Project Margin Variance or Project Cash Position? What are the top Analytics KPI’s for the construction industry?

Contributing: David Clemens – SAP Industry Solution Marketing; Ravi Rathi – SAP EC&O Industry Business Unit

The ability to access and analyze business process data is necessary to successfully manage construction projects.  But what key performance indicators (KPI’s) are the most important to managing your business? Knowing what KPI’s will provide the insight for your unique construction company might be the most important requirement of all.

The emergence of enterprise data and information is being used to measure business performance by creating “bench marks”, “yard sticks”,“score cards”, or just “reports”; all types of Performance Management instruments.   Typically construction businesses have measured their performance, only looking at financial information; however, managing project execution and resource utilization is also crucial to a construction firms success. Now, an abundance of non-financial information coming from the enterprise systems can be tapped into as well, to develop key performance indicators (KPI’s). A construction firm, more than ever, needs KPI’s to effectively manage the business.

With nearly flat construction growth, especially in the US, projects are scarce, bids are competitive and so keeping a healthy project margin is vital. Now, with enterprise Business Intelligence (BI) solutions, companies have access to capabilities to retrieve the data, make sense of it and establish reporting, score cards and operational dashboards (dashboards are not just for the executives anymore!)

BI solutions can provide these KPI’s.

It’s easy to see that KPI’s are very necessary to successfully run projects and construction business. No company today, whether it’s a general contractor, or highly specialized EPC can afford to know “what happened?” and then make adjustments. Today, better operational and financial performance requires each business area to know “what’s happing, now?”

Maybe more than any services business, project-based engineering and construction companies require a broad scope of focused; informative KPI’s in order to measure project health. Here are several examples of KPI’s that some of the leading construction firms use today:

Schedule variance indicator	Calculated as the difference between original planned completion duration and current forecasted completion duration and expressed as a % of the remaining duration, schedule variance indicates potential delay in project completion.
Margin variance indicator	Calculated as the difference between actual and planned gross margin, margin variance indicates how a firm is doing on the profitability goal for an individual project or for an entire portfolio of projects.
Project cash flow/cash position indicator	Calculated as the difference between all cash receipts and all cash disbursements on a project, cash position could indicate over-billing/under-billing issues. In an under-billing situation, General Contractor firms usually compensate by not paying sub-contractors; however firms which self-perform the work will either borrow money and incur financing costs or will have to give up interest if they use their own cash.
Unapproved change-order indicator	Calculated as the sum of all the costs incurred on un-approved change orders, it indicated the financial exposure/risk a project could be carrying. Firms also term this as the amount of project gross margin at risk.
	Tip – Deciding what KPI’s are important to your business is an important step towards building  a performance management framework.  However, adding or changing your KPI’s may be neccessary. The ability to modify what KPI’s you use should be a consideration when in choosing and implementing BI solutions.
Committed cost indicator	Calculated as the total of all uncommitted costs divided by total committed cost, it is an indication of the financial exposure or the contingency liability a firm could be looking at due to material price increases and subcontractor pricing.
Productivity index	Calculated as earned hours divided by actual hours, it is an indication of productivity of labor involved in executing activities in a project. Especially important for firms which self-perform the work, low labor productivity could have significant impact on schedule and costs and hence on profitability.
Rework indicator	Calculated as a total cost incurred to do rework in a project divided by total direct cost in a project, it is an indication of the gross margin at risk arising from quality of work and project management issues.
Equipment Utilization indicator	Calculated as the # of days a piece of equipment was used divided by total # of days the equipment was available for use, it indicates the amount of time an equipment is sitting idle at the job site. When multiplied with the cost data, it also indicates the unnecessary equipment costs a project or a firm could be incurring while equipment is not being used.

The list included here is just a sample. There are more KPI’s, some may be very unique to an individual construction business, but the majority are proven as best practice KPI’s.  Knowing what to measure in your construction business is the first step in gaining better control of your operations and maintaining healthy, balanced financials.  With many best-practice, industry specific KPI’s available, there is an easy way to start, by choosing what’s right for your business. Does your firm have established KPI’s. Are BI solutions being leveraged to create dashboards and scorecards?

Have a comment? 

Please let us know your go-to KPI’s in the comment secion below.

Don’t see it listed? Feel free to suggest something.

Related Links:

SAP for EC&O

Video Overview: SAP Performance Analytics for EC&O

Demo: SAP Performance Analytics for EC&O

Smart KPI’s

Dashboard Project