2.2 Financial Statements, Monetary Limits, and the Surety Bond Option

Calculating the License Monetary Limit (Tenn. Comp. R. & Regs. 0680-01-.13)

Every Tennessee contractor's license carries a specific Monetary Limit representing the maximum single contract or bid amount the licensee is financially qualified to undertake. Under Tenn. Comp. R. & Regs. 0680-01-.13, the Board determines a contractor's monetary limit from two foundational balance sheet figures—Working Capital (short-term liquidity) and Net Worth (long-term solvency)—assuming the contractor also owns or leases sufficient fixed assets (property, plant, tools, and equipment) to perform its classification.

$$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$ $$\text{Net Worth (Owners' Equity)} = \text{Total Assets} - \text{Total Liabilities}$$ $$\text{Monetary Limit} = 10 \times \min(\text{Working Capital}, \text{Net Worth})$$

Because the multiplier of 10 is applied to the lesser of Working Capital or Net Worth, both numbers must equal at least 10% (one-tenth) of the desired monetary limit. For example, to qualify for a $1,200,000 monetary limit without financial supplements, an applicant must demonstrate at least $120,000 in Working Capital AND at least $120,000 in Net Worth.

Mandatory Balance Sheet Adjustments by the Board

When reviewing an applicant's balance sheet, Board financial analysts apply strict regulatory adjustments before multiplying by 10:

1. Accounts Receivable Over 3 Months Past Due: Any trade accounts receivable aged more than 3 months overdue must be deducted from Current Assets, directly reducing Working Capital.
2. Retirement Funds (IRAs, 401(k)s, Keogh Plans): When listed on a sole proprietor's or personal guarantor's balance sheet, vested retirement funds are credited at only 50% of their stated value to account for income taxes and early-withdrawal penalties.
3. Cash-Only Balance Sheets and Fixed Assets: If a newly formed entity presents a balance sheet consisting solely of cash without construction equipment, vehicles, or tools, the Board may require a Guaranty Agreement or equipment verification.

Worked Balance Sheet Adjustment Example: Cash is $180,000; accounts receivable is $90,000, including $25,000 more than three months overdue; equipment is $130,000 net of depreciation. Current liabilities are $120,000 and long-term debt is $60,000. Assume the overdue receivable has not been written off and the Board makes no separate net-worth adjustment.

• Reported current assets: $180,000 + $90,000 = $270,000.
• Board-eligible current assets: $270,000 − $25,000 = $245,000.
• Eligible working capital: $245,000 − $120,000 = $125,000.
• Reported net worth: ($270,000 + $130,000) − ($120,000 + $60,000) = $220,000.
• Basic limit: $10 \times \min(125000,220000)=\mathbf{1250000}$, or $1,250,000, subject to Board approval and experience. An exclusion from regulatory working capital is not automatically a GAAP write-off or reduction of net worth. If the accountant writes off an uncollectible asset, total assets and net worth also change; identify that extra assumption before doing the arithmetic.

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CPA / LPA Financial Statement Tiers (T.C.A. § 62-6-111; Rule 0680-01-.13)

Unless the applicant chooses the July 1, 2026 Contractor's Surety Bond option described below, every initial license application and every request to increase a monetary limit must include a financial statement prepared in accordance with Generally Accepted Accounting Principles (GAAP) by an independent licensed Certified Public Accountant (CPA) or Licensed Public Accountant (LPA), dated within 12 months of application. Compiled financial statements and income-tax-basis statements are strictly rejected for initial licensure and limit increases.

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The 10% Monetary Limit Tolerance (Rule 0680-01-.13(8)(a))

Under Tenn. Comp. R. & Regs. 0680-01-.13(8)(a), a licensed contractor is granted a 10% tolerance above its stated monetary limit when bidding or contracting on a project. For example, a contractor holding a $600,000 monetary limit may lawfully submit a bid and execute a contract up to $660,000 ($\text{\textdollar}600,000 \times 1.10 = \text{\textdollar}660,000$).

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Financial Supplements: Line of Credit, Guaranty Agreement, and License Bond

When a contractor's balance sheet falls short of the required Working Capital, Net Worth, or fixed-asset profile, the Board allows specific financial supplements:

1. Board Line of Credit (LOC) — Supplements Working Capital ONLY

An applicant may submit a bank Line of Credit on the official Board form to supplement working capital. The prescribed form states that credit is available for one year from issuance, subject to no adverse financial change; it does not promise irrevocable availability through the entire two-year license cycle. The Board decides whether the bank, terms, and supporting financial information are acceptable.

