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NEC4: Financial Protection Plan explained in relation to the contracting organisation appointed

Updated: Oct 28, 2021

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.

Current Ratio

Acid Test Ratio or Quick Ratio

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.

The managerial aspect of a business could be assessed through the ROCE ratio and revenue/total assets as shown in Equation 3 and Equation 4 where higher ratio values indicate an effective contract winning strategy suggested to be important ratios by (Singh & Tiong, 2005) and (Council, North Hertfordshire District, n.d.). Furthermore, a multiple criteria decision-making (MCDM) technique as used by (Singh & Tiong, 2005) could be implemented to get an overall grade on the financial performance of tenderers with a focus given on ratios deemed more important to the client.

Nevertheless, it should be pointed out that a downturn in the construction industry or of the global economy could put a financially strong company into financial difficulties such as the currently unseen COVID-19 pandemic.