Thursday, May 1, 2014

Construction Pre-Qualification


The key to it all is that we should only deal with Companies who we have pre-qualified. The nature and extent of Pre-qualification will vary based upon the size and complexity of the activity, the risks involved, the critical nature of the schedule, etc. In general, the flow of a Pre-qualification process would occur in stages however, depending upon the criticality of the schedule you may have to skip various stages, compress stages or even take acceptable short cuts to allow you to have some level a pre-qualification accomplished and yet still meet your schedule.

Information Gathering
The formats for this will vary as each of the different businesses are unique and certain information that deals with the uniqueness is required.
In general, What you are trying to find out is their size, areas of expertise, the types of people they have on staff, the character of their past projects or products, their financial strength, and any other information which will give you insight into their capabilities. In general this information becomes the basis for your own file of Potential Suppliers of Contractors for that particular type of service or product.

Information Screening
Second, usually when a requirement has been identified, you would review the information you have and from the type and size of products or projects
that they list as experience. You use that to try to establish an initial group of companies to screen/or interview. You are trying to MATCH YOUR NEED AGAINST THEIR CAPABILITIES. Big doesn't always mean better, as a small job can easily "get lost" in a large firm and not get the proper attention. Neither would you hire a small firm for a project well beyond their proven capabilities. You would look at it carefully from the type of work they have done.

The Interview
Third, it is strongly suggested that you CONSIDERING INTERVIEWING THE COMPANY to allow you to get a better idea of the company's capabilities and
their management. Its staff, current status, current workload, management structure and philosophy, general personality, etc. represent the Company.
In short, all the information that you can't get from your Pre-qualification form you should get in the interview. An interview will disclose many
things you would not be able to get from the form. First, a trip to their office or manufacturing facility will indicate how busy they are at the time. For example, empty desks during a period where the business is booming can mean underlying problems in the company.

Always ask for a TOUR OF THEIR FACILITY. It will allow you to look around, see what they are doing, how they manage the business, and the tools they
have. It will also give you a better understanding of the character of the company.

In an interview you use the time to probe in detail. For example, if you were dealing with a Company with multiple offices you may need to find out the
Specific capabilities for the particular office that you will be using. This is especially important in service related activities, where you are relying upon the people and capabilities of the local office. Each office may have a different character depending upon their customer base and may be arranged
and organized to deal with that customer base. For example, an office located in a Country or State Capital may specialize in Government work, while another
office of the same firm in another location may specialize in private work.

You should also have them PRESENT A REPRESENTATIVE PROJECT and have them walk through the project explaining how they managed it. That will allow
you to understand their basic capabilities. It will also allow you to probe about who did what. It is possible to discover through the interview that the
individual who was a major factor of the success of a prior project or the the company is no longer with them. That would change their perceived
capabilities. It is also possible for them to identify a management structure or approach which they use that would be incompatible with your requirements
For activities which involve design you should want to see representative samples of the design drawings and technical specifications which they
generate to determine the quality and depth of the product. You may also want to see in detail their management systems for things like scheduling, buying of equipment and materials, material flows, quality processes, field service and support capabilities, lists of equipment they have, etc. One final suggestion for interviews, use the interview to get you information you need to help you make decisions you need on the Project such as: their estimate of what the time for the project, the estimate of equipment and material lead times, their opinion of your schedule, The contract approach they would recommend using to meeting it.

The Interview Team
As you would in most cases not have all the experience needed to be able to qualify a supplier by yourself, you need to form an interview team to address
all of those other areas. Clearly the size and character of the interview team is dependent upon the complexity of the project and the risks foreseen and the long term relationship. For example, if there is a need for long term service you should have someone with service knowledge and experience look at the supplier's capabilities to help understand what you will need from the supplier and what may have to be covered through other resources to develop the overall service strategy.

Reference Checks
Fourth, you would CHECK REFERENCES on the Company. Find out when they worked, what they have sold, the type of job, their role, the type of
contract, etc. Seek to find out everything that a reference would be willing to share with you. You may quickly find that the work they show in their brochure may not have been totally performed by them. Or they may have done the work but with a high level of work performed by or management assistance and guidance from the client. It is important that you both ask them for references and, while you are at the interview make note of the programs that they may be doing or may have just completed. References provided by a Company will always be positive in nature. That is why you should go beyond those provided in your checking.

Key questions to ask in a reference check would be:
• When did they work for you ?
• How large was the project ?
• What was their role in the project ?
• Who managed the project for them ?
• Would they accept that manager again ?
• How well supported were they by the main office ?
• What Contract Approach was used ?
• Were they satisfied with the performance ?
• Would they use them again ?
• What was the frequency of Change Requests or waivers ?
• What was their adherence to the Schedule ?
• How responsive were they to problems which occurred during the project ?
• How responsive were they to problems or warranty issues after delivery ?
• If they were going to do it over again, what would they do differently ?

