How to Measure Performance in Construction Business Using KPIs

Listening in on conversations between business executives and those who work in a subordinate role, you will likely hear the word “KPI” being mentioned repeatedly in varying contexts. These days, KPIs are everywhere, and there is no escape from them – you can either embrace their existence or detest them. Things that are both valuable and quantifiable are intermittently measured and observed by means of KPIs, and these KPIs exist in many forms ranging from the grades on your kids’ transcripts to the health metrics in your health records.

Despite their prevalence, there has still been a widespread misunderstanding in the interpretation of KPIs. If you go and ask around what a KPI actually means, it is highly likely that you will get a large number of varying definitions. In a nutshell, a key performance indicator (KPI) is a quantifiable measure – you can think of it as a gauge – that businesses use to numerically measure their performance against the set targets or objectives. It helps to lead businesses in the intended direction, especially in these difficult times.

Many businesses have been facing unprecedented hardships as the pandemic continues to cause major upheavals in the global economy. Particularly, if you are doing business in the construction sector, maintaining a competitive edge has become more indispensable than ever for survival. You will need a technique that helps you evaluate your business progress in real-time – this is what a KPI does – and formulate proper strategies to adapt to what the KPIs indicate.

How to Correctly Employ KPIs

In the world of business, there has been a case of the blind leading the blind – I am not referring to people who are visually impaired. It is a prevalent situation in which people with limited knowledge of KPIs provide relevant advice to unknowing individuals. Unintentionally, this has propagated the incorrect application of KPIs throughout many industrial sectors.

Nevertheless, defining a KPI for your business can be a tricky process. As a rule of thumb, any KPIs should be directly associated with the mission, vision, and core values of your business. Otherwise, your business will be progressing on a path toward an ultimate objective that has little to no impact on the whole organization. You will be squandering money, time, and other valuable resources that could be better directed elsewhere.

There is no better way to explain the proper use of a KPI than by giving a practical example. Suppose that in the mission and vision statement, you have established for your business, one of your core values is to provide a safe working environment for your employees in the office and on construction sites. Now, if you intend to numerically measure how your business has been performing with respect to this core value, what kind of KPI will you use?

In practice, businesses in construction often use a safety-oriented KPI, known as Lost Time Injury Frequency Rate or LTIFR, to measure their safety performance. The calculation of your LTIFR is as follows:

LTIFR = the total number of lost-time injuries in a period*1000000/the total hours worked in that specific period = 5*1000000/2,000000 = 2.5

The above calculation assumes that there were 5 lost-time injuries recorded in a period and in that period, there were 2000000 hours worked. By multiplying the lost time injuries by 1000000, we got an answer of 2.5. This means that for every 1000000 hours worked, the number of lost-time injuries that will likely occur is 2.5.

Types of KPIs You Can Use

There is an exhaustive list of KPIs that are applicable to the management of businesses in construction. To navigate your business through this period of economic downturn coupled with a looming recession, you can focus on – but you need to also take into consideration the goals of your business – the use of these few critical financial KPIs and project-related ones:

Gross Profit Margin

Finding out the gross profit margin of one of your projects allows you to ascertain how much you have been getting on average per dollar collected. Assume that for the project, you have spent a total amount of $1000000 on labor, materials, and equipment, and collected $123000 in return. The gross profit margin is computed below:

Gross profit margin = ($1230000 – $1000000)/($1230000) = +-$0.20

The +-$0.20 tells us that at this point in time, for every dollar of spending, you have made an approximate amount of $0.20. You will want to keep an eye on this KPI closely and share it with the management team.

Net Profit Margin

Net profit margin is a more in-depth variant that you can use to measure the profitability of a project. It captures the cost of interest, taxes, and operating costs on top of the types of expenditures that gross profit margin considers. To compute the net profit margin of a project given that the total labor, material, and equipment expenditure is $1000000, with the cost of interest, tax, and operating cost being $20000, $30000, and $50000 respectively. Let the total cash inflow be $1600000, and the calculation is as follows:

Net profit margin = ($1600000 – $1000000 -$20000 – $30000 – $50000)/$1600000 = +-$0.30

Labour Downtime

This KPI enables you to monitor the productivity level of your employees – you will want the result to be very close to 0. Dividing the total number of downtime hours during a period by the number of working hours in total during that period will give you the number of downtime hours per hour worked in that period on average. For instance, suppose that there were 1000 hours of downtime recorded over a 1000000-hour working period, the calculation of the downtime hours per hour on average is shown below:

Labour downtime = 1000/100000 = 0.1 hours

This means that for every hour worked, there was a downtime of 0.1, which is equivalent to 6 minutes. If improving productivity on your projects is what you are planning to do, you will need to start using this KPI to track the productivity performance of your employees.

Planned Hours Versus Actual Hours

As a contractor having employees at job sites, you should compare the work hours budgeted for a particular task with the actual work hours once the task is complete. This is just a simple numerical comparison; there is no calculation required.

If the actual work hours are higher than budgeted, it means that your profit margin may have been eaten into by the cost of labor. You shouldn’t let this slide, but instead, take the initiative to look into it and determine what the cause was for the extra work hours. You will find yourself getting better and better at producing an accurate work schedule.

It is highly likely that you will come across a task that completes earlier than planned. It will be beneficial for you to figure out why and consider the underlying cause next time when you plan for a project. Doing this will help make your bids more competitive and projects more profitable – this is definitely killing two birds with one stone!

Cost Variance

Figuring out the cost variance of a project gives you an insight into the project’s cost performance. The cost variance of a project at a point in time is the difference between the budgeted cost of work supposed to have been performed and the actual cost of work that has already been performed at that point in time. We have talked about how to ascertain the cost variance or CV of a project before; I suggest that you read this article if you are new to the application of Earned Value Analysis in construction.

Percentage of Employees Trained in Health and Safety

Last but not least, calculating and monitoring the percentage of your workforce that has been health-and-safety trained will help you determine the extent of your commitment to providing a safe work environment for your employee. This simple KPI helps contractors prevent the occurrence of workplace accidents while it assists them in understanding the effectiveness of their health and safety programs. The calculation is as simple as dividing the number of trained employees by the total number of employees, both trained and untrained. For example, let’s say that you have 40 employees, of which 20 are untrained. The calculation is as follows:

Percentage of trained employees = 20/40 = 50%

Particularly in this COVID-19 crisis, protecting the health and safety of your employees has to be of the utmost priority. You will need to ensure that all of your employees – you can use this particular KPI to track your performance – are well-trained to protect themselves from the virus at the workplace.

Contact Leopard Project Controls today for your next CPM Scheduling Project.