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Why Construction Companies Should Use Benchmarking to Assess Performance

Posted 12:00 PM by

Construction Site

With another year-end in the books, construction owners and top-level management share a similar concern: How do our company’s financial results compare to our competitors and peers?

That question may not be answered on a specific basis, but it can be evaluated across a broad population of results. And while contractors operate differently in terms of type of work, customer base and specialty, a company can gain a lot of useful information about how efficiently it is operating by benchmarking itself against others.

Here are some common benchmarking areas.

  • Liquidity measures the ability to meet current obligations as they come due. Key metrics include:
    • Current and quick ratios
    • Days in cash
    • Working capital turnover
  • Profitability measures the ability to generate earnings. Key metrics include:
    • Return on assets and equity
  • Leverage measures capital structure and the ability to meet lending obligations. Key metrics include:
    • Debt to equity
    • Fixed asset ratio
    • Average backlog to equity
  • Efficiency measures the sufficiency of, and the ability to utilize, current assets and liabilities. Key metrics include:
    • Average backlog to working capital
    • Months in backlog
    • Days in accounts receivable
  • Productivity measures the output per unit per employee. Key metrics include:
    • Revenue and gross profit per full-time equivalent employee

It is important to have a large population with which to compare when looking for industry benchmarks. Certain services have become go-to sources for this information, including the Construction Financial Management Association and the Risk Management Association, among others. 

Participating in these financial surveys often allows participants to receive a free benchmarking report. If the report is done well, it can provide a company with data that can be viewed across different peer groups, such as industry, geographic location or revenue size.

Since contractors can vary so greatly by industry, location and size, a company should also look at a year-over-year self-comparison of these same metrics. These actual-to-actual results should also factor in the company’s original goals and budgets for the period, which is often the most timely metric because the industry surveys tend to be delayed by the gathering, computing and disseminating of data.

Just as employees undergo an annual evaluation, so should your company’s financial performance through benchmarking. This is the perfect time to look back on your financial and operational results and determine what worked well and what can be improved.

About the Author
Ron Lenz is the partner-in-charge of Katz, Sapper & Miller’s Construction Services Group. Ron's particular areas of expertise include accounting and auditing matters, tax planning and business structuring, mergers and acquisitions, and succession planning. Connect with him on LinkedIn.

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