Are you about starting a construction business? If YES, here are top 10 performance indicators for contractors that you can use to measure your growth rate.
Key performance indicators are very important and beneficial to almost all types of business. This is because they can hep businesses keep track of their profitability and efficiency at the same time. As a contractor, it is very important to make use of key performance indicators so as to be able to determine the best practices and drive success toward your business.
If you have an intention of getting the best out of your construction project and business in general, then you should only utilize the best key performance indicators. It is a well-known fact that running a company is no walk in the park. This is because you will be continuously facing an unprecedented number of pressures that can come from your own business as well as other external factors.
In the latter, this can include the profit margins, the ever changing technology, the expectations and the declining workforce. As a contractor, you should follow the best practices so as to get the best results. Because in doing so you will be able to increase your profit and reduce the risk you may face in the future as well.
Why the Need for KPIs in the Construction Industry?
The construction industry is faced with even more technicalities and difficulties than your average business. As a matter of fact, over 10,000 construction businesses fail every year and billions of dollars have been lost since 1998 alone. However, there is no need to panic because if you have the best key performance indicators, you can definitely succeed here.
Experts in this field have come to realize that in order for a contractor to succeed, they should be able to fine tune their company by means of aligning the processes, the people and the technology so that they can produce results that soar above the average of this industry. The construction industry has already accepted the key performance indicators that are able to indicate the overall health of the company.
If a contractor is able to track, analyze and interpret the key performance indicators that he or she has gathered, then the construction company can build long-term resilience while also meeting short-term financial goals.
Key performance indicators can as defined as the crucial indicators that show if a business is performing according to laid down plan. The “key” part of the acronym indicates prioritized metrics. The “performance” part of the acronym refers to ways in which your company operates or behaves. The “indicator” aspect usually are quantitative data, such as numbers or percentages, that present a quick picture of a condition and its favorable or non-favorable status.
Here are some key performance indicators that will give a reading on a companies’ health and performance. You should bear in mind that you should not view key performance indicators individually, rather they should be viewed collectively so as to get the whole picture.
5 Best Key Performance Indicators for Contractors You Must Know
1. Profitability: Construction Company’s usually make their profits from two sources. Operational profit is derived directly from your company’s construction activities, while non-operational profit is derived from independent opportunities like improved cash management, savings from self-insurance programs and income from other profit centers.
There are three primary key performance indicators for measuring profitability:
- Gross Profit Margin: gross margin is calculated by subtracting your direct cost of work from your revenue divided by revenue i.e. (Revenue – Direct Cost of Work)/Revenue. The number that you get from this calculation shows the percentage of sales revenue that is not paid out in direct costs (costs of sales).
The gross margin is a very important metric that can be used in business planning because it indicates how many cents of gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more efficient.)
- Net Profit Margin: net profit margin is calculated by subtracting the indirect costs from gross profit and then dividing it by revenue i.e. (Gross Profit – Indirect Costs)/Revenue. This is an important metric. As a matter of fact, as time goes on, it is one of the more important figures you should keep in mind.
It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts, and the higher the number the better.
- Return on Equity: this is calculated by dividing the owner equity by the net profit (i.e Net Profit/Owner Equity). This measure shows how much profit is being returned on the shareholders’ equity each year. It is a vital statistic from the perspective of equity holders in a company, again, the higher the return the better.
2. Cash flow: money is the lifeline of all businesses. You will need money to pay your staff, pay for materials and supplies, reimburse subcontractors and meet general expenses, while still meeting lenders’ and sureties’ liquidity requirements. A broad cash flow reading is the cash demand period. It is driven by three balance sheet accounts: accounts receivable, accounts payable, and overbillings/underbillings:
- Cash Demand Period: this can be derived by subtracting average days to pay creditors from the average days required to fund operation i.e. (Average Days Required to Fund Operations – Average Days to Pay Creditors). This is basically the difference between the length of time it takes to receive payment for work and the time you take to pay your creditors.
- Days in Accounts Receivable: this metric is derived by using the formula 365/ (Revenue/Accounts Receivable). Top-performing contractors reduce this by managing client relationships and collections carefully. This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. The lower the better.
- Days in Accounts Payable: this metric is derived using the formula; 365/(Direct Cost/Accounts Payable). By making a judicious use of your trade credit, you can be able to maintain flexibility. This ratio shows the average number of days that lapse between the purchase of material and labor, as well as payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better.
- Overbillings/Underbillings: this metric is derived by subtracting earned revenue from billing and then dividing the result by the earned revenue. i.e. (Billings – Earned Revenue)/Earned Revenue. Aggressive billing practices can help reduce underbilling for work performed and promote prudent overbilling.
3. Liquidity: this metric seeks to measure the ability of a company to meet with its short term obligations. They are particularly important to your financial partners and creditors.
- Current Ratio: this is derived by dividing your current assets by your current liabilities. It seeks to compare the availability of current assets to satisfy current liabilities. Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect measure, but it is a good one.
- Working Capital Turnover: this is gotten using the formula; Revenue/(Current Assets – Current Liabilities). Working capital measures the amount of money that a company has at its disposal that can be invested in operations to generate more revenue. Working capital turnover measures how aggressively these funds are being used to generate income.
