9 KPIs successful construction firms should monitor

Liquidity: Determine how much cash your work in progress is generating or consuming, by monitoring key current asset and liability balance sheet accounts.

Cash flow: Understand whether individual projects are generating or consuming cash can better identify execution problems on projects. Consistent attention to cash flow also helps to promote timely billing and collections.

Labor productivity: Labor productivity is particularly important for subcontractors, as productivity problems can break labor budgets and erode profit margins. Managers can separate jobs within a project to identify discrepancies between actual labor expenditures and estimates. This information helps managers and field supervisors forecast cost-to-complete, establish daily performance goals, address current problems, and improve future estimating and bidding accuracy.

Schedule variance: Project owners demand clear communication regarding project progress and timely completion. Given increasingly complex project specifications and schedule compression, you must be able to identify and monitor schedule variance to deliver projects on a timeline that satisfies owners' demands. Understanding how factors cause schedule variance, such as change orders and weather, allows you to properly plan, communicate, and coordinate resources, to ensure higher quality output, improved safety, and better resource utilization and allocation. Effectively managing schedule variance also helps construction firms maintain a competitive advantage against other firms that often fall behind schedule.

Margin variance: Compare your gross margins to business plan objectives by monitoring overall margin variance. Similarly, investigate the gross margins on particular projects, relative to the project estimate, to determine whether the project is achieving expected profitability. Through constant attention to margin variance, management and field supervisors can make the corrective changes necessary to keep individual project margin variance to a minimum and the overall gross margin stable.

Unapproved change orders: Construction firms face an increasing economic threat from risk transfer provisions in standard contract types. Reduce your firm's financial exposure by identifying and diligently pursuing unapproved change orders.

Committed cost—With rising material prices and labor shortages, construction firms face financial exposure when suppliers and subcontractors are not yet committed contractually—particularly on longer-duration projects. It is imperative for your firm to track uncommitted costs to increase the proportion of committed costs where possible and, where necessary, to incorporate factors such as price escalation and contingent cost terms into their committed costs in order to limit financial exposure.

Backlog—Properly tracking backlog—and the expected gross margins on backlogged work—allows construction firms to avoid the problems associated with insufficient work and profit fade. With this knowledge, your firm can make strategically sound decisions about which projects to pursue.

Customer satisfaction/scorecard: To maintain competitive advantage, track your firm's ability to meet owner expectations by compiling and analyzing qualitative feedback. This retrospective examination of past projects identifies potential deficiencies, enabling your firm to address such issues in current and future projects.