ASSESSING FINANCIAL VIABILITY

Principles

1. Financial viability assessment is one of a range of measures designed to reduce risk.

2. The requirements for financial viability assessment should be considered when planning the tender. The process for the assessment of financial viability should be proportionate to the risk of the project.

3. While the information provided for financial evaluations is a historical snapshot which can only give current or short term future likelihoods based on current, known issues and situations, an entity must satisfy itself that, based on that current available information the tenderer it is dealing with is likely to remain financially viable for the life of the proposed contract or can be readily replaced should they become insolvent.

4. A tenderer’s financial viability can rapidly deteriorate or improve with changes to the economic and operating environment. As such it should be recognised that a point in time assessment of viability can only screen out high risk tenderers, and is not a substitute for sound project planning and contract management.

5. Tender request documentation should include a mechanism to allow entities to exclude tenderers that are considered too high risk. The tender request documentation should also specify the documents that are required to undertake a financial viability assessment of the preferred tenderer.

6. Financial statements can be analysed to provide insight into a tenderer’s financial stability. A range of financial ratios can be used to assess a tenderer’s profitability, liquidity and financial stability. Care should be used in applying the ratios, as standards vary between industries. If a project is assessed as being moderate or high risk, it may be appropriate to seek a professional financial assessment of the preferred tenderer. In all cases, entities should only undertake their own ratio analysis, without professional advice, where they have the expertise to do so.

Last updated: 10 July 2014