The Eight Steps to Contractor Licensing in Tennessee
Tennessee Board for Licensing Contractors
NOTICE! A Tennessee contractor’s license is required BEFORE bidding or offering a price, for projects $25,000 and up (includes materials and labor), as a prime (general) contractor; and many subcontractors. Reciprocal agreements do NOT allow using another state’s license in Tennessee.
A Contractor’s license is assigned a monetary limit and also a classification, such as: Building (Residential, Commercial and Industrial); Electrical; Mechanical (Plumbing and HVAC); Heavy Construction; Highway, Railroad & Airport; Masonry; Municipal Utility; Environmental; and Specialties (landscaping, excavation, roofing, cell towers, solar panels, audio visual, etc.,). Contractor’s must bid/contract in the exact name as licensed.
8 STEPS TO LICENSING
– STEP ONE
Who takes the exam?
Individuals, those acting as the Qualifying Agent (QA) for the entity obtaining the license, take the exam(s) on behalf of the business and they may be an owner, officer, or full time employee. The QA(s) must register with PSI to take the exam. PSI has testing centers all over, including throughout Tennessee, as well as in other states. Walk-ins are not allowed and you must schedule an appointment ahead of time, but exams are offered daily. Scores are given upon completing the exam, so you know right away whether you passed. The same person taking the Business and Law is not required to take the trade exam and more than one person may take the exams for the company.
(PSI Examination Services is the official testing agency for the Tennessee exam. Their website is www.psiexams.com and their phone number is 1-800-733-9267. Tests are given weekly in Chattanooga, Jackson, Johnson City, Knoxville, Memphis and Nashville you must schedule an appointment. Any passing test score is valid for a period of 3 years from the date it was passed. It is required to have proof of insurance, workers’ compensation, and general liability in the minimum amount of $100,000.)
What exams are required?
There are two types of exams:
Business and Law – $55
Trade Exams (for various license classifications) – $55
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The following is a list of trade exams for contractors (building, electrical and mechanical) offered and includes combined exams:
Res/SmCom (BC-A,b(sm) – (Projects less than $750,000)
*Full Mechanical -Plumbing & HVAC (CMC) Must be pre-approved
*Plumbing (CMC-A) – Must be pre-approved
**Fire Sprinkler (CMC-D)
Licensed Masonry Contractor (LMC) – Projects $100,000 or more
Examples for trade exams needed for classifications:
Build residential houses only, take the BC-A exam.
Construction Manager is required to take the full BC exam.
Residential, commercial and industrial building, take the BC exam. (NOTE: Do not take the BC exam unless you can show experience on your application or may be limited to specific class.)
Build homes and commercial projects, (such as a doctor’s office, less than $750,000), need the BC-A and BC- b(sm) exams OR may take the combined BC-A,b(sm).
Commercial building in excess of $750,000, BC-B exam.
A BC-B or BC is needed to build a water/sewer plants or to get a MU classification.
Communication/cell towers; no trade exam.
– STEP 2 – FINANCIAL STATEMENT
Who must prepare the financial statement?
The law requires a Reviewed or Audited financial statement which must be prepared by a licensed independent firm. There is no exception!
Contact a Certified Public Accountant (CPA) or a Licensed Public Accountant who is actively licensed to prepare a “Reviewed” or “Audited” financial statement. They may be licensed in the state where the business operates. In Tennessee, you may check with the Tennessee Board of Accountancy to perform a License Search to verify if they are properly licensed as both a firm and individually, to perform an audit or review.
What type of financial statement is required?
The CPA must prepare a *current financial statement with a:
**Reviewed opinion (required for a monetary limit of $1,500,000 or less); or
***Audited opinion (required for a monetary limit exceeding $1,500,000); and based on
Generally Accepted Accounting Principles (GAAP).
*Current is considered less than 12 months
**At renewal time, a “Review” would not be required; may supply an in-house financial statement or “Compiled”
***At renewal time, an “Audit” would not be required and a “Reviewed” would be acceptable
General Information on Financial Statements
Compiled financial statements are NOT acceptable for the entity obtaining a new license.
Financial statements prepared on an income tax basis are NOT acceptable.
Contractor licenses are issued according to the legal NAME appearing on the financial statement and the name should match on ALL related information, such as the Charter, Articles of Organization, and Line of Credit, Contractor’s Affidavit or *Guaranty Agreement. In addition, the contractor should only operate in the name as licensed. If the entity obtaining the license is a subsidiary, an in-house statement may be supplied with the parent’s audit and guaranty agreement.
