Quick Ratio vs. Current Ratio: Which Matters More for Construction Companies?
- Cost Construction Accounting
- Nov 13, 2025
- 8 min read
Your surety agent just asked for your "liquidity ratios," and you froze. You know you have a balance sheet. You think your numbers look fine. But quick ratio? Current ratio? Which one matters, and what do these numbers actually mean for your bonding capacity?
Here's what just happened: Your surety is trying to answer one critical question "If this contractor's projects all go sideways tomorrow, can they cover their bills without liquidating equipment or begging for emergency loans?"
That question determines whether you get bonded for $5 million or $500,000. It determines whether banks approve your line of credit or leave you scrambling for cash to make payroll. And it all comes down to two numbers most contractors never track.
Here's the truth that surprises most construction business owners: these two ratios tell completely different stories about your financial health. One might look great while the other screams danger. And if you don't know which one your surety prioritizes, you're flying blind.
What Are Liquidity Ratios (And Why Sureties Obsess Over Them)
Before we dive into specific ratios, let's talk about what "liquidity" actually means in construction. Liquidity measures your company's ability to pay short-term obligations payroll, supplier invoices, subcontractor payments, equipment leases using assets you can quickly convert to cash. It's not about whether you're profitable. It's about whether you can survive a cash crunch. Think of liquidity like this: profitability is your long-term health. Liquidity is whether you can survive the next 90 days.
Why do sureties care so much about liquidity? Because most construction failures don't happen because companies are unprofitable. They happen because companies run out of cash before they can collect payment. A contractor might have $2 million in accounts receivable and $1.5 million in work-in-progress (WIP). On paper, they're flush with assets. But if they can't pay this week's payroll or next month's material suppliers, those assets become worthless. The surety gets called to finish the project, and that's exactly what they're trying to avoid.
Liquidity ratios give sureties an early warning system. When your ratios start declining, it signals cash flow stress months before you default on a bond. That's why every bonding application asks for your balance sheet, they're calculating these ratios before they even talk to you.
Current Ratio: The "Big Picture" Liquidity Test
The Current Ratio is one of the most straightforward liquidity measures, serving as a litmus test for a company's short-term financial viability. It's calculated using the formula:
Current Ratio = Current Assets / Current Liabilities |
Current assets encompass everything a company expects to convert to cash within 12 months, including cash on hand, accounts receivable (e.g., payments due from clients on completed milestones), inventory (such as stockpiled building materials or unfinished projects classified as WIP), prepaid expenses, retainage receivable (money held by owners), materials inventory, and short-term investments. Current liabilities include accounts payable (bills to suppliers or subcontractors), current portion of long-term debt (due within 12 months), accrued expenses (payroll, taxes, insurance not yet paid), billings in excess of costs (overbilling on projects), customer deposits, and lines of credit balances.
To illustrate, suppose a mid-sized construction company has $850,000 in current assets and $425,000 in current liabilities. The Current Ratio would be $850,000 / $425,000 = 2.0. This means the company has $2 in assets for every $1 in liabilities, suggesting it could theoretically cover its debts if all assets were liquidated within the year.
Advantages in Construction
This ratio is particularly useful in an industry where assets like WIP can represent significant value. It helps stakeholders, including banks and bonding companies, evaluate overall solvency. For instance, surety underwriters often look for a Current Ratio above 1.5 when approving performance bonds for large projects.
What Sureties Want to See
According to CFMA's 2025 Construction Financial Benchmarker, the average Current Ratio for construction firms is 1.9. Industry benchmarks include:
Below 1.0: Red flag, you can't cover short-term obligations.
1.0-1.3: Weak; sureties get nervous, limiting bonding capacity.
1.3-1.5: Acceptable; you'll get bonded, but capacity may be limited.
1.5-2.0: Strong; sureties are comfortable with good bonding potential.
Above 2.0: Excellent; maximum bonding capacity, and banks love you.
Most sureties want at least 1.5, with some accepting 1.3 for established firms.
