The construction industry continues to face labor shortages, material cost volatility, inflationary pressures and increased financing costs. In this environment, contractors need more than historical financial statements to evaluate performance. The most successful firms rely on key performance indicators (KPIs) to identify trends, manage risk and make informed business decisions before issues impact profitability.
As advisers to construction companies, we often find that firms focus on revenue growth while overlooking some of the operational and financial metrics that drive long-term success. Revenue may tell you how busy you are, but the following KPIs can often reveal whether you’re actually generating sustainable profits and maintaining adequate cash flow.
Net income remains a foundational measure of financial performance. It reflects the profitability of the entire organization after considering all expenses, financing costs and taxes.
>> Our Take: While net income is important, we encourage contractors to look beyond overall profitability. Significant project losses, uncollectible receivables or margin erosion on a handful of jobs can sometimes be masked by strong performance elsewhere within the business. Reviewing monthly trends and comparing actual results to budgets often reveals issues before they become permanent problems.
Project-level profitability is often more meaningful than overall company profitability. Monitoring gross profit margins by project can help identify:
>> Our Take: During year-end reviews, we frequently see profitable contractors lose margin not because of inadequate revenue, but because project costs were not monitored in real time. Understanding profitability at the job level allows management to make corrective decisions before a project is completed.
Days in Accounts Receivable (AR) measures how quickly invoices convert into cash. A rising AR trend may indicate:
>> Our Take: Contractors often focus heavily on winning new work while underestimating the importance of collecting existing receivables. In today’s environment, improving collections by even a few days can significantly reduce borrowing needs and interest expense.
Liquidity remains one of the most important measurements of financial strength. Common metrics include:
>> Our Take: Liquidity affects more than day-to-day operations. Sureties, bankers and lenders frequently evaluate working capital and current ratio metrics when determining bonding capacity and credit availability. Contractors that consistently maintain strong liquidity often have greater flexibility to pursue larger projects and growth opportunities.
Many construction companies fail due to cash flow challenges rather than a lack of profitability. A rolling cash flow forecast can help management anticipate:
>> Our Take: We commonly observe contractors with strong income statements experiencing cash shortages because earnings are tied up in receivables, retainage or underbillings. Cash flow forecasting bridges the gap between accounting profitability and operational reality.
A well-maintained WIP schedule remains one of the most powerful management tools available to contractors. WIP reporting helps identify:
>> Our Take: When reviewing contractor financial statements, WIP schedules frequently provide some of the earliest indicators of project risk. Jobs showing repeated profit fade often signal estimating, project management or change order control issues that warrant management’s attention.
Backlog measures the value of contracted work remaining to be performed. Evaluating backlog helps answer several important questions:
>> Our Take: Not all backlog carries the same value. A large backlog made up of low-margin or high-risk projects can create challenges despite appearing positive on paper. Contractors should evaluate both backlog volume and anticipated backlog profitability.
Labor generally represents one of the largest costs incurred on a construction project. Productivity metrics may include:
>> Our Take: With labor shortages remaining a challenge across the industry, improving productivity often provides greater financial benefit than simply adding headcount. Measuring labor efficiency helps management determine whether or not additional staffing is driving profitability or simply increasing costs.
Change orders can significantly influence project profitability. Contractors should monitor:
>> Our Take: One of the most common issues we encounter is contractors performing additional work before receiving formal approval. This can create collection risk, increase underbillings, and negatively impact cash flow. Strong change order controls are often directly correlated with stronger project profitability.
Safety and quality are operational metrics that ultimately impact financial results. Examples include:
>> Our Take: Safety incidents and quality deficiencies create costs far beyond the initial event. Rework, project delays, insurance costs, warranty claims and reputational damage can all reduce profitability. Contractors that invest in safety and quality programs often achieve stronger financial performance over the long term.
Financial statements provide an important view of historical performance, but they often tell management what has already happened. KPIs offer insight into what may happen next. In our experience working with construction companies, the most successful contractors are not necessarily those generating the highest revenues. Rather, they are the firms that consistently monitor job profitability, maintain strong WIP reporting practices, manage cash flow proactively and use operational metrics to identify risks before they affect financial results.
By implementing a KPI dashboard tailored to the needs of your organization, management can improve forecasting, strengthen profitability, enhance bonding and lending relationships, and position the company for long-term success.
Contact Gino Scipione, Mullen Socha or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.