For example, a $500,000 Tennessee Contractors License Bond can be had by most for $5,000 per year. Contractors must often weigh the cost of purchasing a bond with obtaining a CPA prepared financial statement. However, contractors with other bond needs such as Contract Bonds will save money by getting the CPA prepared statement and sharing it with the state in most circumstances.
Contractors with strong balance sheets may pay even less. Contractors with credit challenges may have to pay more.
The surety company may cancel a Tennessee Contractor License Bond at any time by providing 90 days' notice to the state. If this happens, the contractor will need to provide a replacement bond or risk having their license revoked. The contractor and the surety will still be responsible for any claims that occurred while the bond was active and during the 90-day cancelation period.
While bond claims are rare, they do happen. Anyone damaged by the contractor’s failure to uphold these terms can bring action against the bond. However, action against the bond should be brought within one year after the expiration of the license term in which the claim occurred.
Be aware that the amount of the bond is the most the surety bond company will have to pay, regardless of the actual damages sustained, the number of claims filed, or the number of years the surety has written the bond for the contractor. The face value is referred to as “the Penal Sum” and is the most the surety will have to pay on the bond. However, the contractor is usually still legally liable for further damages.
In addition to License Bonds, many Tennessee contractors will need other bonds as well. These include additional license and permit bonds for many municipalities. Commercial contractors may also need bonds such as maintenance bonds, bid bonds, performance bonds and payment bonds. Visit the links below to learn more about these bonds.
While not every contractor will need a Tennessee Contractor License Bond, many do. These bonds are inexpensive and easy to obtain for most contractors. Axcess Surety has expertise and bond companies to help most contractors obtain these bonds easily. Contact us today.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