The Current Ratio's Blind Spot
It treats all current assets equally, assuming WIP or retainage (which might not be collectible for months) is as liquid as cash. In construction, if 60% of assets are tied up in illiquid items like specialized materials, a high ratio might mask an impending cash crisis.
Quick Ratio: The "Can You Pay Bills THIS Month?" Test
The Quick Ratio (or Acid-Test Ratio) refines the assessment by excluding less liquid assets. The formula is:
Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities |
Or, simplified for construction:
(Cash + Accounts Receivable + Short-Term Investments) / Current Liabilities |
Using the earlier example: If quick assets total $500,000 (excluding $250,000 WIP, $80,000 retainage, $20,000 prepaids), and liabilities are $425,000, the Quick Ratio is $500,000 / $425,000 = 1.18.
What Gets Excluded (And Why)
WIP inventory (can't convert partially completed projects quickly), retainage receivable (collectible only at project end), prepaid expenses (already spent), and materials inventory (unless easily salable).
Advantages in Construction
This ratio emphasizes immediate liquidity, critical for handling sudden expenses like emergency repairs during cash gaps. It's especially pertinent where inventory liquidation is slow.
What Sureties Want to See
CFMA's 2025 average Quick Ratio is 1.6. Benchmarks:
Below 0.5: Danger zone, you're dependent on collections or project finishes.
0.5-0.8: Concerning; sureties scrutinize A/R aging.
0.8-1.0: Acceptable (lower in construction due to WIP-heavy sheets).
1.0-1.3: Strong; comfortable with immediate liquidity.
Above 1.3: Excellent; can weather delays easily.
Construction firms naturally have lower Quick Ratios, but sureties aren't alarmed by 0.9 if Current is strong and WIP healthy. Below 0.7 raises flags.
Key Differences Between Quick Ratio and Current Ratio
While both measure liquidity, their scopes differ significantly. Here's a quick comparison:
Criterion | Current Ratio | Quick Ratio |
Formula | Includes all current assets, including inventory | Excludes inventory for focus on high-liquidity assets |
Liquidity Focus | Broad, medium-term (up to 1 year) solvency | Strict, immediate (days/weeks) liquidity |
Best Suited For | Industries with high, salable inventory | Volatile sectors like construction with illiquid stock |
Ideal Benchmarks (2025) | 1.5-2.0+ (CFMA avg: 1.9) | 1.0-1.3+ (CFMA avg: 1.6) |
Potential Pitfalls | Can overstate if inventory is slow-moving | May overlook value of certain inventories |
The core distinction: Current assumes inventory sells within a year, which falters in construction's project-based reality. Quick offers a "worst-case" scenario, making it more reliable for true resilience.
Why These Ratios Matter in the Construction Industry
Construction's unique challenges long timelines, cost volatility, milestone payments, and external risks make liquidity vital. The Current Ratio helps with long-term planning and benchmarking via CFMA's 2025. It's key for securing financing, as lenders prefer above 1.0.
The Quick Ratio is often more critical, revealing vulnerabilities in cash-dependent operations. For subcontractors with tight margins (12-16% for generals, 15-25% for specialties in 2025), it signals resilience against delays.
Real-World Case Study: During the 2020-2023 supply chain crisis, a contractor had a Current Ratio of 2.0 (bolstered by stockpiled materials) but a Quick Ratio of 0.83. When projects stalled, they couldn't liquidate fast enough, leading to shortages and liens. Firms with Quick Ratios above 1.1 pivoted using receivables. CCA recommends integrating into dashboards via QuickBooks or Procore for real-time tracking.
Current Ratio vs. Quick Ratio: Which One Matters More?
Here's the answer most contractors don't expect: it depends on your specific situation.
When Sureties Prioritize Current Ratio:
For established contractors with clean track records (bonded 5+ years, no claims), they trust your WIP management.
Evaluating overall health broadest view of assets vs. liabilities.
Capacity calculations higher Current often means higher bonding limits.
When Sureties Prioritize Quick Ratio:
Newer or higher-risk contractors survival shouldn't depend on project completions.
Economic downturns (e.g., 2023-2025 material surges) tightens requirements for survival without smooth execution.
