1. Contractor Review and Prequalification
Patrick A. Cebelak, Controller
Granger Construction Company

2. Contractor Review and Prequalification
What is it?
Why does Granger Construction Company use it?
How we perform the review…

3. What is Contractor Review and Prequalification?
An extensive procedure to review the technical and financial capacity of contractors beyond “calling for references”
A valuable tool used to make informed decisions about hiring and/or bonding contractors.
A method of defining and mitigating risk to construction owners and contractors.

4. BENEFITS OF USING THE QUALIFICATION PROCESS
Delivers a higher assurance of project performance for our clients.
Builds a database of contractor performance for future projects.
Eliminates repeat contracting with firms that perform poorly.
Encourages a measurable process of review consistent with the Granger quality plan.

5. BENEFITS OF USING THE QUALIFICATION PROCESS (continued)
Provides subcontractors an opportunity to improve, and rewards reliable subs .
Provides risk management to safeguard Granger and our clients.
Reduces chances of claims and budget overruns.
Helps us evaluate a contractor’s changing circumstances over time.

6. When is the Prequalification Review used?
Granger ISO procedures require prequalification on all projects (Either Pre-Bid or Pre-Award)
When requested by a subcontractor before investing in their bid preparation.
Before Granger awards a contract to the apparent low bidder, given the following conditions:

7. When is the Prequalification Review used? (continued)
Granger has not worked with the subcontractor within the last year.
The contract amount is greater than $200,000.
For contract values less than $200,000, we do not do another pre-qualification if the pre-qualification form and financial information on file is less than 1 year old.

9. How to get started
Utilize prequalification specifications and bidder prequalification form (includes for example)
Proposed Contract Amount
Duration on Site (Beginning and ending date)
Cost of bonds
Second bidder information
Collect industry benchmark data
CFMA Construction Industry Annual Financial Survey
Risk Management Association – Annual Statement Studies
Review insurance company rating guide
Best’s Key Rating Guide

10. Financial Ratios Working Capital Working Capital Turns Current Ratio
Current Assets – Current Liabilities
Working Capital Turns
Revenue
Indicates the amount of revenue being supported by each $1 of net working capital. A ratio exceeding 30 may indicate a need for increased working capital to support future growth.
Current Ratio
Current Assets
Current Liabilities
Indicates the extent to which current assets are available to satisfy current liabilities. Generally looking for a ratio greater than 1.0.
Debt to Equity
Total Liabilities
Total Net Worth
Indicates the relationship between creditors and owners. A ratio of 3 or lower is considered acceptable.
Accounts Receivable Turnover
(Accounts Receivable – Allowance for Doubtful Accounts) * 360
Indicates the number of days to collect accounts receivable. A lower ratio means faster collection.
Accounts Payable Turnover
(Accounts Payable – Retainage) * 360
Indicates the average number of days it takes to liquidate trade payables. The ratio should be compared to credit terms.

11. “Risk Factor Formula” or “R score”
Attempts to answer three questions:
Is the subcontractor’s capability to perform adequate, considering its capital structure?
Is the subcontractor’s earning power providing ample funds to maintain a proper balance between assets and liabilities?
Is there adequate equity in the company to deliver the capital necessary to support the planned project and fund unforeseen losses?

12. A score below 5 indicates low financial risk
“R score” (continued)
A score below 5 indicates low financial risk
A score between 5 and 7 indicates moderate financial risk
A score above 7 indicates financial resources are stretched
A score above 9 indicates high financial risk

13. “Z score” Profitability Analysis
The Z score provides an indication of the likelihood of financial failure in the coming year.
A Z score below indicates potential failure.

17. Subcontractor Review and Prequalification
Contact Information:
Patrick A. Cebelak

18. Thank You! Questions?