.svg)
Current Ratio
What is a Current Ratio?
A Current Ratio is a financial metric primarily used in the construction industry to gauge a company's short-term liquidity and ability to pay off its immediate obligations. It is calculated by dividing a company's current assets by its current liabilities. In construction, current assets include cash, accounts receivables, and inventory (like raw materials and work in progress), while current liabilities encompass accounts payable, income taxes, wages, and current portion of long-term debt. A high ratio indicates a company's robust financial health, implying it has adequate resources to cover its short-term debts. However, it varies depending on the specific business environment, so it is essential to compare this ratio with firms in the same construction sector for accurate benchmarking.
Trusted by trade contractors across the country
Other construction terms
What are Liquidated Damages?
Liquidated damages in the construction industry are a pre-agreed sum specified in a construction contract, which the contractor will pay to the client in the event of a breach of contract, typically when there are delays in completion. This contract clause serves as a protection mechanism for the client, giving an estimate of the potential loss they might incur due to the delay. However, liquidated damages must be a genuine pre-estimate of loss, not a penalty. They are not intended to be a punishment, but a compensation for the client's actual anticipated loss. This approach mitigates the risks and provides predictability for both parties in a construction project. One party cannot claim more than the contracted liquidated damages. They bring certainty to the potentially complex process of calculating actual damages in construction delays, thus fostering an efficient dispute resolution.
What are Direct Costs?
Direct costs in the construction industry refer to the expenses directly related to the actual building process. These essential expenditures are easily traceable to a specific project and vary based on the size or scope of work. Examples include raw materials (like concrete, steel, wood), labor costs that involve wages for the construction crew, equipment hire, and subcontractor fees. If a cost can be directly allocated to a particular construction job and affects the final total bid price for the project, it is considered a direct cost. Management of direct costs is crucial for financial efficiency and profitability.
What is Insurance?
Insurance, in the context of the construction industry, refers to a contract known as an insurance policy, that a company or individual buys from an insurance provider to reduce the financial risk associated with potential loss or damage. There are numerous types of insurance policies like liability insurance, builder's risk insurance, and workers compensation that are specifically designed to safeguard construction businesses against various hazards. For example, if a construction site accidentally experiences unexpected damages, having proper insurance can alleviate the burden of these costs. Each insurance policy has a premium and a deductible, and the terms and conditions can extensively vary based on the policy. The selection of insurance types and coverage should be made meticulously considering the nature and scope of the construction project.
Ready to end the fire drill and get paid faster?