Aging A/R or growing WIP need liquid assets for delays.
High volume contractors (15+ projects) proof of cash velocity management.
The Real Answer: Both Matter, But Context Determines Priority. Current tells if you're healthy generally; Quick if you'll survive 60-90 days if things go wrong. A strong Current (2.0+) can offset a mediocre Quick (0.7), but weak both lead to cuts. In construction's landscape, Quick often edges out due to illiquid assets. Aim for Quick ≥1.1 and Current ≥1.6.
The Hidden Third Metric: Working Capital
While we're on liquidity, sureties care about working capital, which relates to both ratios:
Working Capital = Current Assets - Current Liabilities |
Example: $850,000 assets - $425,000 liabilities = $425,000 working capital. Sureties use this to gauge bonding capacity. Contractors can handle backlog 10-15 times working capital (e.g., $4.25M-$6.4M here).
But you can have positive working capital with poor ratios: $500,000 assets (mostly WIP) - $450,000 liabilities = $50,000 (positive), but Current 1.11 (weak) and Quick 0.44 (terrible). Sureties examine all three for max capacity.
5 Ways to Improve Both Ratios (Starting This Month)
Accelerate Accounts Receivable Collection: Collect faster to boost quick assets. Invoice within 3 days, follow up weekly on 30+ day invoices, offer 1-2% early discounts, use progress billing, implement liens. Real impact: A Colorado framing contractor cut collections from 52 to 38 days, freeing $127,000 and raising Quick from 0.68 to 0.94 surety approved capacity increase.
Manage Accounts Payable Strategically: Reduce liabilities by using full terms (Net 30? Pay day 30). Negotiate Net 45-60, take discounts wisely, pay subs on time but materials strategically. Real impact: A Texas electrical contractor kept $85,000 off balance sheet, improving Current from 1.42 to 1.63.
Reduce Overbilling on Projects: Overbilling creates liabilities bill accurately via cost-to-cost method, reconcile monthly. Trade-off: Tighter short-term cash but better ratios and avoids returns if projects fail.
Pay Down Short-Term Debt: Lower liabilities by paying revolving lines, refinancing to long-term (moves out of current). Avoid credit cards for big buys. Real impact: An Arizona GC refinanced $180,000, moving $120,000 to long-term Current jumped from 1.38 to 1.71.
Maintain Accurate, Timely Financials: Close books in 15 days, ensure AR/AP/WIP/retainage accuracy. Track ratios monthly, set alerts (e.g., Quick <0.8). Construction accounting is complex job costing and classifications need expertise.
How Construction Cost Accounting Ensures Your Ratios Tell the Right Story
Your ratios are only as good as your balance sheet garbage in, garbage out. Common struggles: Unreconciled A/R (overstated by uncollectibles), inaccurate WIP (estimates vs. costing), incomplete A/P (understated liabilities), misclassified retainage (counted as quick when not), untracked overbilling (inflates ratios artificially).
At CCA, we specialize in construction-specific balance sheets that pass scrutiny:
Accurate A/R management: Monthly reconciliations for real, collectible balances.
Proper WIP calculations: Percentage-of-completion schedules for accurate assets.
Complete A/P tracking: All invoices recorded timely.
Correct classifications: Retainage, over/underbilling handled right.
Monthly tracking: Ratios, trends, alerts.
Surety-ready financials: Accurate, timely, professional.
With 150+ clients nationwide, 15+ years expertise, CFMA membership, and Sage 100 certification, we build bonding-ready financials.
Conclusion
Both the Current and Quick Ratios are indispensable, but in construction's high-stakes environment, the Quick Ratio's immediate focus often proves more valuable especially with 2025 CFMA averages at 1.9 and 1.6, respectively. Use them together for resilience and growth. Improving isn't about massive changes, faster collections, strategic payables, accurate billing, and clean financials unlock bonding and bids.
Ready to get your ratios working? Contact Construction Cost Accounting for a free balance sheet review and construction-specific support. Check our blog for "Financial KPIs for Contractors" or "Navigating WIP in Volatile Markets." Let's build your future together.
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