Can This Contractor Carry the Job? A Worked Capacity Assessment

A step by step assessment of whether a contracting company has the financial and resource capacity for a specific contract, worked through in illustrative figures.

Capacity is not solvency. A profitable contractor can still be unable to carry your project, because a construction contract consumes working capital for months before the money comes back. The assessment below works through one contract against one company using illustrative figures, and the method matters far more than the numbers.

The situation

You are about to award a building contract with a sum of 24 million riyals over an 18 month programme, with monthly valuations and payment within a stated period after certification. The preferred bidder is a company with annual turnover of about 90 million riyals and five live projects. The question is whether this contract fits inside its capacity, or whether awarding it would make your project the one that suffers when something elsewhere goes wrong. Every figure here is illustrative and chosen to show the arithmetic.

Assumptions (illustrative)

• Contract sum: 24,000,000 riyals over 18 months.
• Contractor annual turnover from the latest accounts: 90,000,000 riyals.
• Current and committed order book: 140,000,000 riyals, of which 60,000,000 riyals is scheduled in the next 12 months.
• Net current assets from the latest balance sheet: 7,000,000 riyals.
• Advance payment offered: 10 per cent of the contract sum, against a guarantee.
• Retention: 5 per cent deducted from each valuation.

Step 1: Convert the contract into an annual revenue requirement

The contract sum of 24,000,000 riyals spread over 18 months averages 1,333,333 riyals a month, or 16,000,000 riyals in a 12 month period. Construction spend is rarely level, so assume the peak year runs at 1.3 times the average, giving roughly 20,800,000 riyals in the busiest 12 months.

Your project will ask the company for about 23 per cent of its current annual turnover at peak. As a rough working rule, a single contract taking more than a quarter to a third of annual turnover concentrates risk heavily, so this one sits just inside the range where it deserves a closer look rather than an automatic pass.

Step 2: Test the order book against delivery capacity

Committed work in the next 12 months is 60,000,000 riyals. Adding your peak year of 20,800,000 riyals gives 80,800,000 riyals against demonstrated annual turnover of 90,000,000 riyals.

The total is below the company demonstrated throughput, which is reassuring on paper. The caution is that demonstrated turnover was achieved with a particular team, and growth in the order book does not automatically come with growth in supervision. The next step is to look at people rather than money.

Step 3: Estimate the working capital the contract will absorb

Assume the contractor spends on labour, plant and materials through a month, applies for payment at month end, waits for certification and then for payment. Treat the exposure as roughly two months of spend plus retention. Two months at the peak rate of 1,733,333 riyals is 3,466,666 riyals, and retention at 5 per cent accumulating to 1,200,000 riyals by completion adds to that. Call the peak exposure 4,700,000 riyals, reduced by the advance payment of 2,400,000 riyals if it is paid early and not yet repaid.

At its worst point your contract alone could tie up something close to 4 million riyals of the company money. Against net current assets of 7,000,000 riyals, which must also support five other projects, that is a significant share, and it explains why payment discipline on your side is a delivery issue rather than an accounting one.

Step 4: Check the resource requirement in people, not riyals

Ask the contractor for a resource histogram. If the peak staffing for this contract is one project manager, two engineers, one planner, one quantity surveyor, one safety officer and four foremen, compare that with the company total technical staff and the posts committed to other projects.

If the histogram requires people the company does not currently employ, the real question becomes recruitment, and recruitment during mobilisation is the single most common reason a programme slips in month one. A credible answer names individuals or states a recruitment plan with dates.

Step 5: Stress the assessment with one adverse event

Assume one of the five live projects suffers a three month payment delay of 3,000,000 riyals. Deduct that from net current assets of 7,000,000 riyals, leaving 4,000,000 riyals against your peak requirement of about 4,000,000 riyals and the needs of four other sites.

Under that single event the company is stretched to the point where somebody waits. That is the realistic failure mode: not insolvency, but slow procurement and thin supervision on whichever project has the least pressure behind it. Structuring your contract so that it is never that project is a design decision you make now.

Step 6: Translate the assessment into contract terms

If the assessment shows a tight position, the responses are commercial rather than a refusal to award: a shorter valuation and certification cycle, direct payment visibility for critical subcontractors, an advance payment tied to a guarantee that reduces as it is repaid, a performance security sized to the cost of completion rather than a conventional percentage, and named key personnel with restricted substitution.

Each term addresses a specific finding from the assessment. The value of doing the arithmetic is that you can argue for these terms with a reason rather than as a general request for comfort.

What changes the answer

• Payment cycle length: every additional week between application and payment increases the working capital the contractor must find, and on a contract of this size the effect is measured in hundreds of thousands of riyals.
• Advance payment: paying it early reduces the contractor exposure substantially, which is why it buys goodwill, and why it must be secured by a guarantee that reduces as it is recovered.
• Retention percentage: holding a higher percentage improves your security and directly worsens the contractor cash position, so the two effects have to be weighed rather than maximised.
• Material procurement timing: a contract requiring large early purchases of imported material shifts the cash peak forward and makes the first three months the critical period.
• Turnover concentration: if your contract were 40 per cent of annual turnover instead of 23 per cent, every finding above becomes materially more serious and the security package should change.

What the numbers tell you

• Capacity is about timing and concentration, not about whether a company is profitable.
• The ratio of contract value to annual turnover is the fastest single screen, and anything above roughly a third deserves a full assessment.
• Your own payment behaviour is part of the contractor capacity, so a slow certification process converts a sound contractor into a struggling one.
• A resource histogram with named people is better evidence than any financial ratio, because delivery fails through absent supervision long before it fails through insolvency.
• The purpose of the assessment is to design the security and payment terms, not simply to award or refuse.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira builds and supervises projects across Saudi Arabia, and the commercial discipline above is how its projects stay inside their budget and their programme. Send the drawings, the contract or the site and Domira will tell you where the risk actually sits.