Guaranty Agreement is required with a cash only financial statement and when it’s not an operating statement. The Guaranty must include a personal financial statement from the owner(s) or the parent company guarantying the entity.
The Board may require a Guaranty with personal financial statements if the working capital is mainly accounts receivable (may supply an update showing the receivables have been collected).
*A Bond in the Board’s format may be supplied in lieu of the Guaranty Agreement, in the amount of $500,000; or $1,000,000 for an Unlimited monetary limits.
Why is a financial statement needed?
Every contractor is assigned a monetary limit on their license, as to the size of project they wish to contract or bid. This limit must cover the total project and it cannot be split into phases of smaller contracts to circumvent the law. The total contract should include materials, labor, and profit. For example, if a residential contractor is building a house for a consumer, on their land, the land would not be part of the contract. However, if the contractor is not building on the consumer’s land, then it would be part of the total contract price; could not be split into two contracts, one for land and one for the house. In addition, there is not a limit on the amount of single projects ongoing. A contractor with a $200,000 limit may construct as many of these homes as long as each one does not exceed the limit. A contractor is allowed a 10% tolerance, unless they have a BC-A/r classification (residential restricted limited license).
Monetary Limit Determination
1. Inform your accountant of the size license you need.
o For example, if you plan to contract homes no more than $150,000 per contract, your CPA can help determine if your financial statement meets the criteria.
2. Monetary limits are based 10 times the lesser of both working capital and net worth (plus experience).
o In order to hold a license with a limit of $150,000, you would need to show working capital and net worth of at least $15,000, as well as experience for this amount.
o Since the limit is based on the lesser of the two, a contractor with a working capital of $10,000 and net worth of $200,000 would qualify monetarily for a limit of $100,000.
• The contractor could supplement their reviewed for audited financial statement with a “Line of Credit” (on the Board’s format) in the amount of $5,000 to increase working capital; or
• Submit a personal or parent company financial statement with a *”Guaranty Agreement”.
o Personal supplemental financial statements may be prepared by the contractor, in addition to the required review or audit.
3. The Board may limit the monetary license limit based on prior experience. Be sure to list all experience of owners and officers.
4. If the working capital is mainly uncollected accounts receivable, the Board may not utilize the full amount.
*A Bond in the Board’s format may be supplied in lieu of the Guaranty Agreement, in the amount of $500,000; or $1,000,000 for an Unlimited monetary limits. (At renewal time, the Guaranty Agreement or Bond may be removed by making a request to the Board and providing an updated financial statement meeting the requirements, to replace it.)
Unlimited License Limit
To obtain an unlimited monetary limit on a license, the contractor must show $300,000 in both, working capital and net worth, as well as experience, with an audited financial statement. At renewal time, a contractor may supply a “Reviewed” financial statement for unlimited.
Working Capital and Net Worth
Please ask your CPA/LPA to determine the amount of your working capital and net worth to ensure you qualify for the limit requested. Please take in consideration of experience and whether the majority is uncollected receivables. Working capital is current assets minus current liabilities. Net worth is total assets minus total liabilities.
The monetary limit is the total dollar amount per each individual contract or project. A contractor cannot split a contract into phases to work within their limit, however, a 10% tolerance is allowed. A contractor with a monetary limit of $150,000 may contract up to $165,000 without being in violation (see Rule 0680-01-.13). In addition, there is no limit of the number of projects a contractor may perform, as long as a project has not been split into phases to circumvent the law.
Line of Credit
A Line of Credit (LOC) [pdf] in the Board’s exact format, may be considered to supplement working capital. (The Line of Credit must be in the same name as on financial statement, and must be in the EXACT format or it will not be acceptable.)
–STEP 3 – LETTER(s) OF REFERENCE AND PROOF OF INSURANCE
Letter of Reference
Submit the “Letter of Reference” from the application and have it completed by a past client or employer who may comment about your construction work/experience OR a code official who has inspected your work. Only one reference letter is necessary.
Proof of insurance
General Liability is required based upon the monetary limit of a contractor. Workers’ Compensation insurance is required or you may supply proof of exemption.
– STEP 4 – CORPORATIONS, LIMITED LIABILITY COMPANIES, etc.
Tennessee corporations must submit a copy of their Charter and proof showing they have registered with the Tennessee Secretary of State’s Office.
Out-of State corporations must register as a foreign corporation and submit a copy of their Charter, along with a copy of their Certificate of Authority showing they have registered their charter (we may accept a copy of their application stamped “FILED” from the Tennessee Secretary of State’s office in order to meet the 20th deadline).
