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Steer clear of irrelevant KPIs & focus on more meaningful metrics
by Bruce Orr

Analytics dashboards continue to grow in popularity among contractors, but the discussion can omit an important consideration—metrics that are useful to one company can be meaningless to another.

While certain financial yardsticks are universal, the relevance of other key performance indicators (KPIs) depends on many factors, such as how large the company is, what it builds, who its customers are and how long its projects take to complete. Here are some factors that can determine the relevance of KPIs in areas like customers, projects and labor.

Ranking Customers by Profit Margin

Some general contractors (GCs) rank customers according to project profitability over time. Let’s say you regularly work with 15 to 20 clients. Running this analysis could yield some surprise standouts, allowing you to target bids to those at the top of the list. For other contractors, such a high-level ranking may have less utility.

 

 

Let’s say the company focuses on stucco for commercial and residential buildings, operating in a limited geographic area where just five GCs handle 85% of all major projects. While the contractor works with all five of those GCs, it mainly does business with just two of them. The pool of customers is small, and the stucco contractor already knows which clients are the most profitable.

In fact, the consistent volume of work provided by those two primary GCs may be an overriding consideration: Even if their projects are less lucrative, they translate into more work overall. But using a dashboard to drill into the variables that go into customer profitability can still be highly relevant.

Contractors may discover that certain project types are more profitable than others or find ways to boost profits and cut costs by identifying trends in their schedule-of-values data—the negotiated billing schedule for their projects. For other companies, charting customer profitability could amount to a kind of category error. Let’s say the contractor builds multifamily residential housing in a wealthy, high-density market like Seattle, Washington.

What appear to be distinct customers on its client list may actually be ever-shifting jumbles of complex, one-off LLCs and joint ventures. Many of these investors and developers may have never worked together before and will never do so again. You could rank them, but would that be useful?

Is the Juice Really Worth the Squeeze?

The relevance of other KPIs can be affected by factors, such as project duration, size and complexity. For bigger projects that will last months or years, contractors have a strong incentive to track things like the number of requests for information being filed or how long it takes to complete change orders or approve daily reports.

 

With enough data in hand, they can set up alerts to warn them when projects are underperforming based on historical norms. However, using advanced reporting to create detailed, project-specific budgetary and other dashboards may not be worth it if the contractor does a large number of small, rapidly executed jobs. One chief financial officer (CFO) put it this way: “On a $10,000 job, the juice isn’t worth the squeeze.”

On complex projects, GCs may want to pay close attention to reporting and analysis around the closeout process. The goal should be to avoid situations where, having formally closed out the job, the GC learns that it has lost track of work completed by its subs and now must go back to the customer, hat in hand, with unexpected bills.

Sloppy closeouts damage customer relationships. This is why some analytics dashboards issue periodic alerts aimed at keeping costs and billings on track. All of that said, there may be no need to track closeout-related KPIs if the contractor does straightforward work, such as installing only windows or doors, with few such issues. In that instance, operational KPIs around punch-list items would be more relevant.

Caveats in Payment Tracking

Getting paid on time is an issue in construction. Many contractors aim to improve their collections by tracking and analyzing payment trends among repeat customers. In a dashboard for accounts receivable, advanced data visualizations could help a contractor understand multiple dimensions of the accounts receivable process in one glance. Similar data visualizations can be used to track payments during the course of a single, long-term project. However, such measurements may be of little use to contractors that finish projects quickly.

Contractors reap the most benefit when they track payment trends among repeat customers over longer stretches of time. Let’s say you are a specialty contractor trying to figure out if a particular GC falls into the category of “pays late” or “pays on time.” In most contracts, the GC’s payment responsibilities are contingent to some degree upon whether it has been paid by its own client.

 

As a result, a few late payments from that GC may simply point to the failure of others to pay the GC on time. By gathering and analyzing customer payment data over the long term, contractors will start to see patterns: If that GC has repeatedly paid late across a large-enough sample size of projects, your analytics are pointing to a chronic issue.

How Unions Can Change the Equation

Many GCs use analytics to keep tabs on the performance of subcontractors and other crew members in areas such as safety, quality and rate of production. The goal is to ferret out underperformers. However, when the company is a union shop, its project managers (PMs) and superintendents may have less control over the crew mix.

During busy times, in particular, the company will turn to the union for needed crew positions. This complicates the interpretation of other KPIs. If a project fails to make enough money, this would show up in the profitability-based performance metrics of estimators and PMs. But why should they get the blame if the real problem was the low production rates of bad personnel on that job?

To be clear, both union and non-union contractors alike routinely work with core individuals and teams in which they have strong confidence. It’s always possible to evaluate performance KPIs related to these team members, with a view toward identifying room for improvement.

Thinking Critically About KPIs

The examples above are just a sample of ways in which specific circumstances can affect the relevance of construction data. They illustrate the need to continually ask whether you are seeing the situation clearly. If it’s a 100-hour job and the crew has already logged 50 hours, that may seem to suggest that the project is halfway done. But introduce production quantities and you may learn that only 25 cubic meters of concrete, out of a required 100, have actually been poured.

 

Sometimes, logistical challenges make it difficult for GCs to collect information. Maybe superintendents are so busy, traveling back and forth to projects across a large region, that they struggle to monitor and report what’s happening with labor or production at each site. Ideally, the company would close those gaps by investing in data-collection resources. If not, the leadership team should stay cognizant of the misleading picture that can result from overinterpreting incomplete datasets. And just because you can measure something doesn’t mean you should.

One contractor made a conscious decision to avoid incentivizing or tracking its PMs by project profitability. “We look at our PMs in the context of how the whole company is doing,” the CFO explained. “If you think about it, you want your best project team on your worst job.” Nearly any KPI can sound like it would add to your understanding, but by looking at the specifics at your own company, you can better determine which metrics will serve you best.