Financial health indicators: an analysis of financial statement information to determine the financial health of DoD contractors

Abstract

Prior to awarding a contract, government contracting officers must be able to determine the financial health of prospective contractors. In fact, according to the Federal Acquisition Regulation (FAR) 9.104- 1(a), the very first general requirement to being considered a responsible prospective contractor is to show adequate financial resources to perform the contract or the ability to obtain financing. The purpose of this research is to identify a financial assessment framework that could assist DOD contracting officers with determining the financial health of potential DOD contractors. This research study may help DOD contracting officers determine the financial health of potential contractors prior to awarding a contract. The findings of this study provide a recommended framework that a contracting officer could follow in order to assess the financial health of a prospective contractor. The framework includes a ratio analysis using selected ratios compiled by this study, as well as a comparative analysis using industry average driven data. The framework also incorporates horizontal and vertical analyses, as well as bankruptcy and fraud analyses. The financial assessment framework created in this study is a comprehensive financial health assessment tool that can be utilized by DOD contracting officers.