Most builders may be familiar with the process of benchmarking and know that it involves comparing a certain set of results to prior years, industry averages or other criteria.
What you may not know is how important benchmarking can be to running your business profitably, and how you can use it most effectively.
Benchmarking is good business
Contractors who regularly benchmark their companies’ financial performance and other operating metrics against averages for their specific trade, niche, company size, type of work or region know the value to be gained from learning how well they compare to their competitors.
Becoming “best in class” in any business or specialty often hinges on having objective data on “where you are” among your competitors, what your performance strengths and weaknesses are, and what trends are taking place within your industry and the industries that directly impact your business or specialty.
Benchmarking is the way to gather that data and apply it to your company. Benchmarking comparisons help quantify performance in specific areas and allow owners and leadership teams to forecast trends, anticipate a required change in direction for weak areas and increase focus on strong areas.
Average vs. best in class
Simply comparing your company to prior years or industry “averages” will not get you where you need to go.
Your company might have performed poorly in prior years, and simply equaling what everyone else has done may not help you make more money.
If you want to improve your company’s financial performance, compare its results to the best-in-class measurements for your specialty, and then you will have a goal worth achieving.
Best in class is often the top 25 percent most profitable firms in any particular classification. If you can meet or beat those stats, you will know you are on the right track.
If your benchmarking statistics do not measure up to best-in-class standards, then you can set strategic goals to address those specific metrics.
Where to begin
So where do you go for best in class measurements for your specialty?
A number of general contractors and subcontractors belong to national trade associations that calculate and publish annual benchmarking results for their members and typically make them available when those members share their companies’ financial results with them.
CFMA (Construction Financial Management Association) has been doing the same thing for decades for the entire construction community in America, breaking down the results by contractor size, geographic region and trade. CFMA publishes its results annually in its Construction Industry Annual Financial Survey available via the Internet.
Most sureties maintain an extensive database that includes every company they underwrite, categorized by contractor size, region, trade and more.
Your surety should be glad to share with you how your company stacks up against others like yours in their database.
Other organizations, such as CPA firms, perform contractor surveys of specific local regions. Their contractor clients frequently ask them, “How’s everybody else doing?”
So rather than just giving you a shoot-from-the-hip answer about what they have seen, or national or regional data, these professionals may produce financial surveys of local contractors.
Some contractors find this type of benchmarking data to be more useful in gauging how contractors are performing in just their region. You may want to try to find someone in your region who does this and take advantage of that opportunity.
Key benchmarks and ratios
What are some of the benchmarks contractors should be tracking? In addition to looking at net income and whether or not you made money, key financial ratios include gross profit, operating income, working capital, debt-to-equity, backlog, underbillings to overbillings, and profit gain or fade from open to closed jobs.
Profit gain or fade on jobs may be the most critical area to examine and understand, especially if your closed jobs regularly show significant fade from what you expected to make.
Ideally, your final profit ratio on closed jobs should equal or exceed the estimated profit ratios while the jobs were in progress. Best-in-class contractors routinely show more gross profit on closed jobs than the original estimates when those jobs began.
If yours do not, you need to analyze your jobs by the type of work you are doing, contract size, geographic region, estimator, project manager, owner, general and any other factor that may consistently cause you to lose money. Also, employee turnover, equipment utilization and overall workload can impact job profitability.
Once you begin benchmarking, you’ll have the data you need to consistently and objectively analyze your company’s performance and set solid, quantifiable goals.
Observe key ratios, be proactive and you will be well on your way to becoming “best in class” yourself!