Why does Net Worth matter when obtaining a Contractor's License?
Updated: Mar 24, 2022
We are frequently asked, “Why does the Board need my company’s net worth?” It’s a great question.
To review, a Class A contracting firm must have a minimum net worth of $45,000 and a Class B firm must have a minimum net worth of $15,000. There is no net worth requirement for Class C firms.
Why is Net Worth necessary?
As with other licensing requirements, the net worth requirement is for consumer protection.
Let’s look at Class A contractors as an example.
A Class A contractor is permitted to take any size contract.
If a consumer hires a Class A contractor to do a large project, the customer should have a reasonable expectation that the contractor has the financial resources to not only do the job, but to handle any problems or contingencies that may arise on that jobsite. The same holds true for Class B contractors who are permitted to take contracts up to $120,000. The net worth requirement of $15,000 is to ensure that those contractors are financially able to handle projects of that size.
How do contracting firms prove their net worth?
There are three options:
The firm can submit a balance sheet with a complete accounting of all assets and liabilities held by the firm. This option is the most cumbersome, as the Board requires detailed documentation of all line items on the balance sheet which the Board must then verify. This can be a lengthy process of information gathering, documentation, and verification.
The firm may submit a CPA review or audit of the firm’s net worth in lieu of a financial statement. This option does not require independent verification.
The firm may obtain a 2-year, $50,000 Surety Bond that coincides with the term of the contractor license. If this option is chosen, no further financial reporting is required by the Board.