Contractor financial prequalification using simulation method based on cash flow model

• We assess the credit qualities of construction contractors.
• We use historical free cash flow to firm to simulate future cash flow paths.
• The credit quality scores of construction contractors are simulated.
• We demonstrate the effectiveness of assessing credit quality for contractors.

Although construction contractor prequalification highly prioritizes the financial capacity of the construction contractors, a special assessment of contractors' financial capacities has seldom been performed in the construction industry. Cash flows largely reflect a contractor's capacity to meet its financial obligations, this study assesses the credit qualities of construction contractors by using a cash flow based credit model (CFB credit model). The model uses historical continuously free cash flow to firm of construction contractors to simulate possible future cash flow paths. The credit quality scores of construction contractors are then assessed using the CFB credit model. The results demonstrate the effectiveness of assessment of the credit quality of construction contractors, and recommend the clients to adopt it in prequalification of the contractors' financial abilities.