A risk analysis system for evaluating construction contractors by potential creditors

Abstract

This thesis investigates the financial business relationship between UK construction materials suppliers (creditors) and contractors (potential debtors). Particularly, the work concentrates upon suppliers' decision to grant credit (or otherwise) and to what level such credit limits should be granted. A literature review highlighted the inadequacies of, and lack of previous research relating to current creditworthiness evaluation procedures. Based on this, a conceptual model was developed, to assist suppliers in determining if the risk associated with granting credit resulted in a worthwhile gain, or not. Subsequent research into the variables in the conceptual model identified that the decision to grant credit was a complex one, and that a definitive creditworthiness evaluation model could not be constructed within the time and resource constraints of one particular PhD. However, the underlying notion that suppliers had to perceive the risk of granting credit as 'worthwhile' continually occurred throughout the research. Subsequently, a utility model was determined which took into account both creditor and debtor financial characteristics, to evaluate the utility achieved by a supplier from their business interaction with a contractor (potential debtor). A UK nation-wide survey of suppliers' credit control and debt collection departments' practices was conducted. This emphasised the importance of materials suppliers to the construction industry. Four multivariate discriminant analysis (MDA) models were constructed based on the data resulting from the survey. The MDA models identified which practices of a supplier's credit control department had most influence upon: i) the utility achieved from furnishing a contractor with credit; and ii) from (i) discovered variables needing consideration in the conceptual creditworthiness model. The MDA models were validated by an independent hold-out sample of suppliers' characteristics. The need for better creditworthiness evaluation procedures is emphasised throughout the thesis.