Evaluating the financial health of construction contractors

Economic slowdown and fierce competition in the construction industry in recent years has led many construction companies to pull out of projects due to deep financial and cash flow problems. As a result the risks of project failure in terms of time and cost overruns as well as poor quality products have increased. The reduction of such risks demands a closer examination of the financial soundness of candidate contractors before awarding a contract. This paper proposes a quantitative method using financial ratios to evaluate changes in the financial health of contractors and to enable a comparison of financial soundness during a tender evaluation process to be made. The concept of the entropy method was employed to calculate the objective weights of financial ratios and a multi-criteria decision-making method was used to produce overall performance scores of contractors. An empirical study of real company case data in Singapore was carried out to illustrate application of the method. The results show that the approach can be used to assist construction clients in assessing the financial capability of contractors.