Is Construction Arbitrage Legal in Tennessee?

Yes. Construction arbitrage is legal in Tennessee. Winning the prime contract, subcontracting the physical work to licensed tradespeople, and keeping the margin between what the client pays and what the subs charge is standard commercial practice throughout the state. The compliance question is whether you hold the correct licence from the Tennessee Board for Licensing Contractors (TBLC) for the value of work you are taking on, and whether every sub you use holds their own independent trade licence.

Tennessee is a large and growing construction market. The Nashville metro in Davidson County has been one of the fastest-expanding urban areas in the United States, driven by both commercial development and a wave of residential renovation following years of inward migration. Memphis, Knoxville, Chattanooga, and Clarksville all run substantial construction pipelines. If you are going to operate here, the licensing structure is clear and the thresholds are specific.

Is construction arbitrage legal in Tennessee - the direct answer#

Construction arbitrage means holding the prime contract, deploying licensed subcontractors to perform the work, and keeping the spread. Some people call it contractor arbitrage or construction dropservicing - same model, different name, and the model is entirely legal in Tennessee.

Tennessee law does not require the prime contractor to self-perform any portion of a project. Subcontracting is how the construction industry operates at every scale. The question is not whether you can subcontract - you can - but whether you, your business entity, and every sub you put on site hold the licences required for the type and value of work involved.

The primary licensing authority is the Tennessee Board for Licensing Contractors (TBLC), a division of the Tennessee Department of Commerce and Insurance (TDCI). This is the body you register with, the body that sets your monetary limit, and the body that can sanction you if you operate without the correct licence.

The $25,000 threshold - when a TBLC licence is required#

Under TCA § 62-6-103, a contractor licence is required before a person or company bids on, negotiates, or contracts for any project where the total cost is $25,000 or more. The figure covers the complete cost of the job including labour and materials combined - not just the labour component.

For an arbitrage operator, the relevant cost is the total value of the prime contract with the client. If you are quoting a bathroom renovation for $28,000, you are above the threshold and need a TBLC licence before you put that quote in front of the client. Below $25,000, the state-level TBLC licence is not required for general construction work, though the separate Home Improvement Contractor licence rules apply to residential work in certain counties (covered in the next section).

There are two important exceptions where the threshold drops or disappears entirely:

• Masonry work: The threshold drops to $3,000. A masonry project worth $3,000 or more requires a TBLC licence.
• Electrical, plumbing, HVAC, and roofing: These specialist trades require the appropriate licence regardless of the dollar value of the job. There is no minimum threshold for these trade categories.

Licence types and monetary limits#

The TBLC uses classification-based licences rather than a tiered structure by project size. The main classifications relevant to a construction arbitrage operator are:

• BC (Building Construction): Covers all types of building work - commercial, residential, and mixed use. The BC licence includes all 34 building sub-categories. This is the most flexible classification for someone winning a range of different projects.
• RB (Residential Building): Specific to residential construction. Suited to an operator focusing on houses and smaller residential projects.
• BC-A (Industrial): For industrial and manufacturing facility construction.
• BC-B (Highway, Railroad, Airport): Horizontal infrastructure and transport projects.
• BC-C (Municipal and Utility): Public works and utility infrastructure.

Every TBLC licence carries a monetary limit - the maximum total value of any single project you are permitted to bid on and contract for. Your monetary limit is set by the financial statement you submit when you apply or increase your limit:

• A CPA-reviewed financial statement supports limits up to $3,000,000.
• A CPA-audited financial statement supports limits above $3,000,000.
• From July 2026, a new Contractors' Surety Bond option is available as an alternative to the financial statement. The bond must equal at least 50% of the monetary limit you are requesting.

Restricted licence: New applicants who have not yet completed the required examinations receive a restricted licence capped at $125,000. To increase past $125,000 and remove the restriction, you must take the Business and Law exam (required for all applicants) and the relevant trade exam, and submit a reviewed financial statement.

Start low if you are just getting in. You can increase your monetary limit as your business grows and your financial statements support a higher figure. Operating above your stated monetary limit is a compliance breach.

The Home Improvement Contractor licence for residential work below $25,000#

For residential remodeling projects in the $3,000 to $24,999 range, Tennessee operates a separate Home Improvement Contractor (HIC) licence - but with a critical detail: the HIC licence is not statewide. It is required only in nine opt-in counties:

Bradley, Davidson, Hamilton, Haywood, Knox, Marion, Robertson, Rutherford, and Shelby.

If you are winning residential improvement work between $3,000 and $24,999 in Nashville (Davidson), Memphis (Shelby), Knoxville (Knox), Chattanooga (Hamilton), or any of the other five counties on that list, you need an HIC licence. Outside those counties, the state HIC requirement does not apply to that value band, though local ordinances may impose their own requirements - check with the relevant municipality.

HIC licence requirements:

• General liability insurance: $100,000 per occurrence minimum
• Financial responsibility: Proof of $10,000 financial responsibility (typically a surety bond)
• Scope restriction: The HIC licence does not cover HVAC, plumbing, or electrical work. For those trades within the $3,000-$24,999 range, the sub holding the relevant trade licence must perform the work independently.

Apply through the TDCI's contractor licensing portal. Renew through the same portal when required.

Specialist trade licences#

This is where the most common compliance gaps appear. As the prime contractor, you cannot cover your subcontractors under your own TBLC licence. Every specialist trade sub must independently hold the correct licence for their work.

Electrical work: For work valued at $25,000 or more, your electrical subcontractor must hold a CE (Contractor Electrical) classification licence from the TBLC. This requires at least three years of verifiable electrical experience, passing both the trade exam and the Business and Law exam, and carrying a minimum of $500,000 general liability insurance. For smaller electrical jobs, the sub needs a Limited Licensed Electrician (LLE) permit from TDCI. Some municipalities including Nashville run their own electrical licensing layer - always verify what the local permit office requires.

