5 Key Performance Indicators every contractor should know
Key Performance Indicators (KPIs), can be powerful tools for managing and improving the profitability of your contracting firm. Business owners and managers can use KPIs to evaluate how things are going, spot problems early, and make decisions with confidence. There are a vast array of KPIs to choose from, here are 5 to help you get started.
Liquidity or Cash Flow
Cash is the single most important asset that keeps your contracting business running. The complex nature of contracting can make forecasting cash flow difficult. The timing of your cash receipts and payments can be affected by schedule delays, invoice processing time, processing and approving change-orders, subcontractor payments, labor costs, and numerous other factors.
As an owner or manager, your accounting system should give you the ability to evaluate liquidity at the company level. You should also be able to drill down on a project by project basis and determine which projects are providing positive cash flow and which are using cash.
Once you can accurately track your cash flow in real time, you can be more strategic in the planning and managing of your projects and their budgets. Budget slips can be recognized and addressed more quickly. Variances will always occur, but by setting and monitoring your KPIs, you can manage variances by exception and spend more time on the tasks that demand your attention.
As customers continue to demand shorter project duration times, managing project schedules is critical to your success. Effective scheduling includes the integration of subcontractor schedules, and change orders into a master schedule.
Schedule variance is typically calculated by taking the planned completion duration and subtracting the current forecasted days until completion – giving you the number of days the schedule is ahead or behind. Taking the schedule variance in days and dividing it by the total remaining days until completion will show you the variance as a percentage of remaining duration. This will give you an idea of the significance of the schedule variance and your ability to get the project back on track.
Unapproved Change Requests
Changes can make or break your projects. Your system needs to be able to track and document the changes to your projects so that disputes are minimized and you get paid for all of the work you put into your job.
General contractors who are skilled at backlog management are well positioned to select profitable projects. The KPI for backlog can be an early warning indicator of profit fade. To calculate it, sum the total gross margins forecasted for all projects and subtract the total earned gross margins on all projects. Gross margin on awarded but unsigned contracts can be added to this total. The total of gross margins in backlog is then compared to selling, general, and administrative expenses budgeted for future periods.
Remember, no single KPI can tell you everything you need to know about how your business and your projects are doing. You need to view KPIs as a group in order to get an accurate and complete picture of your business. If you have questions about how to use KPIs to better manage your business, contact us anytime.