CONSTRUCTION Accounting ARTICLE -
Add Muscle to Your Bottom Line With Benchmarking

Target Audience: Construction Industry Professionals, Benchmarking Interest, Employees, Contractors, Managers, Financial Management, Financial Advisors, Construction Businesses

You’ve learned to give a pretty good sales pitch, and you know how to complete projects. But are you equally proficient at managing your money? To maintain your competitive edge, it’s critical to know where you stand financially.

One way to do so is by benchmarking. Under this process, you select metrics, or “benchmarks,” to measure your construction company’s performance against your own past performance or against other, similar construction businesses.

Benchmarking is not unlike bench pressing for athletes. Done regularly, both add muscle where it’s needed (for you, to your grasp of your financial standing) and both get easier as you go along.

Look Inside or Out

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 that 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.

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 other similar businesses? Industry organizations, such as trade associations, can be a good source of information, though they tend to have a regional focus.

Indeed, 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.

In deciding which benchmarks would be best for you, consult with your financial advisor. Some you’ll likely consider include:

• A comparison of estimates to historical averages using a three- to five-year period,
• How gross profit in backlog compares to historical averages, and
• 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.

Bring It All Together

Once you’ve established your benchmarks, you’ll need to assemble the data you need to measure them. Again, your financial advisor 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.

Tone Up Your Finances

As mentioned earlier, think of benchmarking as an exercise in financial toning. Consistency is important. And, just as with pumping iron, you may be astonished at how quickly you start to see results.

Sidebar: Educating Your Managers About Financial Management

Financial success begins at the project level, but do your project managers and field supervisors understand why benchmarking — and overall financial improvement — is important?

It may be time for you to offer a little training in financial management. Your field supervisors may — and should — view a no-show subcontractor as a more compelling concern than how they can improve return on investment. But it’s in your best interest to ensure that return on investment and the cost of rework — both of which can be measured in a benchmarking study — stay fixed on their radar.

Middle managers probably command the vast majority of your direct job costs, but they may not think about their big-picture power. Spend some time explaining the basics of cost and profit to them, and show them how much influence they have on the overall financial health of the company.

After all, if your managers aren’t fully engaged, they won’t help you address the findings with action plans and follow through. 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. Even if you generally like to keep your financial data held close to the vest, sharing certain results can be a great motivator for your crews.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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