Towards an improved financial ratio model for construction contractor evaluation

The use of financial ratio models to evaluate construction contractors is already well established. These models can also help construction companies to assess their own performance as part of the strategic evaluation. Ratio models employ a dichotomous indexed scale to measure the performance of a company. Previously developed ratio models have been criticised as lacking in their efficiency of evaluation. This paper presents two methods for improving on the efficiency of ratio models to be employed in the evaluation of the construction contractor. The first relates to the nature of the data employed in the estimation of ratio models and proposes data quality improvements of transformations and outlier deletion; and the second addresses the scope for classifying companies and utilises different statistical transforms to provide early detection of imminent financial bankruptcy. A discriminant ratio model was developed with these two approaches, resulting in a three-function sequential model.