The Problem with NFCC

Government agencies use Net Financial Contracting Capacity (NFCC) during bidding to ensure contractors have the capacity to complete an infrastructure project. However, challenges arise after the project has been awarded when the contractor simultaneously gets other projects with no monitoring of the NFCC. This is a significant gap in the government’s contract implementation guidelines since the NFCC is only required during the bidding stage. 

How do we calculate the NFCC?

NFCC = [(Current assets minus current liabilities) (K)] minus the value of all outstanding or uncompleted portions of the projects under ongoing contracts, including awarded contracts yet to be started coinciding with the contract to be bid.

Where: K = 10 for a contract duration of one year or less, 15 for a contract duration of more than one year up to two years, and 20 for a contract duration of more than two years.

The values of the bidder’s current assets and current liabilities shall be based on the data submitted to the BIR, through its Electronic Filing and Payment System (EFPS).

Contractors understandably need to have several projects going on at any given time to maintain and grow their business. But risk management requires ensuring the contractor does not become overstretched with other projects. Project delay due to an overstretched contractor is a critical risk since the contractor will have difficulty securing the necessary financing to finish the project. The deterrent effect of blacklisting is minimal since it only lasts a year during which large contractors simply get contracts from the private sector.

We’ve heard of many government agencies start off with a good relationship with their contractors, and then delays slowly creep-in such as a decreased workforce assigned to the project or delays in procuring required materials and equipment, eventually building up to an impasse. While RA 9184 provides penalties and forfeiture of bonds, using these remedies is counter intuitive since it is after the face and further tightens the depleting resources of an overstretched contractor.

The threat of liquidated damages is an effective deterrent that keeps the contractor’s managers on their toes, but liquidity and NFCC are issues with the top management and owners. The risk treatment strategy for such an issue should be to avoid it altogether. 
Here are some strategies government agencies can consider, which ideally should be made part of the Special Conditions of the Contract for Bidding Documents:
  • Require Quarterly NFCC Updates: Project Managers for government projects should require contractors to provide quarterly NFCC updates under oath during contract implementation, especially for critical projects. This gives Project Managers an early warning system on the contractor’s capacity vis-à-vis the remaining work for the project. 
  • Mitigate NFCC Shortfalls at the Earliest Possible Time: When a contractor’s NFCC falls short of the required amount to finish the project, proactive measures should be taken, such as requiring the contractor to secure another letter of credit, or increase the current one from an accredited bank. This financial safeguard ensures that adequate funds are available to cover NFCC deficiencies, safeguarding project continuity. 
  • Require Quarterly Interim Financial Statements Under Oath: Measuring financial capacity is not solely dependent on the NFCC. Contractors can prove liquidity by a credit line, or a certificate of a hold-out on cash deposit,. Nonetheless, continuing and updated knowledge of the NFCC on shorter intervals would warn the procuring entity of the possibility that the current resources of the contractor are becoming overstretched across different projects. A certificate of deposit, without a clause for garnishment or trust agreement, is just a statement of availability of funds at that given time. These funds might be shared with other projects or concerns. Cash inflow based on the current assets of their interim financial statements is a better determinant of its capacity to finance the remaining work and make good on any credit line. 
Early detection is key to managing this risk. Adding this to the risk management system for any project does not require any new law or regulations since it can be made part of the required reports. More importantly, it empowers clients and contractors to make informed decisions, mitigate project delays, and ensure the successful and timely completion of vital projects. For large infrastructure projects, Construction Management Supervision (CMS) professionals are also key in making sure this system is effective.

The Authors

Engr. Florel Cruz

Lead Author

Atty. Zennia Barrion

Lead Author

Noah Nojadera

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