All business owners (including contractors) need to get a handle on where their companies stand in relation to the past and to others in their respective industries. Unfortunately, too many contractors fail to do so and, as you can imagine, this can undermine their bottom lines. Fortunately, there are ways to keep track of key performance measures using proven benchmarking methods.
Look for improvements
The first thing to know about benchmarking is that it’s a very effective management tool. Benchmarking tells you how your company is performing and shows you where you can improve.
Internal benchmarking, or tracking your own performance, is your guide to weaknesses and opportunities within your operation. If, for example, your long-term debt-to-equity ratio (an indicator of your ability to pay long-term debt) is rising, benchmarking will alert you early so you can determine why it’s happening and bring it back into proper alignment. Similarly, if your repeat business percentage is declining, benchmarking can give you a heads-up so you can identify and correct the problem. Also, some contractors might not have debt, especially general contractors. In such cases, it would be critical to measure days outstanding, profitability, or fade/gain.
External benchmarking helps you understand how other construction companies like yours have performed. For instance, how does your time to completion compare with those of similar businesses? Industry organizations, such as trade associations, can be a good source of information, though they tend to have a regional focus. Another tool is to compare financial stats such as days outstanding or profit margins.
But, be wary of the source and content of any benchmarking studies you review. National benchmarking, while informative, may not be useful for a locally or regionally focused contractor because construction practices vary widely across the country. Similarly, a contractor with national reach would likely find local or regional data to be less helpful or even misleading.
Choose your metrics
The specific benchmarks you use should be those that have the most effect on your company. A plumbing contractor, for example, is unlikely to be as concerned with capital equipment costs as an excavator will be.
Frazer, LLP can help you decide which benchmarks would be best for you. Some you’ll likely consider include a comparison of estimates to historical averages using a three- to five-year period. You should also determine how your gross profit in backlog compares to historical averages. Plus, you need to know how profit recognized to date compares to historical averages.
You’re also likely to look at labor costs (including overtime), overhead, materials and equipment costs, cycle time, and change orders and late work orders (those submitted after cutoff dates). In addition, surety information — how your bonding compares to that of your peers — is valuable. Your bonding company is likely to be the most important user of your financial statement, and any benchmarks you establish in that area can only help your capacity, especially if you can demonstrate that you’re working to improve.
Use the right measurements
Once you’ve established your benchmarks, assemble the data you need to measure them. Again, Frazer, LLP can be a good partner in the process.
Just make sure you’re working with complete information that’s relevant to what you’re measuring. A single financial statement from five years ago won’t provide an accurate representation of what you were doing back then, and a marketing summary that confidently predicts you’re going to double your gross revenues next year isn’t a reliable guide to the future.
Last, when you’ve collected all the information, keep it together — benchmarking should become a regular part of your financial operations. If you report financial information every quarter, benchmark every quarter, too.
Spread the word
Benchmarking results shouldn’t be hidden in a drawer. It’s critical to share the results with every employee. Why? Even if you generally like to hold your financial data close to the vest, sharing certain results can be a great motivator for your crews. It’s one thing to know your equipment maintenance costs are on the rise; it’s another to have managers who are determined to ferret out why and be aggressive in turning them around.
For the same reasons, share benchmarking results widely. All your employees will likely have an interest in the findings — particularly those whose departments were measured. Spreading the word can build enthusiasm that will carry you through any needed changes and keep existing excellence in place.
Finding a reliable benchmarking resource and entering your data for comparison can be time consuming. We can help! We can provide you with a complimentary comprehensive benchmarking report on your company, as compared to industry averages as well as your multi-year trends. Click the button below to get started.
Lou Rendon, CPA, CVA
Lou Rendon has over three decades of experience in tax and financial matters for a wide range of companies with particular expertise in the construction industry. His areas of service include financial statement engagements, banking and surety consultations, individual business and corporate tax compliance, tax and financial planning, and business valuations. Contact Lou at [email protected] or 714.990.1040.
Frazer LLP has far-ranging experience in the specialized accounting methods for the construction and engineering industries. From tax and accounting compliance and consulting on purchase and sale of real estate, negotiating and tax free exchanges to cost segregation and business valuation, our team can provide you with expert tax, financial, and management advice in any stage of your construction business.