Plumbing work: For work at or above $25,000, your plumbing subcontractor needs a CMC-A (Plumbing and Gas Piping) or CMC (Full Mechanical) classification licence. This requires three years of verifiable plumbing experience, passing both the trade and Business and Law exams. Below $25,000 at the state level, local municipalities often impose Master Plumber licence requirements - Memphis and Nashville in particular have local plumbing licensing tiers that apply to work below the TBLC threshold.

HVAC and roofing: Both require a TBLC licence regardless of project value, as noted above. Verify your sub holds the correct CMC classification for HVAC or the relevant roofing classification.

Verify every sub's licence number through the TDCI licence verification portal before they start work. If an unlicensed sub causes damage or an injury, the liability exposure does not stay with the sub - it comes back to you as the prime.

Worker classification - the 20-factor IRS test#

Tennessee changed its independent contractor classification standard in 2020. From 1 January 2020, Tennessee adopted the IRS 20-factor test as the basis for determining whether a worker is an employee or an independent contractor for purposes including workers' compensation and tax classification.

The 20 factors examine the nature of the working relationship in practice, not just the label on the contract. Key factors include:

• Whether you control not just the result but the manner and means of the work
• Whether the worker operates independently and serves multiple clients
• Whether the worker supplies their own tools, equipment, and premises
• Whether the working relationship is ongoing or project-by-project
• Whether the worker has an opportunity for profit or loss

The burden of proof sits on the business engaging the sub. If you cannot demonstrate that a worker passes the independent contractor standard, the default presumption under Tennessee law is that they are an employee. Misclassification creates payroll tax liability and - critically - workers' compensation liability for injuries that your sub's own WC policy should have covered.

Get proper written subcontract agreements in place. Use tradespeople who have their own business registrations, their own clients, their own tools and equipment. A plumber who works exclusively for you, on your schedule, with your van, is exposed to reclassification however you structure the paperwork.

Workers' compensation#

Tennessee draws a sharp line between construction and non-construction employers. Non-construction businesses only need workers' compensation coverage when they employ five or more workers. Construction businesses must carry coverage from the first employee - the threshold is one.

Any business winning construction contracts and putting people on site falls in the construction category. This includes the prime contractor and every sub operating as an employer rather than as a sole proprietor under a workers' comp exemption.

For your own employees: WC coverage is mandatory from day one.

For your subcontractors: A properly classified independent contractor is not your employee and is not on your policy. However, if a sub is reclassified as an employee - because the 20-factor test is not satisfied - you face retrospective workers' comp liability going back to when they started working for you.

A construction services provider (a sole trader without employees) can register a workers' comp exemption with the Tennessee Bureau of Workers' Compensation. This is common for sole-trade plumbers and electricians working as true independents. Ask every sub whether they carry a WC policy or whether they hold a valid exemption, and verify both. If a sub has their own employees on site, they must carry WC regardless of exemption status for themselves.

Penalty for non-compliance: Fines of up to $10,000, Class A misdemeanor charges, and civil liability for any uninsured injury claim. Stop-work orders can be issued immediately at the project level.

Full insurance picture at what insurance you need for construction arbitrage.

What the Tennessee spread looks like#

Tennessee trades at a mid-range level in US construction - well above some Midwest markets, below the coastal premiums. In the Nashville metro, a kitchen and bathroom renovation package that a client pays $60,000-$80,000 for might carry $35,000-$48,000 in sub and materials costs, leaving a gross margin of $15,000-$32,000 on that single project. Simpler residential jobs in the $18,000-$28,000 range run margins of $4,000-$8,000.

In Memphis and Knoxville, volumes are somewhat lower but so are sub rates - the spread dynamics are similar. Commercial fit-out work in Nashville's growing urban core can run significantly higher ticket values.

These are examples, not promises. Read how much construction arbitrage makes for a full breakdown of how the economics work at different scales. Your numbers will depend on the trades you work with, how you price, and how your sub relationships develop.

The real risks to understand#

The model is legal. These are the risks that actually cost operators money in Tennessee:

• Operating above your monetary limit. Taking on a $350,000 project when your TBLC licence monetary limit is set at $200,000 is a direct compliance breach. Increase your limit before you bid at that level.
• Skipping the HIC licence in the opt-in counties. In Nashville, Memphis, Knoxville, and Chattanooga, residential improvement work between $3,000 and $24,999 without a current HIC licence exposes you to civil penalties and unenforceable contracts.
• Using an unlicensed electrical, HVAC, or roofing sub. These trades are licensed regardless of project value. One unlicensed sub on a small job creates the same exposure as on a large one.
• Local plumbing licensing gaps. State-level TBLC plumbing classification covers work at $25,000+. Nashville and Memphis have local licensing tiers that apply below that threshold. This is where the gap typically shows.
• Misclassifying subs under the 20-factor test. Tennessee's test is employer-friendly compared to some states, but it is still a real standard. Subs who fail the test pull WC liability and payroll tax exposure back onto your books.

The model is not risk-free. What running it correctly looks like in Tennessee: a TBLC licence with the right classification and a realistic monetary limit, a current HIC licence for the counties where you do sub-$25,000 residential work, verified trade licences for every electrical and plumbing sub before the job starts, written subcontract agreements that reflect genuine independent contractor relationships, and WC certificates on file for every sub who employs people.

For the full picture of how the model works before you tackle the compliance layer, start with what construction arbitrage actually is and how it works legally across the United States. For the contractor licence question across all US states, that post covers the national picture.

Last checked: 2 September 2026.