Bonding in Tennessee

A surety bond is a 3-party promise. The contractor (the principal) pays a surety company for a bond that a customer, subcontractor, or a government entity (the obligee) can draw against if the contractor breaks the rules the bond covers. The surety pays valid claims up to the bond face value. The contractor then owes the surety for what the surety paid out. A bond protects the public. It is not insurance for the contractor. Tennessee uses bonds in four places that contractors commonly confuse. Keep them separate. 1. Tennessee Contractor License bond (monetary limit supplement). Under rules of the Tennessee Board for Licensing Contractors, applicants for the Tennessee Contractor License (for projects at or above $25,000) may supplement their monetary limit with a $100,000 contractor license bond in addition to the reviewed financial statement. The bond, combined with working capital, sets the maximum single-project value the license can bid. Source: TN Contractors (https://www.tn.gov/commerce/regboards/contractors.html). 2. No statewide LLE / LLP license bond. The Limited Licensed Electrician (LLE) and Limited Licensed Plumber (LLP) credentials do not require a statewide surety bond. Individual counties or cities may impose a local permit bond as part of municipal registration. Source: TN LLE (https://www.tn.gov/commerce/regboards/lle.html); TN LLP (https://www.tn.gov/commerce/regboards/llp.html). 3. Home Improvement Contractor bond (HI). The Tennessee Home Improvement Contractor license (for residential remodeling between $3,000 and $24,999) is required in select Tennessee counties. Applicants post a Home Improvement Contractor bond in an amount set by the Board. Source: TN Contractors (https://www.tn.gov/commerce/regboards/contractors.html). 4. Public works payment and performance bonds (Little Miller Act, Tenn. Code Ann. 12-4-201). Tennessee's public-works bond statute (Tenn. Code Ann. 12-4-201) requires a payment and performance bond on public construction contracts. Published industry summaries indicate the threshold is $100,000 for state-level public contracts. Bonds each equal 100 percent of the contract amount. The performance bond runs to the governmental entity; the payment bond protects subcontractors and suppliers. Subcontractors on a bonded public job perfect claims against the payment bond rather than lien public property. Verify the current threshold against the statute before assuming a job is bonded or unbonded. Source: Tenn. Code Ann. 12-4 (https://www.tncourts.gov/). Premium math. A surety charges an annual premium, typically 1 to 3 percent of the bond face value for a contractor with strong credit and no prior claims. Weaker credit, tax liens, prior surety losses, or a new business can push the rate to 5 to 10 percent or more. A $100,000 Tennessee Contractor License bond at 2 percent is $2,000 per year. Public works payment and performance bonds are priced per job, usually 0.5 to 3 percent of the contract price depending on contract size, job type, and the contractor's financial statements. Bond, insurance, and workers' compensation are separate requirements. A Tennessee contractor carries state-license bonds if applicable, general liability insurance at limits required by the Board or the project owner, and workers' compensation under Tenn. Code Ann. 50-6 (which requires coverage for most employers with five or more employees, and for any employer in the construction trades with one or more employees).