Financial Evaluations
Fifth, you would PERFORM A FINANCIAL EVALUATION of the Company. In the exhibits we have provided samples of financial analysis guidelines for
various types of businesses. However, from business to business and from location to location the importance of various things will differ and as such it is always recommended that the specific financial norms for evaluation be locally generated in conjunction with your local finance organization. It is important that you get the most current financial information available. Many Businesses can change dramatically from year to year. Suppliers which
can be very sound one year could have sustained substantial losses and be on the verge of bankruptcy the following year.

In some locations, or for certain size projects the Companies which you may wish to use may be privately held. This can present a problems in terms
of getting detained financial information. If you encounter this type of situation there may be ways of getting an assurance of their financial
stability without you needing to get the actual detailed financial information. For example: You could provide a set a financial norms which you require to be met and ask that the individual's Certified Public Accountant certify that they have reviewed the information and that it meets those norms. In some locations you may consider accepting a third party guarantee such as a Bank Guarantee which would protect you for any advances or payments to third parties. You could consider requiring the party to provide Payment and Performance Bonds which are normally issued by insurance companies. However, as bonds cost money you should consider this as a last step as it will add to the cost of your project and you should try to get the needed information elsewhere to determine the risk.

One important note about Bank Guarantees and Insurance Company issued Bonds. It is important to remember that while they may reduce the financial risks
they will not guarantee you any greater degree of success in completion of your project. In fact, their interests (those of the bank or insurance company)
may be contrary to yours when there is a problem. It will bring them in as third party and usually their sole goal is to minimize their potential
loss. They will not be concerned with your needs unless that effects them financially. On-demand bonds allow immediate collection of the bond amount if the trigger for payment of the bond is reached, they will also cost more than a normal surety bond as the on-demand bond does not require any mitigation of the costs, whereas a surety bond the surety has the right to mitigate the cost to complete the work.

Staffing Comments and Concerns

If you have done all of this checking, will you be successful? If you are dealing with work which relies on the personal performance you can encounter the problem that while you can select a very good company it is possible to get one bad performer from amongst the good. At interviews companies will always will always put their best foot forward and you will meet the top level managers and key personnel. THESE ARE NOT THE PEOPLE WHO YOU WILL BE DEALING WITH IN THE LONG RUN. As impressive as their credentials are, most of the key individuals willbe involved in Marketing for the Firm, Operational Management or providing conceptual or high level direction or top level problem solving.
YOU WILL NORMALLY BE DEALING WITH SOMEONE WHO IS MUCH FARTHER DOWN IN THE ORGANIZATION FOR ALL OF YOUR EVERYDAY NEEDS. As such if you are dealing with a business where personal performance of someone on their staff is critical to your success, it is highly recommended at the interview or as a prior condition of the award, that you MEET WITH THE ACTUAL PERSON OR TEAM WHO THEY WILL ASSIGN TO PROGRAM. By doing this you can interview the specific members, make sure that you feel comfortable with their knowledge and abilities and also feel that you can work with them to accomplish the common goal of the successful completion of the Project. If you are not comfortable with the individual or team presented you should feel free to let the company know that they are not acceptable and that you want someone more acceptable. If they promise you someone and you are concerned about the veracity of their promise, you can consider including a provision in your contract which designates them as the person or team and limit the Company's ability to change to only those situations approved by you.

Approval of subcontractors.
In a number of situations you the contract with may not have all of the capabilities necessary to manage the complete project. The will then have
to use subcontractors to assist them in the performance of their activities. YOUR SUPPLIER OR CONTRACTOR WILL ONLY BE AS STRONG AS THE WEAKEST SUBCONTRACTOR.This is especially the case where the flow of the work requires a strong interdependence between the supplier and their subcontractors performing the work.

If you have one Subcontractor that is non-performing or poor performing it can effect the entire flow of the work and the performance by your other
subcontractors. Their resources are planned around the scheduled flow of the work. Commitments for their other projects are made based upon
the projected flow. If your project is delayed, you then may have the problem where their people are already committed to another project
and the will have to back fill when possible or using secondary resources,which won't provide you as good of a job.

As such, many agreements provide for APPROVAL OF ALL SUBCONTRACTORS. If the performance by a third party is critical to your success, make sure that you have control over who is selected. If it is critical to your success, It would be important that you take the time to verify the subcontractor's capabilities. It may be as easy as discussing their capabilities with your Supplier who may have had on-going business with them. It may however require that you jointly check them out in detail if they do not have an on-going relationship.

