25Apr
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The Top 2 KPIs Every Construction Business Should Track

In the dynamic world of construction, managing projects efficiently is key to success. Yet, with so many moving parts, keeping track of every detail can feel overwhelming. This is where Key Performance Indicators (KPIs) come into play. By focusing on a select few essential metrics, construction businesses can gain valuable insights into their project performance and overall business health.

What are KPIs?

KPIs, or Key Performance Indicators, are metrics used to gauge success and progress towards goals. Across various industries, teams rely on KPIs to ensure they’re on track and meeting objectives. In construction, where projects are multifaceted, KPIs serve as invaluable tools for monitoring and managing project details.

Why KPIs Matter in Construction:

Construction managers juggle numerous responsibilities, from financial performance to site safety and customer satisfaction. KPIs provide a streamlined approach to overseeing these elements throughout the construction process. By consistently updating and analyzing KPI data, managers can proactively address issues and maintain high-quality work standards for clients.

Here Are 2 KPIs I Suggest You Start Tracking:

Net Profit Margin:

  1. Net profit margin measures the company’s profitability by calculating the percentage of revenue that translates into profit after deducting operating costs, cost of goods sold (COGS), interest, and taxes. A higher net profit margin indicates better financial health and overall profitability. By tracking this KPI, construction businesses can identify areas for improvement and adjust pricing strategies to enhance profitability. The percentage reflects how much of each dollar earned is actual profit.

Net profit margin = (Sales – COGS – Operating costs – Interest – Taxes) ÷ Sales

A higher net profit margin means a company is making more money overall. 

Let’s look at an example:

XYZ Construction Company, a family-owned business specializing in commercial building projects, is evaluating its net profit margin for the past fiscal year. After calculating the net profit margin using the formula, the company discovers that its profitability has decreased compared to the previous year.

Here’s how the calculation unfolds:

Sales Revenue: $1,500,000

Cost of Goods Sold (COGS): $600,000

Operating Costs: $300,000

Overhead Expenses: $20,000

Taxes: $50,000

Using the net profit margin formula:

Net Profit Margin = (Sales – COGS – Operating Costs – Interest – Taxes) / Sales

Net Profit Margin = ($1,500,000 – $600,000 – $300,000 – $20,000 – $50,000) / $1,500,000

Net Profit Margin = ($530,000) / $1,500,000

Net Profit Margin ≈ 0.3533

Interpretation: The net profit margin for XYZ Construction Company is approximately 35.33%.

Analysis: Despite generating $1,500,000 in sales revenue, the company incurred significant expenses, including COGS, operating costs, interest, and taxes. As a result, only approximately 35.33% of the total sales revenue translates into net profit. The management team at XYZ Construction realizes that the current net profit margin is lower than desired, indicating potential areas for improvement in cost management, operational efficiency, and revenue generation strategies. By identifying and addressing these factors, the company aims to enhance its net profit margin and improve overall profitability in the upcoming fiscal year.

Cost Variance (CV)

  1. Cost variance (CV) measures the variance between the actual cost of a project and its planned budget. This comparison can be conducted at any stage of the project by calculating the percentage of completion and then subtracting the costs incurred to date from the projected budget.

For general contractors, it’s beneficial to break down the project into its individual scopes to monitor progress, particularly on a subcontractor-by-subcontractor basis. Any instances of exceeding the budget warrant thorough analysis to identify the underlying reasons.

Cost variance = (Planned budget * Percentage of completion) – Actual cost

Here’s an example:

ABC Construction Company is in the midst of a commercial building project for a new office complex. As the project progresses, the management team decides to evaluate the cost variance (CV) to ensure that the project stays within budget and to identify any potential areas for cost savings or efficiency improvements.

Here’s how the calculation unfolds:

Planned Budget for the Project: $2,000,000

Percentage of Completion: 60%

Actual Costs Incurred to Date: $1,100,000

Using the cost variance formula:

Cost Variance = (Planned Budget * Percentage of Completion) – Actual Cost

Cost Variance = ($2,000,000 * 0.60) – $1,100,000

Cost Variance = ($1,200,000) – $1,100,000

Cost Variance = $100,000

Interpretation: The cost variance for the project is $100,000.

Analysis: With a positive cost variance of $100,000, ABC Construction Company has spent $100,000 less than what was budgeted for the project at this stage of completion. This indicates that the project is currently under budget, which is a positive outcome. However, the management team must delve deeper into the reasons behind this cost variance to determine whether it results from efficient cost management practices or potential areas of concern. By analyzing the cost variance and addressing any underlying issues, the company can ensure that the project remains on track financially and achieve its objectives within the allocated budget.

Construction accounting presents distinct challenges and requirements compared to traditional accounting practices. Given these differences, partnering with an accountant who specializes in the construction industry is crucial for ensuring accurate financial management. Understanding Key Performance Indicators (KPIs) can feel overwhelming, however leveraging KPIs is essential for driving business success. With the right KPIs in place, construction companies can navigate challenges effectively and achieve sustainable growth in the long run. 

To discover how Beyond Books Solutions can assist you with construction accounting or to schedule a consultation, reach out to us today.

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