Tennessee has unique contractor bonding rules compared to many states. Most contractor bonds are required at the county or city level or on a per project level. However, there is an official contractor license bond that may be required at the state level given certain circumstances.
This short article will cover:
There are many contractors who require a surety bond to obtain a license. The most common in Tennessee are:
There is an "official" state level :
This bond is only applicable to individuals or entities who obtain a Tennessee contractor license for .
The Tennessee Department of Commerce and Insurance determines the size of a project a contractor can take on by determining their monetary limit.
Upon initial licensing, . This financial statement must cover the most recent 12 months. If you're trying to obtain a monetary limit of over 3 million you need to provide an audited financial statement. Less than 3 million, you must supply a reviewed statement.
The monetary limit will officially be assigned during the application review process. The monetary limit is . For an unlimited monetary limit, the working capital and net worth must be a minimum of $300,000.
An unlimited monetary limit means the contractor can take on projects of any size.
Working capital and net worth are determined by the assets and liabilities from the financial statement.
Based on this monetary limit is where the contractor license bond becomes an option. The bond is also an option for licensed entities who have a subsidiary entity seeking licensure.
Before we get into these bonding scenarios, what is a contractor's bond at a high level?
A surety bond is a legal document a contractor or entity purchases as a financial guarantee they will perform the work they're contracted to perform and follow all state, county, and city contracting licensing rules.
In most cases, contractor bonds are required to
In this case, the contractor's bond is .
Let's go into more detail.
If a legal business entity has a subsidiary (another business entity) getting independently licensed, the parent company must:
:
The Guarantee Agreement is where the owners or members of the parent company . This guarantee will need to support the monetary limit of the subsidiary at double the value. The guarantee agreement liability is limited to 10% (of $3,000,000) at the high end for an unlimited monetary limit which would be $300,000.
:
If a subsidiary is requesting a monetary limit of $500,000 the entity's financial statement must show $50,000 in both working capital and net worth ($50,000 multiple by 10 is $500,000).
The parent company providing the indemnity would need to show $100,000 in both working capital and net worth because 50% of $100,000 matches the working capital and net worth requirement of $50,000.
The limit of the guarantee in this example would be $50,000.
If the parent company elects not to guarantee this amount or they don't have the necessary working capital or net worth, they can request from the Board to purchase a contractor license bond.
A contractor bond can be purchased as the financial guarantee "backing" the subsidiary.
There are no other bond amount options.
In the example, the parent company can purchase a bond to guarantee the $50,000 required amount. Below we go over examples of bond prices because the bond amount is not the cost to purchase the bond.
If a contractor or entity requires an increased monetary limit, but their working capital or net worth don't allow for the increase, a line of credit, Guarantee Agreement, or contractor license bond can supplement the shortfall.
:
A contractor is seeking a monetary limit of $500,000. This would mean the contractor would need to show at least $50,000 in both working capital and net worth.
If this contractor has $40,000 in (business) working capital and a $100,000 (business) net worth, the lesser of working capital creates a shortfall of $10,000.
:
The contractor can work with a bank and obtain a line of credit for the full $10,000.
A Guarantee Agreement can be signed guaranteeing the $10,000 amount. Keep in mind, for a Guarantee agreement to be valid the individual would need to show a personal financial statement or a parent company’s financial statement with working capital (or net worth) of double the monetary shortfall. In this case that would be $20,000 because 50% of $20,000 is the required $10,000.
Just to stress, this $20,000 would have to come from:
If a parent company comes in to support this shortfall, they will need to make sure all subsidiaries who might be requesting a larger monetary limit can be supported as well.
:
In our example, the contractor could purchase a $500,000 contractor bond to guarantee the $10,000 monetary limit deficit. Of course this does not always make sense based on the amount of the shortfall.
The Tennessee Department of Commerce does not recommend a contractor license bond unless .
A bond will make sense if a larger contractor or business secures an important job. Their current monetary limit is far below the requirement for the job. A contractor bond makes sense because a personal or business Guaranty Agreement may not be feasible.
The contractor bond amount is not the cost of the bond. .
The cost is typically a small fraction - or rate - of the bond amount.
The rate is determined by a surety. The surety is the insurance company that writes surety bonds. Surety Bonds Direct is a surety agency. .
:
Typical rates for contractor bonds .
In our example, the contractor has the option to purchase a $500,000 contractor bond.
Here are the potential costs of this bond and you can clearly see if a , purchasing the bond may become the best option.
If you're looking to or you're a , get your specific contractor bond pricing today.
You can use our free online bond quote form and request a quote online or call a bond specialist at 1-800-608-9950.
I hope this article helped make sense of Tennessee's contractor license bond and when it might make sense for you and your contracting business.
