Contractors can no longer award business with only a low bid, a nod, and a handshake. A formalized process to review and evaluate those with whom you do business – especially those with whom you have contractual obligations – is a must.
Ascertaining your upstream and downstream risk has many facets, including a well-thought-out subcontractor review and prequalification process; selecting the right partner allows you to produce the desired end result. If a contractor, subcontractor, or supplier has a financial or performance problem, then no one benefits.
This article will walk through the necessary criteria of a review process, including non-analytical considerations; present the benefits of prequalification; and explain how to obtain upstream feedback from an owner/GC.
When done correctly and diligently, a prequalification and review process can help avoid costly problems and litigation.
Prequalification Criteria Checklist
At its core, the prequalification process is used to review the technical and financial qualities of subcontractors in an effort to assess their capital, capacity, and character.
The first step in the process is to develop a standard data collection form – whether it’s specifically developed for your company or shared among organizations (see Exhibit 1 and download the Excel file at www.cfma.org/SO17BP_16). Be sure to include all desired areas of focus for the subcontractor to complete. This information should paint a picture of the subcontractor’s financial health, safety, work experience, and abilities. Let’s review some key data sources to analyze.
Financial Ratios
When reviewing a subcontractor’s finances, it’s important to know what type of statements you are analyzing (e.g., audits, reviews, compilations, or internally prepared statements). An outside CPA firm can also provide assurance on a subcontractor’s financial health.
But review is only half of the equation; it’s critical to benchmark these ratios against similar companies in the industry. A useful tool for this process is CFMA’s Construction Financial Benchmarker (www.financialbenchmarker.com), which allows you to make meaningful comparisons and draw important conclusions about best-in-class contractors.