4. Leverage: your company’s financial leverage indicators tend to have a direct effect on your company’s risk profile as well as its ability to repay debts and take advantage of new opportunities.
- Debt to Equity: this is gotten by dividing your Total Liabilities by Owner Equity. Debt to equity ratio is one of the most important ratios when considering your key performance indicators. This measures how highly leveraged your company is. A higher ratio creates additional risk. A ratio of 3.0 or lower is usually desirable.
- Revenue to Equity: this is derived by dividing your revenue by the owner equity. A high ratio indicates you have less flexibility to absorb project losses.
5. Forecasting: if you want to be successful as a contractor, you should be able to carefully monitor work in the pipeline, and project sales and revenue at least one year out.
- Backlog to Equity: this is gotten by dividing Backlog by Owner Equity. There should be a healthy balance. If you have too little backlog, you company will stumble and if you have too much backlog, you will definitely become overwhelmed.
Other examples of Key performance indicators for the Construction Industry include;
- Number of accidents
- Number of accidents per supplier
- Actual working days versus available working days
- Cash balance – Actual versus baseline
- Change orders – Clients
- Change orders – Project manager
- Client satisfaction – Client-specified criteria
- Client satisfaction product – Standard criteria
- Client satisfaction service – Standard criteria
- Cost for construction
- Cost predictability – Construction
- Cost predictability – Construction (client change orders)
- Cost predictability; Construction (project leader change orders)
- Cost predictability – Design
- Cost predictability – Design and construction cost to rectify defects
- Customer satisfaction level
- Day to day project completion ratio – Actual versus baseline
- Interest cover (company)
- Labor cost – Actual versus baseline
- Labor cost over project timeline
- Liability ratio (over asset) on current versus completion comparison
- Number of defects
- Outstanding money (project)
- Percentage of equipment downtime
- Percentage of labor downtime
- Percentage of backlogs over project timeline
- Percentage of unapproved change orders
- Productivity (company)
- Profit margin – Actual versus baseline profit margin over project timeline
- Profit predictability (project)
- Profitability (company)
- Quality issues at available for use
- Quality issues at end of defect rectification period
- Ratio of value added (company)
- Repeat business (company)
- Reportable accidents (including fatalities)
- Reportable accidents (non-fatal)
- Return on capital employed (company)
- Return on investment (client)
- Return on value added (company)
- Time for construction
- Time predictability – Construction
- Time predictability – Construction (client change orders)
- Time predictability – Construction (project leader change orders)
Here are types of data these Key performance indicators might scrutinize:
4 Ways Key Performance Indicators Can Help your Construction Business
a. Safety: it is quite obvious that a safer construction site incurs less risk and as a result, less long term cost. Whenever safety is compromised in your site, you could end up wasting your precious time and money to rectify it. In addition, safety incidents can mean higher insurance payments.
Therefore, knowing and understanding your safety rating is key to reducing your costs and keeping your staff productive. Important construction safety key performance indicators include: Safety/ incident rate, Number of safety meetings/communications, Number of accidents per supplier.
b. Quality: having a good grasp on your project quality will help to reduce the need for changes to the work and ultimately prevent you from wasting money and time. Therefore, keeping a thumb on quality metrics is a surefire way to keep on budget and schedule.
The following construction key performance indicators will help your team maintain a high level of quality: Number of defects, Number of defects due to workmanship, Time to rectify defects, Number of site inspections conducted, Ratio of the number of inspection passed to total number of inspection, Total cost of rework, Customer satisfaction, Internal customer satisfaction
c. Performance: Performance metrics can provide a project’s productivity. Calculating the amount of time and efforts that goes into a construction project can allow teams to adjust and allocate additional resources or tools to the areas that need them the most to reach project goals.
Here are a few Key performance indicators related to construction performance: Waste/recycling per job, Average revenue per hour worked, Percentage of equipment downtime, Percentage of labor downtime
d. Employees: it is very important to track your employee’s performance, measure their development and satisfaction rate in order to get the best from them and your construction. Staff members who are invested in and happy will be able to work more efficiently for the long-term and contribute more to the bottom line.
In addition, employee turnover can present a hefty cost to contractors thus reducing this cost can save teams enormously. The following construction Key performance indicators are vital to employee retention: Worker satisfaction, Training completion percentage rate, Turnover rate
In conclusion it is very important that the indicators are timely and relevant for the company since being aware in the early part of the business can help you and your workforce to avoid problems and get great opportunities instead.
You should be prepared for an ongoing team effort to improve Key performance indicators so they will be as beneficial, relevant and up to date as possible. What this means is that, you will have to build in time for discussion and adaptation including digital change.
It is good to note that when you are considering key performance indicators for construction, you should not just focus on the financial metrics.
Even though keeping a watchful eye on financials is essential, adding new construction Key performance indicators that relate to safety, quality, performance and staff are very important in order to understand your project’s full story. In time, this will allow for better control of costs and schedule and increase your company’s bottom line.
You key performance indicators should be tracked from time to time in order to note a pattern. It is recommended to take measure of some indicators on a monthly basis — especially as you pursue a change in strategy — to get an early reading on whether you are gaining or losing ground.