2.1 Monetary License Limits, Financial Statements & Limit Increases

Statutory Authority and Purpose of Monetary Limits

Under NRS 624.220(2), the Board limits the field and scope of every licensee by placing a monetary limit on the license. The limit is set after weighing the factors in NRS 624.260 to 624.265: experience, financial responsibility, and character.

What the Limit Measures

The statute defines the limit precisely, and the CMS exam tests the wording:

• Per Site, Per Client: The limit is the maximum contract a licensed contractor may undertake on one or more construction contracts on a single construction site or subdivision site for a single client.
• Not an Annual Cap: A contractor with a $500,000 limit may hold several $450,000 contracts at the same time for different clients or different sites. It may not take $505,000 of work on one site for one client.
• No Splitting: Because the limit counts "one or more" contracts on the same site for the same client, splitting one job into several smaller contracts does not avoid it.
• Void Bids and Contracts: A bid or contract that exceeds the monetary limit or the license scope is void (NAC 624.640(1)). Bidding or contracting above the limit is a ground for discipline under NRS 624.3015(2). The Board may fine the licensee up to $50,000 per violation (NRS 624.300(3)(a)).
• Disclosure: Every bid and contract must show the license number and any monetary limit on the license (NAC 624.640(5)).

Financial Responsibility Criteria (NRS 624.262 and 624.263)

An applicant or licensee must show that its past, current and expected financial solvency gives the Board a reasonable expectation that it can do business without jeopardy to the public (NRS 624.262). NRS 624.263(2) lists criteria the Board may use, including:

1. Net worth, liquid assets, current assets and current liabilities
2. Working capital and the ratio of current assets to current liabilities
3. Bonding under NRS 624.270, and prior payment and credit records
4. Previous business experience, prior and pending lawsuits and liens, and adverse judgments
5. Felony or moral-turpitude convictions, prior license suspension or revocation, and bankruptcy, receivership or assignment for the benefit of creditors
6. Form of business organization, confidential financial references, and the reputation for honesty and integrity of the applicant and its principals

Financial responsibility must be established independently of the assets or guarantees of owners, managing officers or the qualified individual, although the Board may consider their finances (NRS 624.263(1)). A licensee must notify the Board in writing, as soon as reasonably practicable, when a bankruptcy, receivership or assignment proceeding is filed (NRS 624.263(3)).

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Financial Statement Requirements (NAC 624.593)

The NSCB requires a financial statement regardless of the monetary limit requested. Business statements must include a classified balance sheet, and a Bank Verification Form must accompany the application. The level of CPA involvement rises with the limit:

Practical Rules

• Applying Entity: The statement must be for the applying entity. Sole proprietors and each general partner of a general partnership submit personal statements.
• Currency: Self-prepared or compiled statements must be current within 6 months of the date the application is received. Reviewed and audited statements may be up to 1 year old.
• Independence: Compilations, reviews and audits must come from an independent CPA.
• Residential Builders: For residential contractors, the Board may also require a statement of the building permits issued and projects completed in the preceding year (NRS 624.263(4)).

Working Capital and Net Worth Calculations

Two of the NRS 624.263 criteria are basic balance-sheet formulas, and CMS questions often ask you to compute them.

1. Working Capital (Short-Term Liquidity)

$$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$

Working capital is the cushion available to meet payroll, pay suppliers and carry jobs until progress payments arrive. Current assets are cash and items expected to become cash within a year (receivables, costs and estimated earnings in excess of billings, prepaid expenses). Current liabilities are obligations due within a year (accounts payable, accrued payroll and taxes, billings in excess of costs, and the current portion of long-term debt).

The related current ratio is:

$$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$

2. Net Worth (Owners' Equity)

$$\text{Net Worth} = \text{Total Assets} - \text{Total Liabilities}$$

Net worth measures the owners' stake and the firm's ability to absorb a losing job, a lawsuit or a slow period. Total assets include fixed assets such as equipment and vehicles at book value (cost minus accumulated depreciation).

