Towards effective client procurement: assessing contractor risk with financial ratios

Evaluation of the contractor by client organisations forms a very crucial part of the client's procurement strategy for construction services. Current practice in undertaking such an evaluation often employs factors that are directly project-related. More important in this regard is the overriding influence of the tender price as a criterion for contractor selection. In the prevailing business climate within construction, the need for such an evaluation to take on board the susceptibility of the contractor's whole organisation to financial insolvency is apparent. This should allow for a clear awareness of the risk of engaging the services of a particular contractor by the client. The paper reviews various financial measures and tools that have been developed, or found application in the risk evaluation of enterprises. It puts forward a case for the incorporation of some of these tools in assessing the overall risk associated with the client's engagement of the services of a particular contractor.