3 Construction Company KPIs You Should Be Tracking

Without KPIs, you may be confident about opening a new branch for your construction company after two years, but when that duration elapses, you declare bankruptcy.

The most painful part is the fact you never saw this coming.

Here's the truth. From Net Profit Margin to Working Capital Ratio, there are several KPIs construction companies should keep a tab on. Otherwise, your construction company may be in the red, yet you imagine it's the next big thing.

Of course, you can go the whole hog and monitor up to 20 construction KPIs.

However, the following three KPIs are among the most critical — and ones you should consistently track.

But first—

What are Construction KPIs?

Known as Key Performance Indicators, KPIs are objective metrics that asses your company's progress against the business goals you've set.

KPIs help you know whether your construction company is on the right track — so that if it's headed in the wrong direction — you can take timely steps to put it back on course.

Now that we know what KPIs are, and why they're critical for construction companies, discover three KPIs your construction company should always track.

Construction KPI #1: Net Profit Margin

Unless you're running a charity, you're in business to make a profit. 

It doesn't matter how many buildings you've constructed in a year — or how many millions of dollars you earned as revenue. 

At the end of the day, you'll want to know whether that effort yielded a profit or a loss.

The truth is that you may lose money regardless of closing several deals — or using low-cost materials in your projects. However, as is often mentioned, nobody ever went broke taking a profit. 

And Net Profit Margin is among the best measures of profit.

Knowing your net profit margin will help you—

• Find out whether your company has made a profit.
• Assess your company's profit size.
• Monitor the profit-making trend of your construction company over a period.

What Is Net Profit Margin?

Net Profit Margin is the net profit of a business expressed as a percentage of its sales. 

Tracking Net Profit Margin will help you know how much of each dollar you made as sales translated into actual profit. 

Put another way, Net Profit Margin is what percentage of sales you will keep. 

This is because some of your sales often go into paying your business expenses or taxes. And the thing about business is that It's never about how much you make — but how much you keep. That's how critical Net Profit Margin is.

How To Calculate Net Profit Margin

Net Profit Margin is total net profit divided by total revenue, multiplied by 100, according to the formula below.

Net Profit Margin = (Net profit ÷ revenue) × 100.

To keep a tab on your Net Profit Margin, you need to monitor it monthly to spot any seasonal variations and yearly — to see the trend.

It would be best to compare your Net Profit Margin to the average Net Profit Margin in the construction industry, especially among construction companies of similar size.

Construction KPI #2: Sales Growth Rate

Aside from the Net Profit Margin, another critical KPI you should consistently track is your Sales Growth Rate.

This is because while your net profit is crucial, your net profit doesn't drop from the skies. It is a function of your sales. You can't generate a profit if you can't sell a product.

What Is Sales Growth Rate?

Sales Growth Rate is a financial metric that measures the ability of your construction company to generate revenue over a period.

Sales Growth Rate can either be negative or positive. Positive Sales Growth Rate implies your construction company is growing. Conversely, a negative Sales Growth Rate implies your construction company is declining.

While you should be happy with a positive Sales Growth Rate, you need to assess the trajectory.

For example, if, for three consecutive years, your Sales Growth Rate has been 15%, 10%, and 5%, you should not rest easy.

As has been frequently observed, young construction companies often post higher growth rates. 

On the other hand, the Sales Growth Rate of construction companies flatten out with time. This is not necessarily a bad thing, however. It means you should start thinking of diversifying and introducing other revenue streams.

How To Calculate Sales Growth Rate

Sales Growth Rate is Current Year's Sales divided by Previous Year's Sales multiplied by 100 — according to the formula below.

Sales Growth Rate = {(Current Year's Sales − Previous Year's Sales) ÷ Previous Year's Sales)} × 100.

For example, if your construction company earned $750,000 and $500,000 as revenue in 2021 and 2022, respectively, your Sales Growth Rate will be—

{(500,000 - 750,000) ÷ 500,000}× 100; which is (-250,000 ÷ 500,000) × 100.; 

Hence, your Sales Growth Rate will be -50%.

Construction KPI #3: Working Capital Ratio

So long as cash is king in business — particularly in construction companies —working capital remains among the most critical KPIs to track.

If you don't have the cash to undertake projects, your construction company could be in its last days. And that's where Working Capital Ratio comes in.

What Is Working Capital Ratio?

Working Capital Ratio is the financial metric that measures a company's ability to meet its short-term obligations. 

For a construction company, your short-term obligations include immediate construction projects and current expenses, including salaries and wages.

What figure should you aim for here?

The working capital of your construction company should be at least 1. Then again, while a figure above one could still be fine, anything above 1.5 may mean idle cash or short-term assets.

How To Calculate Working Capital Ratio

Working Capital Ratio is current assets divided by current liabilities as expressed below —

Working Capital = Current Assets ÷ Current Liabilities.

To clarify, current assets are cash and other assets you intend to consume — or convert into cash — within a financial year.

On the flip side, current liabilities are financial obligations you intend to settle within a financial year.

Need Help Tracking Your Construction KPIs?

Here's the thing. As a construction company, success involves knowing your KPIs, tracking them consistently, and making quality strategic decisions depending on what they reveal.

At Atlas Accounting Group, we've been working with construction companies like yours and helping pinpoint opportunities for revenue growth.

Do you want to be more confident of your numbers? Let's chat.