A straightforward approach to key performance indicators (KPIs) enables business owners to consistently make informed decisions. When we rely on intuition (or flip a coin), we may get lucky sometimes, but for sustainability and growth, establishing and using sensible KPIs is the way to go. Read on for practical examples.
Insights At Your Fingertips
The whole point of having solid information at your fingertips on a day to day basis is so that you can use it for decision making. Should you go after a bigger project? How much profit are you really making? Are you actually closing on enough leads? Toward always having answers on hand, Shawn Van Dyke at Built To Build, recommends a simple approach to KPIs, and explains that when used consistently, it reveals everything you need to know about your construction business at any moment in time:
Imagine KPIs as the scorecard of your construction business. They track the critical aspects of your projects, like schedule variance, change orders, and project and operational profitability, giving you real-time feedback on how you’re doing. But unlike your financial reports, the most effective KPIs are the ones that don’t require a deep financial analysis or letters after your name to produce and interpret. KPIs should be simple to track and give you real-time data so that you can make informed decisions that keep your projects on track, your clients happy, and your bank account full of cash.
As you establish KPIs, it’s key not to make them overcomplicated. Cautioning that “diving into the deep-end” to select and then track KPIs can become complex fast, Van Dyke points out that there is no need to get sucked into the sea of “complex data bases and spreadsheet formulas” to effectively use KPIs. Specifically, he suggests these 5 Simple Performance Indicators (SPIs) “every contractor can track and produce”:
- Real Cash Profit (RCP) – the actual amount of cash you have in a bank account called PROFIT.
- Average Weekly Billing (AWB) – the total amount of money you’ve billed for this week, or the total value of the work you’ve put in place this week compared to the year-to-date average your business requires to hit your budgeted revenue goal.
- Closing Rate (CR) – the ratio of the number of Projects Awarded versus the number of Leads acquired.
- Revenue Per Employee (RPE) – the total amount of revenue produced during a giving period of time divided by the total number of employees (usually measured quarterly and annually).
- Gross Profit per Project (GP/P) – the total amount of revenue received (price) for a single project less the Cost of Goods Sold (COGS) to produce the project, expressed as a percentage of the total price.
Although this pared down approach to KPIs may not reveal every detail of your business, it will yield a helpful snapshot of your operations: “Without spending a lot of time digging deep in your business data, you can identify company-wide strengths and weaknesses, compare yourself to industry standards, and even predict future performance.” At GB Financial Services, Gary Bartecki also encourages minding construction business metrics without overcomplicating: “It’s important to work with metrics to help track operating results. Metrics that are easy to understand and easy to calculate.” A simple and consistent approach to estimating cash receipts and payroll, as well as fixed and other payments, is also crucial for staying ahead of the game in construction, in case cash becomes tight:
Accounts receivable, notes receivable, work-in-process (WIP) and any hard assets sales all convert to cash receipts….The WIP…has to be converted to an invoice as soon as possible…. The invoice has to be problem free with all required back-up so that you can get an anticipated payment date. Every day you gain converting WIP to cash makes a big difference. And when you get a check, it MUST be deposited that day. It does you no good to speed up the billing by a week if you let the check sit on your desk for three days.
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