• Working Capital Only: A Line of Credit supplements Working Capital ONLY. It never increases Net Worth.
• 100% vs. 50% Credit Based on Base Working Capital:
  • If the contractor's base Working Capital (before the LOC) is positive ($> \text{\textdollar}0$), the Board may allow credit up to 100% of its face value.
  • If the contractor's base Working Capital is negative ($< \text{\textdollar}0$), the Line of Credit is credited at only 50% of its face value.

Worked Example (Positive vs. Negative Base Working Capital):

• Scenario A (Positive Base WC): An LLC has Current Assets of $140,000, Current Liabilities of $100,000 (Base Working Capital = $+\text{\textdollar}40,000$), and Net Worth of $120,000. It submits a $60,000 Board Line of Credit. Because base Working Capital is positive, 100% of the LOC ($60,000) is added, bringing adjusted Working Capital to $\text{\textdollar}40,000 + \text{\textdollar}60,000 = \text{\textdollar}100,000$. Comparing Working Capital ($100,000) and Net Worth ($120,000), the Monetary Limit is $10 \times \min(\text{\textdollar}100,000, \text{\textdollar}120,000) = \mathbf{\text{\textdollar}1,000,000}$.
• Scenario B (Negative Base WC): Suppose the LLC instead has Current Assets of $80,000, Current Liabilities of $100,000 (Base Working Capital = $-\text{\textdollar}20,000$), Net Worth of $120,000, and a $100,000 Board Line of Credit. Because base Working Capital is negative, only 50% of the LOC ($\text{\textdollar}50,000$) is credited: $-\text{\textdollar}20,000 + \text{\textdollar}50,000 = +\text{\textdollar}30,000$ adjusted Working Capital, yielding a Monetary Limit of $10 \times \text{\textdollar}30,000 = \mathbf{\text{\textdollar}300,000}$.

2. Guaranty Agreement and Supplemental Contractor's License Bond

• Guaranty Agreement (Personal or Parent Company): Accompanied by a personal or parent-company financial statement, a Board Guaranty Agreement supplements both Working Capital and Net Worth at 50% of the guarantor's Working Capital and 50% of the guarantor's Net Worth (and is also required when an applicant presents a "cash-only" balance sheet lacking equipment/fixed assets). If a spouse's name appears on a personal financial statement, both spouses must sign the Guaranty Agreement. Guaranty Agreements expire at license renewal ($\le 2$ years).
• Supplemental Contractor's License Bond ($500,000 or $1,000,000): May be posted in lieu of a Guaranty Agreement to satisfy supplemental indemnity requirements; requires 90 days' prior written cancellation notice from the surety to the Board.

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July 1, 2026 Reform: The 50% Contractor's Surety Bond Option (Public Chapter 1039)

Key statutory requirements for the Contractor's Surety Bond Option:

1. 50% Bond-to-Monetary-Limit Ratio: The penal sum of the Contractor's Surety Bond must equal at least 50% of the requested monetary limit (equivalently, $\text{Monetary Limit} = 2 \times \text{Surety Bond Amount}$):
   • A $150,000 Surety Bond qualifies for a $300,000 Monetary Limit.
   • A $750,000 Surety Bond qualifies for a $1,500,000 Monetary Limit.
   • A $1,500,000 Surety Bond qualifies for a $3,000,000 or Unlimited Monetary Limit.
2. Continuous Form & 30-Day Certified Mail Cancellation Notice: The bond must be issued by a corporate surety authorized by TDCI to transact surety business in Tennessee and remain continuous across the 2-year license period. The surety may cancel the bond only by sending 30 days' prior written notice by certified mail to both the contractor and the Board. If the bond ceases to be in effect without an approved replacement bond or CPA financial statement on file, the contractor's license immediately becomes invalid.

The Board’s financial packet permits up to full working-capital support and its LOC appendix uses 50% credit when base working capital is negative. The examples above assume the Board accepts those credits. Neither credit supplements net worth. The new 50% licensing surety bond is a separate instrument from a project performance/payment bond and from the older supplemental license bond; its aggregate penal sum does not guarantee completion of every contract.

Source check (October 13, 2026): Board financial statement, guaranty, LOC, and bond packet.