If you run a construction business, you already know how difficult it can be to manage costs. Unlike a more static business, construction costs can vary wildly, making it difficult to increase profitability and improve operational efficiency.
This specific challenge within the construction industry has been in the spotlight in recent years, exacerbated by labor shortages and supply chain issues. As a result, this has caused businesses around the world to struggle with fluctuating costs for goods and raw materials.
Construction companies have been hit with these issues harder than most businesses, and it makes calculating profits for each job extremely time-consuming. So what can construction businesses do to overcome these challenges?
The answer is construction KPIs, short for Key Performance Indicators. Each specific construction KPI helps business owners analyze different aspects of their company at a glance and quickly assess which areas are in need of improvement.
In this article, we'll go over the importance of tracking KPIs for construction companies and how you can apply them to your business to maximize profits and improve performance.
Think of KPIs as similar to statistics for a baseball team. A quick glance at a baseball team's offensive and defensive statistics can quickly tell you where they excel and where there is room for improvement. In addition to measuring a company’s success, KPIs serve other functions as well. For example, construction KPI contracting can be used as an agreement between parties where certain metrics need to be met in order to fulfill the contract.
The truth is there’s no one-size-fits-all set of KPIs. There are no set KPIs for any business in any industry. Ultimately, KPIs can be defined based on whatever is most important to that business at that particular time in its growth or maturity phase. But when it comes to construction, there are a few general construction company KPIs that will always provide valuable insights into the business.
Most of these Key Performance Indicators for construction companies will revolve around core areas of any business, including profitability, costs, safety, and labor statistics. However, these generalized KPIs can be broken down further to include other relevant factors.
Let’s look at eight of the most important construction Key Performance Indicators and get into the nitty gritty of each construction KPI.
Naturally, this one comes in at the top of the list because the main goal of every business is to turn a profit. Otherwise, it can’t continue providing services. But let’s look at exactly what “profit” means.
Profits are broken down into two main components. The company's gross profit margins and net profit margins:
Monitoring this construction KPI is crucial because a construction company may have a healthy gross profit margin per job. But that same company can be burning through cash with high debt payments and other expenses that are crushing the net profit margin.
A major discrepancy between gross and net profit margins can mean the business needs to work on cutting expenses. It could also mean that the pricing for each job does allow for enough margin to cover the business’s operating costs. Either way, this KPI can alert you when something is wrong and how to fix it.
As any construction business owner knows, safety is always the #1 priority. Job sites can be dangerous and adherence to safety protocols for accident prevention is crucial for mitigating risk and keeping workers safe.
Workplace accidents also have an effect on a company’s bottomline. Incidents can drain resources, result in lawsuits, and cause high employee turnover due to fear or dissatisfaction. So while the well-being of employees is the first concern, accidents are also bad for business.
But how do you measure something as abstract as safety? A few examples of KPIs a construction company will want to monitor include its rate of accident reports, both overall and per job. Companies can also track how often safety meetings are conducted and protocols revisited to make sure they are up to date.
Being able to spot warning signs early on will help to prevent workplace accidents, increasing the overall safety and health of your business, as well as your dedicated employees.
Construction projects almost always involve several different moving parts. As a result, issues may arise from time to time after a project is completed that require some amount of revision or repair. Nothing is perfect, but if these issues start to build up, the lost time and money spent fixing problems can quickly reduce overall profits. That’s why quality control is an important part of the construction process.
Let’s look at some construction project KPI examples that center around measuring quality control:
Monitoring these KPIs can help offer insight into which areas may be most prone to defects or issues with workmanship. Businesses can then address these specific areas with new training or improved quality control measures.
This one is obvious — any business will want to monitor their cash flow. However, construction projects require materials and labor before construction even begins, making this KPI even more crucial. After all, not having the working capital on hand can limit what jobs you’re available to take on.
Another common issue is that payments for completed jobs are often delayed until long after completion, so cash flow must be managed during this entire time to ensure payments and other liabilities can be met.
Cash flows can be broken down into the following distinctions:
Cash flow KPIs are meant to provide a summary overview of an overall business's financial health. They are best used against historical data measuring the same metrics. If problems are found in these summaries, then further digging will be needed to find the cause or problem areas of the business. If possible, it helps to use software that provides a construction KPI dashboard to help organize historical data.
A quick ratio shows a company's ability to pay off short-term liabilities. It does this with a simple formula that takes the total assets of a company minus inventory and then divides that number by its current liabilities.
Generally, anything over 1.5 is considered a strong quick ratio. This number also reflects how a business may fare when seeking credit lines or loans. Businesses with a lower-than-optimal quick ratio will have a hard time taking on new liabilities and therefore may not receive funding as easily.
A simple quick ratio formula is first adding up all of a company's most liquid assets. These can include cash and accounts receivables. Then divide that total by all liabilities. Certain assets are left out of this formula, such as prepaid items or equipment as those are difficult to liquidate.
Keeping talented employees on staff is critical to maintaining overall productivity and reducing the amount of resources spent on hiring. And you know what that means — keeping your employees safe and happy. High turnover and dissatisfied employees can impede projects and increase safety risks due to low morale and understaffing.
Key metrics construction companies need to track in terms of employee retention include things like onboarding time, turnover rate, and overall satisfaction. These KPIs are often a bit more difficult to track — especially employee sentiments — but that doesn’t mean they should be overlooked. The most common and easiest method for collecting employee sentiments is through regular online surveys, such as eNPS scores.
Other common employee KPIs include:
Measuring performance is crucial for deciding whether or not projects are being completed on time and to specifications. Performance metrics that are most important to individual businesses may vary, but generally, they will cover the following key areas:
It's best to chart these metrics over time. This allows businesses to spot trends as they happen, as opposed to simply looking at a quarterly snapshot.
In construction, it's not uncommon for payments to be late or delayed. This can be due to problems with final inspections or simply other companies having their own cash flow problems.
By measuring this turnover rate, a business can decide if they need to put more focus on collections to help increase its own positive cash flow. It may also mean the customers they are prospecting for are not credit-worthy or financially viable.
Accounts payable ratios tell how often a company is paying its invoices in a given period of time, generally in increments of months.
Accounts receivable ratios tell how often a business collects its average receivable balance. Since account receivables are basically free loans provided to customers, it's important that this turnover ratio remains high.
A high accounts receivable ratio means that a company's collection efforts are successful and that its customers have positive cash flows. However, too high of a number may suggest a company is too conservative when dealing with new customers.
If a company is looking to increase the number of jobs they take, they may want to offer extended terms to attract new business. This may lower a key accounts receivable ratio, but the benefits from new income streams may make it worthwhile.
Construction KPIs provide businesses with extremely valuable information, crucial for making business decisions that can increase profitability and improve operational efficiency.
Porte Brown’s construction accounting services have helped countless businesses over the years achieve their true potential. Our team of expert accountants and consultants is dedicated to assisting companies that desire to improve their bottom line. We take the finances off your plate so you can focus on what matters most — building your business.
Our award-winning services have helped businesses of all types improve profits, and we can do the same for your company. Contact us today to learn more!
Get in touch today and find out how we can help you meet your objectives.