Financial Prequalification for a Contractor by using a Dynamic Threshold Cash Flow Based Model

Abstract—Prequalification plays a crucial role in selecting a capable contractor in construction project. Contractor prequalification studies seldom address contractor financial risk, despite the importance of contractor’s evaluation in successful project completion. Based on a cash flow based structural model using the dynamic threshold by Liao, Chen and Su, this study evaluates the credit quality of construction contractor. Via uses of the area under curve (AUC), the discriminatory performance of the cash flow model in ranking the credit qualities of construction contractors for three year is evaluated, in whichS & P issuer credit ratings are used as the benchmarks. Empirical results indicate that the proposed model has an excellent discriminatory power under AUC. Result of this study demonstrates that the proposed model is highly effective in evaluating the credit risk of construction contractors. Importantly, the proposed model only requires financial statement, making it applicable to both listed and private construction contractors.