Key Metrics Construction Companies Should Watch
Key Performance Indicators (KPIs) measure how well a business performs compared to its objectives. The most common KPIs construction companies watch include the following:
- Profit. Key profitability ratios include the return on assets (ROA), which indicates how well assets are utilized to generate profits, and return on equity (ROE), which measures the profitability of a business in relation to equity. Gross profit margin shows the amount of profit made before deducting selling, general and administrative costs, whereas net profit margin reflects how much of each dollar earned is actual profit.
- Costs. Construction projects often have tight budgets, which makes cost management critical. Contractors can use KPIs such as cost per square foot, cost of materials and labor costs to track and manage project costs. Cost variance (CV) should also be measured. It is the difference between the actual cost of a project and the planned budget.
- Cash Flow. Positive net cash flow shows the company is bringing in more than it spends. Conversely, negative net cash flow typically means the business spends more cash than it makes. Contractors use net cash flow to measure money moving through a business during a specific period, and projected cash flow to provide a forward-looking view of money that will enter and leave a business.
- Performance. These KPIs include average revenue per hour worked, percentage of labor downtime, percentage of equipment downtime and waste/recycling per job. Percentage of labor downtime helps businesses calculate productivity on a construction project.
- Quality. Delivering a quality product can help contractors grow and make greater profits. KPIs that measure quality on the job are the number of defects, number of defects due to workmanship, time to rectify defects, number of site inspections conducted, the ratio of the number of inspections passed to the total number of inspections, the total cost of rework and customer satisfaction.
- Safety. Safety metrics can help reduce insurance and legal costs while keeping employees and subcontractors productive. Important construction safety KPIs include safety/incident rate, number of safety meetings/communications and number of accidents per supplier.
- Employees. Happy employees are typically more productive than disgruntled workers. Therefore, KPIs like worker satisfaction, training completion percentage and turnover rate can help contractors retain workers and identify opportunities to improve productivity.
- Work-In-Progress (WIP). WIP shows the status of a construction project: whether it is on budget, overbilled or underbilled as compared to the project timeline. There are several vital ratios relating to WIP that contractors should watch: contract gain/fade, underbillings-to-equity, underbillings-to-working capital, overbillings-to-cash, total job borrow, total backlog and total backlog gross profit. Creditors and banks use WIP reports to understand a contractor’s profitability. This can significantly impact a contractor’s ability to secure financing, bonding and lines of credit for projects.
Leading KPIs predict where the company is likely to go while lagging KPIs measure what has already been achieved. For example, labor productivity is a leading indicator of job profitability. Net profit, gross profit, current ratio and accounts receivables (AR) turnover are examples of lagging KPIs. Burn rate is a lagging indicator as it describes how much money is spent (or lost) for any period. Runway is a leading indicator as it predicts how long cash would last with a specific burn rate.
The Construction Financial Management Association (CFMA) conducts an annual survey so that contractors can compare their financial performance to others in the industry. Its 2022 Annual Financial Survey found profitability measures were strong for most companies during 2021. Return on assets (ROA) grew from 13 percent in 2020 to 15 percent in 2021, and return on equity (ROE) was up 6.5 percentage points at 36.1 percent from pre-pandemic (2019) levels. The survey findings are available at cfma.org. Construction contractors can also purchase CFMA’s Financial Benchmarker to compare their financial performance against similar company and industry data. Benchmarking is essential to help contractors make strategic decisions, improve productivity, reduce costs and increase profits.
Watching KPIs is crucial to a contractor’s success. KPIs will help identify problems before they become issues and show contractors where there are opportunities for growth.
Salvatore M. Schibell
Salvatore M. Schibell, CPA, CFP, CGMA, MS, MBA, is the tax partner at Lawson, Rescinio, Schibell & Associates, P.C. He is a member of the NJCPA.
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This article appeared in the Summer 2023 issue of New Jersey CPA magazine. Read the full issue.