Limited Liability Companies (LLC) must submit a copy of their Articles of Organization, and proof showing they have registered/filed with Tennessee Secretary of State, including out of state entities.
Limited Partnerships must register with the Secretary of State.
Exemption Registry for Workers’ Compensation as a “Construction Services Provider” requires registration with another section of the Secretary of State’s office.
Name on License
Make sure your entity is filed in the same name as the financial statement. The contractor’s license is issued in the legal name and mode of operation exactly as on the financial statement. Bidding and contracts must be in the exact name as licensed, as well.
DBA (Doing Business As)
If your entity is in a name with a “DBA”, this will need to be included on the certificate obtained from the Secretary of State and on the financial statement, exactly as on the form. For example, if the entity is wanting to go by, “John Doe DBA Doe’s Quality Construction, LLC”, this whole name must be on ALL documents; contracts must be in the name as licensed and could not be prepared as “Doe’s Quality Construction, LLC” or “John Doe”.)
– STEP 5- COMPLETE APPLICATION, SIGN, NOTARIZE
Complete the synopsis, experience and affidavit pages of the “Contractor’s License Application”. Make sure all questions on the application are complete. If you feel any questions do not apply, please write an explanation; do not leave anything blank! Be sure to list experience from working with other companies, as well as that of other owner(s) or officers.
Please list information from other licenses, such as, if this is a second or additional license; or if you were a qualifying agent or officer listed on a license. Disclosure of a felony, judgements, or complaints is also required. Failing to disclose, could delay the issuance of the license for submitting false information.
Be sure the affidavit is signed and notarized by all applicable individuals (qualifying agent, owner(s), partners, members, main officers and major stockholders). All blocks must be checked. Attach an explanation where applicable. If you have complaints, convictions or have bid where a license is required, you will be required to interview with the Board. Supplying false information is grounds for having a license denied.
– STEP 6- SUBMIT APPLICATION AND $250 FEE
Once the entire application is complete, submit with the $250.00 nonrefundable application fee (may be a company, personal or cashier’s check (no cash or credit cards) payable to: Contractor’s Board. Attach check to the application cover and mail to the following address:Tennessee Board for Licensing Contractors 500 James Robertson Parkway Nashville, TN 37243-1150 Phone: 615-741-8307 or (800) 544-7693 Website: http://www.tn.gov/regboards/contractors/
If you are mailing your application via regular U.S. Postal Services, please allow 5 to 7 business days for our receipt; overnight mail takes two (2) days for our receipt from the “Cashier’s Office/Mail Room”. It may be in your best interest to send express or certified mail for tracking purposes since it includes sensitive information. Always make a complete copy for your records! A letter notifying receipt will be sent to all applicants, however, these are also listed on the website within a week, as “Application in Process” at the “License Search” should you want to confirm delivery. (Do NOT contract prior to being approved by the Board.)
The application is due on the 20th of the month before the Board meets. The application must be received in the office by deadline date (not postmarked).
Please allow approximately three (3) weeks for processing of your application before making telephone inquiries! Due to limited staff, telephone inquiries delay processing applications. The “New Applications” staff will notify you by mail, email and/or fax of the time, date and location of the Board if an interview is required or should additional information be needed.
Do NOT contract, bid or offer to engage before obtaining the license! Doing so could prevent being awarded the contract and license held for six (6) months. See T.C.A. 62-6-120.
– STEP 7- BOARD REVIEW
An interview may be required with a Board member at the regularly scheduled meeting (see “Calendar” for meeting dates) for those not meeting the criteria to have the interview waived (see “Waiver of Interview” below).
Those who are obtaining a restricted residential (BC-A/r) must interview; those with not enough experience provided on the application (3 years); those with felony convictions; and those with complaints are also not waived. These applicants will receive a letter notifying an interview is required.
– STEP 8- LICENSE ISSUED
The staff will process your license to be issued after approval by the Board meeting. You will be mailed a license certificate which will have your license ID number, classification, expiration date (this is the same information required to be on the outside of a bid envelope!) and also your license monetary limit. You may check the status of the license issuance at: License Search. For tips on searching licenses, see “License Search Tips”.
The license is issued for two years. Renewals are mailed 90 days prior to expiration date; required to be renewed 30 days prior to expiration.
Contractors may apply for a license revision in order to make changes. Such as, change the mode of operation; increase their licensed monetary limit; add a classification; add or remove their Qualifying Agent; or may retire the license if they are not working and want to cancel insurance. This information is availalbe on the “Forms Download” section on the web.
Due to changing laws, please review the state website for updates.
Source: Excerpted from Tennessee Board for Licensing Contractors