Worked Example

Apex Builders LLC requests a $600,000 limit, so under NAC 624.593 it needs a CPA-compiled statement with full disclosures (within 6 months) or a reviewed or audited statement (within 1 year). Its balance sheet shows:

Current Assets:
  Cash & Operating Checking:          $95,000
  Accounts Receivable (Trade):       $140,000
  Note Receivable from Officer:       $45,000
  Prepaid Expenses:                   $10,000
  Total Current Assets:              $290,000

Non-Current Assets:
  Construction Equipment (Book):     $180,000
  Office Vehicles:                    $50,000
  Total Non-Current Assets:          $230,000

Total Assets:                        $520,000

Current Liabilities:
  Trade Accounts Payable:             $85,000
  Current Portion of Equipment Note:  $25,000
  Accrued Payroll & Taxes:            $15,000
  Total Current Liabilities:         $125,000

Long-Term Liabilities:
  Equipment Loan (Due after 12 mos):  $95,000
  Total Liabilities:                 $220,000

Step 1: Working capital as reported.

$$\text{\textdollar}290{,}000 - \text{\textdollar}125{,}000 = \text{\textdollar}165{,}000$$

Step 2: Current ratio.

$$\frac{\text{\textdollar}290{,}000}{\text{\textdollar}125{,}000} = 2.32$$

Step 3: Net worth.

$$\text{\textdollar}520{,}000 - \text{\textdollar}220{,}000 = \text{\textdollar}300{,}000$$

Step 4: A conservative view. Analysts and sureties often question whether a note receivable from an officer will really turn into cash within a year. Excluding it as a test gives working capital of $120,000 and net worth of $255,000. NAC 624.593 does not publish a fixed working-capital or net-worth formula for each limit. The Board weighs these numbers together with every other NRS 624.263 criterion.

Indemnification Agreements (NAC 624.675)

When the applicant's own finances do not justify the requested limit, NAC 624.675 lets the Board consider a request to increase, remove or not place a monetary limit if someone indemnifies the applicant or licensee:

• Officers or Directors Indemnifying a Corporation: Submit the NAC 624.593 financial statement and the Board's indemnification agreement signed by each indemnitor and his or her spouse, if any.
• Another Corporation as Indemnitor: Submit a resolution of the indemnitor's directors approving the indemnification, its NAC 624.593 financial statement, and the agreement signed by the appropriate officer.
• A Natural Person as Indemnitor: Submit that person's financial statement and the agreement signed by the indemnitor and spouse.
• Withdrawal: An indemnitor withdraws by written notice to the Board, effective 90 days after the Board receives it. An indemnity given as a condition of a single-project increase under NAC 624.670 may not be withdrawn.

The NSCB describes indemnification as optional; it is a way for an applicant who might not otherwise qualify to have another party's financial strength considered.

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Changing the Monetary Limit

1. Permanent Increase or Decrease (NAC 624.669)

• The licensee files a written application on the Board's form.
• It includes all applicable fees, the NAC 624.593 financial statement for the new limit, and any other information the Board requires.
• The Board's fee to consider a permanent increase or decrease is $250 (NAC 624.130).
• A higher limit may also bring a higher license bond, because the Board sets the bond with reference to the magnitude of operations (NRS 624.270(4)).

2. Single-Project Increase (NRS 624.220(3) and NAC 624.670)

• Timing: The written request must reach the Board at least 5 working days before the date the contractor intends to submit a bid, and it must be approved before the bid is submitted.
• Frequency: A licensee may submit no more than five single-project applications in any 12-month period.
• Submittals: The NAC 624.593 financial statement and any supporting information the Board requests. The fee is $75 (NAC 624.130).
• Approval Conditions: The Board approves if the licensee's finances justify the increase and the licensee procures and maintains any performance or payment bond, or both, that the Board requires and meets any other condition needed to protect the public.

Exam Trap: A single-project increase is approved before bidding, not after award. Bidding above the limit first and asking afterward is a violation of NRS 624.3015(2), and the bid is void under NAC 624.640(1).