Key Performance Indicators (KPIs) are the most common benchmarking experience that construction companies and their clients will have encountered.
A KPI is the measure of a process that is critical to the success of an organization. Many organizations use KPIs, since there are a number of performance measures that define the success of a project or organization. The KPIs are essentially the evidence that culture change and process improvement are actually leading to positive change in terms of better performing projects and organizations.
The responsibility of managing growth and economic challenges requires construction companies to devise a disciplined business strategy. This strategy must address potential opportunities and problems as they arise by providing reliable, timely information to support decision-making. Monitoring KPIs should be a part of your disciplined business strategy.
Most clients, especially within the public sector, prefer working with companies that demonstrate a commitment to continuous improvement. Often demonstrated use of KPI systems are seen as a requirement for companies to win work. From the client’s perspective, KPIs provide a useful way to demonstrate wider project requirements, beyond time and cost issues.
The Purpose of the KPIs
The typical demands of your clients will be that they want their projects delivered:
- on time
- on budget
- free from defects
- right first time
- by profitable companies
Regular clients expect continuous improvement from their construction team to achieve year-on-year:
- reductions in project costs
- reductions in project times
The purpose of the KPIs is to enable measurement of project and organizational performance throughout the construction industry. This information can then be used for benchmarking purposes, and will be a key component of any organization’s move towards achieving best practice.
Clients, for instance, assess the suitability of potential suppliers for a project, by asking them to provide information about how they perform against a range of indicators. Some information will also be available through the industry’s benchmarking initiatives, so clients can see how potential suppliers compare with the rest of the industry in a number of different areas.
When considered together, KPIs help to identify potential strengths that allow firms to capitalize on opportunities available during strong demand, and potential problems that may be detrimental to their businesses. However, dated KPIs will only be able to provide historical information that can be largely inconsequential for present assessment or, worse still, inaccurate information that is misleading to decision-makers.
The actual process of calculating a KPI is relatively simple, although there are some practical issues that may need to be addressed in implementing a workable system making it a difficult task. There are several issues that need to be considered when putting a system in place. Issues such as getting staff involved, storing the data and building the process into the project can make the process difficult.
So why should you be using KPIs in your business? Every company is different, but the most common reasons for implementing KPI’s are that it is a requirement for winning work, a drive for continuous improvement or both.
A KPI system must be used to drive improvement. A system without outcomes creates work without creating any benefit. It is useful for any post-project review to consider the
scores, what they mean, and if there is any relevant action to be taken.
- If a score is low, ask why. There may be good reasons for a score being low that may have been beyond the project team’s control.
- If a score is high, ask why. There may be something that the project team is doing exceptionally well and it may be important to capture it and replicate across other projects.
- Liquidity: Determine how much cash your work in progress is generating or consuming, by monitoring key current asset and liability balance sheet accounts.
- Cash flow: Understand whether individual projects are generating or consuming cash can better identify execution problems on projects. Consistent attention to cash flow also helps to promote timely billing and collections.
- Labor productivity: Labor productivity is particularly important for subcontractors, as productivity problems can break labor budgets and erode profit margins. Managers can separate jobs within a project to identify discrepancies between actual labor expenditures and estimates. This information helps managers and field supervisors forecast cost-to-complete, establish daily performance goals, address current problems, and improve future estimating and bidding accuracy.
- Schedule variance: Project owners demand clear communication regarding project progress and timely completion. Given increasingly complex project specifications and schedule compression, you must be able to identify and monitor schedule variance to deliver projects on a timeline that satisfies owners’ demands. Understanding how factors cause schedule variance, such as change orders and weather, allows you to properly plan, communicate, and coordinate resources, to ensure higher quality output, improved safety, and better resource utilization and allocation. Effectively managing schedule variance also helps construction firms maintain a competitive advantage against other firms that often fall behind schedule.
- Margin variance: Compare your gross margins to business plan objectives by monitoring overall margin variance. Similarly, investigate the gross margins on particular projects, relative to the project estimate, to determine whether the project is achieving expected profitability. Through constant attention to margin variance, management and field supervisors can make the corrective changes necessary to keep individual project margin variance to a minimum and the overall gross margin stable.
- Unapproved change orders: Construction firms face an increasing economic threat from risk transfer provisions in standard contract types. Reduce your firm’s financial exposure by identifying and diligently pursuing unapproved change orders.
- Committed cost: With rising material prices and labor shortages, construction firms face financial exposure when suppliers and subcontractors are not yet committed contractually—particularly on longer-duration projects. It is imperative for your firm to track uncommitted costs to increase the proportion of committed costs where possible and, where necessary, to incorporate factors such as price escalation and contingent cost terms into their committed costs in order to limit financial exposure.
- Backlog—Properly tracking backlog—and the expected gross margins on backlogged work—allows construction firms to avoid the problems associated with insufficient work and profit fade. With this knowledge, your firm can make strategically sound decisions about which projects to pursue.
- Customer satisfaction/scorecard: To maintain competitive advantage, track your firm’s ability to meet owner expectations by compiling and analyzing qualitative feedback. This retrospective examination of past projects identifies potential deficiencies, enabling your firm to address such issues in current and future projects.
Cost and Time – Time for Construction, Time to Rectify Defects
Cost for Construction – Design, Construction, Operational, Client Diagnostic Change Orders, Project Diagnostic, Leader Change Orders
The purpose of this KPI is to see how projects are delivered cheaper and quicker on a year by year basis. This is a useful measure, but is only really useful when there are a number of directly comparable projects where the units are identical or very closely comparable. If there are a large number of differences between the project and the comparator project then the calculation will be complex and the result may be inaccurate.
Cost Predictability – Design, Construction, Operational, Client Diagnostic Change Orders, Project Diagnostic Leader Change Orders
Cost of Rectifying Defects
Cost In Use
MIS of all activities – Profitability, Productivity, Return on Capital Employed, Return on Value Added, Interest cover, Return on Investment, Profit Predictability, Ratio of Value Added, Repeat business, Outstanding Money, Time taken to reach final project
Quality – Defects, Quality Issues at Available for Use, Quality Issues at End of Defect Rectification Periodcash flow, change orders, Construction Business, construction project management, customer satisfaction, Key Performance Indicators, KPI's, labor productivity, liquidity, schedule variance