Good Suppliers are as concerned with not wanting to bring on a subcontractor
who is unknown or which has potential problems as:
•A Bad Subcontractor will affect your perception of them as a Supplier
•A Bad Subcontractor will increase their management time on the project costing them money and resources
•A Bad Subcontractor will be a source for potential claims from other subcontractors for delays and hence will increase the amount of time it
take them to manage all the claims
•A Bad Subcontractor can cause problems with good subcontractors who because of delays will have conflicting commitments.
They should be willing to, as a team, help make all the necessary checks with
you to make you feel comfortable with the total team you have assembled.


As a part of the interview you should also ask them to provide you with the most recent Audited Financial Statement, with the Auditor's notes.
In certain instances where there is added concern, you may also request the most recent balance sheet in addition to the prior audited
report. Obtain a copy of a fully audited, unqualified financial statement as of fiscal year-end. CPA prepared, un-audited interim financial statements are acceptable as long as we have a year-end financial statement. The past two or three years of financial statements are helpful in establishing trends. The financial statement should include as a minimum:
Letter from Accountant (Opinion Letter)
Balance Sheet
Income statement (Profit and Loss)
Notes to the financial statement
Source and use of funds Exhibit*
Change in Financial Position Exhibit*
Schedule of jobs in Progress*
The items marked with an asterisk (*) are helpful for analysis purposes, but are not necessary.

You should obtain bank references, major supplier credit references and client

Evaluation of the Financial Statement.
The first thing to understand in the financial statement is the method of
accounting. The notes to the financial statement should include what method
of accounting the company is using to recognize its income. Contractors generally use either of two accepted methods of accounting:
•Percentage of Completion, which recognizes income on work as a contract
•Completed Contract, which recognizes income only when a contract is

Generally, percentage of completion is most common because it allows contractors to periodically recognize income on a current basis rather than irregularly as contracts are completed. When the completed contract method is used, it does not reflect current performance when the period of the contract extends through more than one accounting period. Contractors may, for tax purposes use the percentage of completion method for financial reporting and the completed contract method for tax purposes.

In your evaluation you would check all of the references as follows:
Bank references - Credit lines, availability, guarantees given
Suppliers - Credit History
Subcontractors - Payment performance

The following ratios that are given are generally considered norms for general construction in the U.S.. You should use them as guidelines. If a contractor does not fall within the guidelines there may be circumstances or explanation for the situation. On the other hand, if they do fall within the norms, it
alone does not automatically qualify them to do the job.

1. WORK ON HAND divided by: ADJUSTED WORKING CAPITAL= 20 or less









WORKING CAPITAL. The working capital is the amount of current assets the contractor has in excess of current liabilities. When determining the
working capital, review carefully what the accountant has classified as current. Generally cash or equivalents, receivables, inventory and
under-billings are considered current assets. Prepaid amounts and cash surrender value of Life Insurance are not considered current. Use your judgment on the current status of notes receivable from sources such as employees, owners,or subsidiaries of the contractor to determine if they can in fact be
converted to cash or consumed in the year. Current liabilities include: accounts payable, over-billings, current portions of notes payable and
other current obligations such as taxes, payroll, etc.

NET WORTH OR EQUITY/ADJUSTED NET WORTH. This is the total of capital stock and retained earnings less treasury stock and dividends. The number as given
on the financial statement must be reviewed to see that the assets which are stated are hard assets. To arrive at adjusted net worth deduct items such
as goodwill from the stated worth.

WORK ON HAND OR BACKLOG. This value represents the estimated cost to complete for the current work that the contractor has on his books at this time. To
determine this number take the total cost of all work and deduct the cost to date.

ADJUSTED CURRENT ASSETS. This equals the current assets as listed by the accountant less items which you do not consider such as Prepaids or cash
surrender value of life insurance. Also review Notes and accounts receivable from the Owner's of the Company or Subsidiaries.

ADJUSTED CURRENT LIABILITIES. This equals the current liabilities as given on the balance sheet by the accountant and adjusted (Up or down) for other
items which should be considered current.

ADJUSTED WORKING CAPITAL. After reviewing the current status of the assets and liabilities to determine the adjusted Current assets and Adjusted Current
Liabilities, subtract the adjusted Current liabilities form the adjusted current assets to find the adjusted working capital.

ANNUAL REVENUE. The accountant will show this on the income statement(profit or Loss) and will be denoted by sales, income, volume or revenues.

DIRECT JOB COSTS. These are the costs of the job exclusive of indirect job overhead and profit.