The need for KPI management in construction industry:
Managing a successful construction business today is a big challenge. The business environment is getting more competitive and demanding for owners and managers of construction companies. Maintaining an acceptable level of performance and profitability is both an art and science even for the experienced manager. As a result understanding and taking advantage of KPIs, metrics, benchmarking, dashboard reporting and best practices can benefit any type of construction business. While all of these approaches are frequently associated with the latest technology, the art and process of KPI management, monitoring and reporting have nothing to do with technology but they are rather management practices which can be utilized in many different ways, environments and approaches. When implemented effectively these best practices can lead to better business performance and higher profit margins for the organizations.
Creating KPI system for construction business: Performance management and performance measurement in construction companies
All KPIs, metrics and dashboards are part of your overall performance management system. The main goal is to monitor critical to success metrics and indicators and use them to successfully manage and improve the business over time. By being able to track performance continuously management can proactively manage the business and identify opportunities on time.
At a corporate level it is critical to establish the methodology and framework for KPI management. This is where metrics and information from various projects are summarized and monitored. In addition benchmarking of these metrics will make sure management is focused on the right initiatives. All these practices help companies improve performance, develop best practices and establish processes and activities which deliver the required results. These KPIs are monitored continuously – daily, weekly, monthly, quarterly and annually.
Construction KPIs are generally organized and grouped into a several key categories which must be included in every performance management system:
- Cost – cost related metrics monitor the expenditures and spending per project and overall. It is important to track the cost metrics on an ongoing basis to ensure proper cash management and manage the profit margins.
- Productivity – while monitoring costs is crucial it only gives you a limited perspective. The productivity metrics will tell you how much value your business creates for all stakeholders. Examples include levels of resource management, employee productivity and scheduling. These are all excellent sources of ideas for developing best practices and continuous improvement,
- Safety – safety metrics monitor critical information regarding safety – both in a reactive (number of incidents, types of incidents, lost time, injuries) and proactive (audits, check points and process control measures) way.
- Quality – quality control metrics ensure all customer requirements and project demands are met. Quality assurance KPIs help management minimizes rework and defects as well as minimizes the cost of quality while management is focused on customer satisfaction. Again both reactive and proactive metrics are considered for maximum impact on improving performances.
Before outlining overall company wide KPIs it is useful to start by identifying project specific metrics. For example by looking at a typical project management can start by identifying project objectives, targets and typical activities.
KPI awareness, training and culture for delivering high performance in construction industry:
It is important to create a KPI driven culture and develop skills where everyone in the company is on the same page. Streamlining and cascading the construction metrics towards achieving the overall objectives and company strategy is crucial for success. Training of employees and involving various departments and teams in the performance management system at different levels is beneficial for the overall performance.
The benefits of benchmarking construction KPIs and metrics:
Benchmarking is a key process in performance management because it takes the KPI tracking to the next level. Monitoring metrics and identifying trends is the foundation of performance measurement and improvement but comparing the metrics both internally and externally reveals additional opportunities for improvement. For example, internal benchmarks allow you to compare one project metrics against another project metrics, while external benchmarking helps you compare your company overall metrics against industry benchmarks and competitors.
Is your metrics system actionable?
Another important point is to make sure your indicators and metrics are actionable – this means that you are able to act on the results and improve them. Monitoring metrics for the sake of historical trends alone is not enough. By modifying your existing metrics you can improve them and make them more actionable. Keep in mid that key performance indicators are performance metrics which are crucial for your business success.
Monitoring cash flows and cash control
One of the most important and critical for success metric for every construction business is cash flow. Successful businesses monitor cash flows from investments and operations closely and are aware that this is not the place for taking risks and making mistakes. Forecasting cash flows is a key discipline in construction industries and it makes difference between successful organizations and thousands of construction companies going out of business each and every year. Monitoring and tracking cash flow trends on your construction scorecard is a must.
Process metrics vs. outcome metrics
Results oriented metrics monitor the deliverables or the results of your projects, processes and initiatives. On the other hand process oriented metrics monitor leading metrics and proactively analyze and predict possible issues and opportunities.
Every successful manager needs to include both of these metrics on the construction dashboard reports – leading indicators help mangers discover, learn and improve while lagging metrics report the results over time. By managing and improving the performance of the leading indicators management strives to continuously improve performance and results.
Regardless of the type of metrics used in the construction business it is always important to link metrics to the business goals and to consider all stakeholders – customers, the business and employees.
Sample construction KPIs and frequently used metrics in construction business:
Customer: Customer Satisfaction, Customer Complaints, Customer Loyalty, Customer Lifetime value, Customer metrics by segment/location.
Quality: Number of Defects, Cost of Quality, Prevention Cost, Rework, Process metrics and work-in-progress indicators.
Employees: Employee retention rate, employee productivity, training hours, employee satisfaction, employee turnover, absenteeism, hours.
Profitability: Gross margin per project, activity based costing (per project, process and activity), operational margin, EBTDA (earnings before tax, depreciation and amortization), project gross margin.