The Top KPIs for Construction Firms

9 min read

April 23rd, 2024

Key performance indicators (KPIs) are metrics that are calculated using a business's operational and financial data. Generally, KPIs are used to measure, track, evaluate, and improve performance. 

One of the primary challenges in using KPIs for business management is identifying which metrics are relevant to your business, strategy, and goals. With an infinite variety of KPIs to choose from, it takes a discerning eye and a mind for business strategy, management, and analysis to identify the handful of KPIs that are most relevant to the management of your business.

The Different Types of Industry-Specific KPIs for Construction Firms

When most people think about KPIs, they think about finance and accounting, and for the purposes of this article, we will focus on financial KPIs for construction firms. However, it is worth noting that several categories of KPIs are relevant to construction firms, and tracking metrics from each of these categories can help you improve nearly all aspects of your company's performance and operational efficiency.

Additional categories of KPIs for construction firms include measurements of data related to:

• Schedules
• Quality
• Health
• Safety
• Sustainability
• Waste
• Customer satisfaction
• Employee satisfaction
• Winning business

Depending on your construction firm's specific business strategy, goals, and challenges, there might be other types of KPIs that are relevant to measuring performance within your business's unique situation. Some of the KPIs within these alternative categories might be more closely related to finances (employee turnover rates, for example) than others. However, they are all relevant to your business's overall performance, and, in that sense, they can all impact financial performance.

7 Top Financial KPIs and Charts for Construction Firms

Within the category of financial KPIs for construction firms, there are countless metrics to calculate and track. However, you are busy and have limited time. So, it's best to narrow down the list to a handful of the KPIs that are most relevant to your company. For most construction firms, the list of essential metrics will include the following financial KPIs and charts:

1. Net Revenue per Employee

In a construction company, labor is usually your biggest cost. This means each dollar spent on labor must generate an adequate ROI to justify the expense. Evaluating net revenue per employee shows you how much revenue you generate per employee in your business. You can compare this revenue to the labor cost per employee. If you notice that net revenue per employee is shrinking, this could indicate an issue with your utilization rate, time leakage, turnover, or staff.

2. Labor Cost per Employee

This metric is important to keep track of in conjunction with net revenue per employee. To preserve your profit margins, labor cost per employee should never increase more rapidly than net revenue per employee. If you notice that your labor costs are increasing more quickly than your revenue, then you likely need to adjust your pricing to compensate for rising labor costs.

3. Net Labor Multiplier

For labor-heavy, service-based businesses, the net labor multiplier is often touted as the most important metric. It is the best metric for determining profitability because it shows you how much money you generate for every dollar you spend on labor. A shrinking net labor multiplier could indicate trouble with productivity, pricing, turnover, or time leakage. A growing net labor multiplier is a sign of success. If yours is growing, determine who your top performers are and be sure to recognize and reward them for their efforts.

4. Trailing Twelve-Month Charts

Trailing twelve-month (TTM) charts show performance over the past twelve months of a business's performance data. These types of charts can be used to look at a variety of different KPIs and identify important trends such as trending upward, downward, stagnation, or seasonality.

We recommend that construction firms track gross revenue, gross profit, and net income in TTM charts. TTM charts can help you assess your revenue growth rate (to determine the health of your construction firm and its progress toward targeted growth benchmarks). These charts can also be compared to reveal insights into your operations. For example, gross revenue and net income should be assessed side by side to compare the amount of total revenue you are generating to the amount of money you actually keep.

The 6 most important KPIs for construction firms.

The AEC Scorecard™️: The only KPI scorecard designed exclusively for architecture, engineering, and construction firms.

5. Cash Flow From Operations

Cash flow, in general, is important for all businesses to track because it reveals the amount of money flowing into and out of a business within a specific period of time. Cash flow is essential to maintaining operations, buying supplies, paying vendors, carrying out payroll, and paying the rest of the bills that keep your business operational.

Specifically, operating cash flow (also called cash flow from operating activities or cash flow from operations) refers to the portion of a company's cash flow statement that reflects the amount of cash generated (or consumed) as a result of conducting operating activities over a defined financial period.

Cash flow from operations can help you assess, at a glance, how successful your core business function is because it isolates the money coming from or being spent on operating activities, allowing you to evaluate this metric apart from other money or revenue sources in your business.

6. Project Profitability Margin

Project profitability margin is essential in businesses where revenue and expenses are generated and incurred on a project-by-project basis, such as construction firms. This metric uses unit economics to examine each project's profit margin on a granular basis (rather than looking at your firm's global profitability as a whole).

By evaluating the profit margins on each project, your firm can identify the types of projects (or clients) that are most profitable for your business, those that might be costing your business money (i.e. generating a loss), and those that are breaking even. With this knowledge, you can focus your energy, efforts, and resources on the types of projects that are most profitable to improve your business's overall performance.

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In construction firms, it's standard practice to provide a job estimate to clients. In this estimate, you make an educated guess about how much you expect a job to cost based on materials and labor. When you deliver a quote to a client, you need to be fairly accurate in estimating your costs so that you don't end up losing money on a job. So, tracking the accuracy (i.e. cost variance) of your estimated costs is crucial to providing estimates that are fair, accurate, and don't undercut your business.

At the end of each project, subtract your actual costs from your projected costs. The difference between the two is your cost variance. You want to aim for as low a variance as possible.

When projects end up costing more than expected, take a close look at what happened. Did materials prices unexpectedly increase? Were your workers not as productive as you expected? Do you need to account for these increasing costs in future estimates?

Improve Performance With Outsourced Accounting for Businesses and the KPI Scorecard for AEC Firms

The success of any construction depends on a wide variety of factors such as the current economy, local demand, seasonality, job type, employee productivity, the cost of materials, and the reliability of supply chains. With so many factors constantly in flux, construction firm leaders must maintain an intimate knowledge of their business's numbers. Keeping a close watch on the KPIs that are essential to your business will help you foresee and prevent problems before they arise, readily leverage opportunities as they present themselves, and confidently make data-driven decisions to lead your company to success.

In small and medium-sized businesses, keeping a close watch on the business's numbers can be exceptionally challenging when your time and attention must necessarily be focused on clients and project management. As a result, growing construction firms can often benefit greatly from outsourced bookkeeping and accounting services that are designed not only to maintain compliance and tax readiness but also to improve business management with advisory services.

For these construction firms, selecting an outsourced accounting provider with experience in the construction industry is vital. Providers without such experience can lack expertise, insight, and knowledge of the unique needs, challenges, and requirements of AEC businesses.

At GrowthForce, we specialize in working with clients who run service-based businesses such as construction firms in the AEC industry. We have unique experience to help you establish back-office systems and implement financial management software designed to work for you and free up your time by automating data collection and reporting. We work with you to deliver a scorecard of KPIs designed specifically for businesses operating in the AEC industry. This enables you to track your performance at a glance, while our advisory services help you learn to use this data to improve the management, operation, productivity, and profits of your construction company.