Disclosure: The following content was written and sponsored by NexTec.
Every kind of construction company relies on metrics to monitor business activity and performance. Whether you are a CFO or Financial Manager for a general contractor, home builder, land developer, subcontractor, or specialty contractor, you measure a number of parameters to ensure compliance with mandatory accounting and reporting requirements. A smart management team then incorporates these measurements into valuable and actionable intelligence.
While the right measurements can be used to help run a business more efficiently and improve performance, information overload is a real thing. Thousands of performance measurements have been defined over the years, including many common ones that virtually every business can use – metrics like profit and loss, cash flow, project commitments, and more. On top of this, specific industries have measurements that apply to their individual situations and business needs.
When decision-makers spend too much time buried in reports and measuring unnecessary indicators, they may miss important nuggets of intelligence and critical early warning flags that are buried in masses of data.
This is where Key Performance Indicators (KPI) are critical. These measurements are often specific to an industry and include a number of relatively small measures that are particularly important for monitoring the overall health of a business. When grouped together in an easy-to-read executive dashboard display with graphics, these KPIs provide an at-a-glance view into the health of an organization, so executives can quickly zero in on opportunities and challenges.
Technology and KPIs
Construction executives have never had more access to business data. The proliferation of connected sensors and smart devices – commonly referred to as the Industrial Internet of Things – provides unprecedented visibility and control into business operations. But it also multiples the information overload problem.
Fortunately, technology like Enterprise Resource Planning (ERP) software built for the construction industry offers powerful yet user-friendly analytics and data visualization tools that act as an extension or enhancement to traditional Business Intelligence solutions. An ERP solution like Acumatica Construction Edition, for example, offers a variety of pre-defined KPIs, which the various users within a company can pull together and tweak to fit their specific business situation.
KPI dashboards within ERP software offer drill-down for analysis of details and can be adapted to provide key measurements to individual departments within the organization. This helps decision-makers focus on the specific measurements that are important to their individual functions.
It’s important to note, too, that all of this data, analytics, and business intelligence is made practical and accessible through the cloud because only cloud deployment offers the connectivity, integration, security, scalability, and capacity necessary to harness an organization’s data and make the intelligence accessible wherever and whenever it’s needed.
Types of KPIs (Historical and Predictive)
The most common KPIs are historical measurements – summaries or analyses of events and data that have already occurred. Historical KPIs often monitor financial data, such as sales, costs, margins, cash flow, and asset utilization. Others are operational measures that managers and executives use to target activities and interests relative to schedules, materials, completion status, backlog, change orders, and more.
These KPIs are classified as historical measurements since they focus on data from activities in the past. Within a software solution ERP, historical KPIs can be set up with alerts and warnings that monitor and detect exceptions, calling attention to the issue using alert messages or color-coded warning graphics.
Predictive KPIs are leading indicators used to project performance expectations into the future. Management uses predictive KPIs to steer decisions and actions aimed at enhancing desirable results or avoiding undesirable outcomes. In the construction industry, predictive KPIs may use bid data to project cash flow and resource utilization; track billing and purchases to estimate future project progress, or harness external data like economic trends and demographics to predict future prospect opportunities.
KPIs for the Construction Industry
Here are some top examples of KPIs that most construction companies need to pay attention to:
Cash Management KPIs
KPIs focused on cash management bring together bank balances, billing and invoices into a comprehensive view of your cash flow. With this, you can make contractual commitments, meet payroll, and better manage the business.
Acumatica Construction Edition has this KPI built-in, enabling a CFO to see cash flow in real-time and providing immediate access to the details behind it.
Project Management KPIs
Project Management KPIs measure expenses vs budget and track projects with visibility into active and completed tasks, time-by-employee, and project profitability. Drill down even further to see budget vs actual costs, change orders, subcontractor commitments, compliance issues, and payroll details.
Project Tracking KPIs
These KPIs track billing and revenue recognition by cost code, contract line item, and more. Using project cost budget status, you can compare actual and committed costs by task/sub-job. Below is an example of Acumatica’s Project Tracking capability.
Profit Analysis KPIs
Use Profit Analysis KPIs to track original and revised margin/markup and estimates, change orders, and revised amounts. Drill down to analyze variances by line item, cost code, subcontractor, and material.
With visibility into this data, you can catch deviations sooner and take preventative action to bring the project back in line faster.
KPI Maintenance and Dashboards
After you have identified and start tracking your KPIs, you may find some need to be adjusted, disregarded, or added. KPI review and maintenance is a normal part of the process and a necessary one for your overall management strategy. Because your business is continually changing, static measurements will inevitably become less relevant and useful if not maintained.
The good news is that today’s KPI dashboards are flexible, adaptable, and completely-user driven. There’s no need to beg IT to make changes to existing reports; user-friendly tools make changes and new report creation simple and easy, putting the user firmly in the driver’s seat.
Acumatica Construction Edition positions your KPI dashboard as the control tower of your business. Acumatica links to other data sources such as demographics, economic trends, weather, etc. to give you full visibility into every aspect of your business. Acumatica makes it easy to collect, distribute and communicate intelligence and information for better decision-making.
Because Acumatica is a cloud-based solution, KPI information is readily available on any device, at any time, from anywhere. And Acumatica’s cloud-based applications are built for real-time updates and a high level of flexibility so your KPIs remain dynamic and responsive in every sense of the word.
How to Get Started with KPIs
If your company already has ERP software, take a look at the selection of pre-defined KPIs already built-in. Though this is a great place to start, think of these KPIs as training wheels that help you find your balance but are not intended for long-term use. Using these pre-defined KPIs, you can familiarize yourself with alerts and warnings, and how to adjust them to make improvements in your business.
The next step is to identify other KPIs that focus on the major functions of your unique business. The goal is to replace the training wheels with high-performance tires that work just for you. A word of caution, though: many companies getting started with KPIs get excited by the new insights and visibility that come about and keep defining new ways to measure business performance. This often leads to a proliferation of KPIs that can quickly become counterproductive.
The best practice around KPIs is to have a small number of high-impact KPIs – no more than 8-10 – aimed at the critical factors for that business, department, project, or area of interest. A flexible ERP coupled with Business Intelligence software will support the unusual situation where drill-down analysis and the creation of new ad-hoc measurements warranting a different view into the business are needed.
It’s important to ensure KPI development is done with the involvement and cooperation of the users of the KPIs. Users must understand the measurements and have the ability to tailor them to their specific needs. This creates ownership over the KPI, which is required for them to be effective.
To learn more about KPIs for the construction industry, contact NexTec Group. We have over 26 years of experience with ERP, KPIs, Business Intelligence, and construction. We can help you select the right KPIs for your business and get you started with ERP software and KPI Dashboards.