How to Determine the Financial Strength of Contractors
Contracting organisation financial strength is important to be determined within the tendering and selection stage to ensure the appointment of the appropriate contractor with limiting the risk of bankruptcy and project incompletion. The financial information of tenderers could be assessed through the collection of financial reports from the PQQ as indicated in PAS91.
Short term and long-term financial stability of the companies could be found by assessing their solvency and calculating the current ratio and acid test ratio as indicated in Equation 1 and Equation 2 respectively. A current ratio of 1 suggests a financially stable company but a trend over the last few years should be looked into to see the fluctuation of the ratio (Council, North Hertfordshire District, n.d.).
Moreover, an acid test ratio may provide a measurement of liquidity and the readily convertible into cash assets of the company with a ratio of 1.0 suggest a financially healthy contractor.
Furthermore, assessment of how efficiently the company’s management is utilising the resources at their disposal to generate revenue and drive profits up, as well as the comparison of significant debt is an important criterion for assessment. <