It’s more critical than ever in today’s environment for contractors to closely monitor their projects and act quickly when issues arise. However, with so many moving parts, it’s easy for something to slip through the cracks and throw a project off schedule or budget.
Best in Class contractors use a series of key performance indicators (KPIs) to measure, monitor, and manage performance at both the project and company levels. KPIs are even more effective when paired with the right technology — namely effective dashboards, automated alert systems, and integrated software solutions.
This article takes a closer look at these technologies as well as the need to allocate the proper time and resources for implementation and training in order to maximize technology utilization.
KPIs to Monitor
KPIs are critical metrics that help contractors evaluate how things are going, identify red flags, and act decisively. However, as today’s contractors are inundated with data, knowing where to begin can be difficult.
At the project level, the most important KPIs are driven by such client demands as:
- Is the work being performed safely?
- Is the project on schedule?
- Is the project on budget?
- Is the work free from defects?
- Is the work getting done right the first time?
At the company level, it is important to monitor what’s happening at any moment across a few key areas, such as:
- Is enough cash coming in?
- Is there enough of the right kind of work?
- Is the labor productive?
- What is the profit margin?
Looking at the big picture, let’s explore eight indicators that every contractor should monitor.
Construction financial professionals (CFPs) must have the ability to evaluate organizational liquidity. Subsequently, they should be able to drill down to the project level to determine which projects are providing liquidity and which ones are consuming it.
2) Work Backlog
Keeping tabs on backlogged work — as well as the expected gross margins on that work — emboldens contractors to avoid risk associated with insufficient work. They can also use this knowledge to estimate future cash flow and adjust business plans accordingly.
3) Labor Productivity
Slight improvements in labor productivity can send profits soaring while slight decreases can have the opposite effect. Budgeted hours, hours worked, and percent complete are three essential components needed to track labor, and this information must be available on demand to field managers and forepersons. Also, hourly rates in the budget vs. the hourly rate of the staff performing the work can have an impact. For example, profitability erodes when the budget for a superintendent is $80 per hour, but the actual rate for the person who performs the work is $85.
4) Schedule Variance
It’s important to track the ability to deliver projects on time. Tracking schedule variance is simply the difference between the original planned completion and the current forecasted completion. However, it’s important to take it one step further and divide the schedule variance by the total remaining duration (in days) to show the variance as a percentage so that a business can evaluate the significance of the impact; a 3% variance is a lot easier to make up than 23%.
5) Budget Variance
When costs are monitored in real time, a contractor can plan and manage projects more strategically and recognize any slips to the budget right away. While some variance to the budget is expected, setting an acceptable KPI for such variance allows contractors and project owners to identify anything that falls outside of that threshold.
6) Change Requests
Poorly managed changes can rob project profitability. However, by proactively tracking, documenting, and negotiating payment for unplanned work and expenses, a contractor can ensure that it gets paid for all changes on the job without disputes or misunderstandings. Change requests that stay unresolved for long periods of time may be an indication that gaining approval is difficult. You lose leverage if you wait to conduct change order negotiations until the project is complete.
7) Project Cash Flow
The project cash flow KPI helps track whether individual projects are generating or consuming cash. A company can then dig deeper to identify execution successes and failures on projects and adjust accordingly.
8) Committed Cost Indicator
When suppliers and subcontractors are not contractually committed to projects, it exposes a company to potentially crippling risk. This can be even more detrimental on long-term projects, particularly given rising material prices and labor shortages.