Key Performance Indicators

Liquidity Indicator

Key Performance Indicators

Over the years, several key performance indicators (KPIs) for decision-making have evolved.  KPIs are meaningful yardsticks that contractors can see and use to effectively communicate the day-to-day operations of the business, supported by the best practices of construction.  The most profitable and successful construction companies have improved their businesses by aligning people, processes, and technology to produce results that are better than the industry average.

The construction industry has generally accepted KPIs that indicate the overall health of a firm. However, the definition and understanding of each of these KPIs varies widely since a typical construction company has a complex combination of requirements.

Here are the important indicators which many successful companies follow:

1. Liquidity indicator

2. Schedule variance indicator

3. Work-in-process (WIP) reporting

4. Margin variance indicator

5. Project cash flow indicator

6. Unapproved change-order indicator

7. Committed cost indicator

8. Backlog indicator

9. Scorecard indicator.

This article describes the Liquidity Indicator.  For more information on the other indicators, please contact me.

Liquidity Indicator:

Cash is the single most important asset that keeps a construction business operational; all sins are forgivable except one: running out of cash. The complexity of contracting makes forecasting cash flow difficult at best. Late client payments, schedule delays, invoice processing, change order approval, vendor/subcontractor payments, labor costs, and numerous other factors affect the timing and ultimate receipt and disbursement of cash.

Understanding cash flow is critically important and is examined in detail when working with the WIP indicator.  One key aspect of cash flow is cash demand or liquidity which is discussed here. A manager should have the ability to evaluate organizational liquidity (availability of cash) and then should be able to drill down and see which projects are providing liquidity and which are using liquidity.  Once the amount of liquidity at the project level is known, an organization can work to improve it.

The next step toward liquidity improvement is to identify actions that will improve the cash generation process.  A project that is losing money may still be generating positive cash flow.  Conversely, a project that is making money may produce negative cash flow.  For example, a positive cash flow can be achieved inappropriately by not paying subcontractors and vendors. Therefore, causes of both negative and positive cash flow should be investigated and analyzed.

Looking at cash flow from a contractor’s perspective reveals four key balance sheet accounts that are largely controlled by project managers. A contractor is funding his WIP with his own cash if accounts receivable (including retention), and underbillings (costs and earnings in excess of billings) exceed accounts payable (including retention) and overbillings (billings in excess of cost and earnings on contracts).  The funding can be in the form of equity or borrowed money. Read more »

Schedule Variance Indicator

Construction project owners are demanding faster construction, cutting the typical project duration dramatically. This schedule compression has made scheduling today of crucial importance. General contractors with the ability to meet and deliver projects quickly have a major competitive advantage.  The goal of scheduling is to create a tool that can be used to drive the project and build credibility with all the participants, particularly the owner. Quality, safety, communication, planning, coordination, and resource utilization are all enhanced through the scheduling process, which includes updates to it and integration of input from all project participants.  Scheduling and its value in communication to owners sets expectations, seeking owner satisfaction with the project’s execution.

Project schedules represent a detailed plan of individual activities, sequencing, duration, and interdependence. Many project schedules are prepared simply at the inception of the project. Though most owners require submission of these schedules as part of the contract, not all general contractors leverage the full advantage of schedules by using them continuously to drive projects to successful completion.  The integration of subcontractors into project schedules is critical to effective scheduling.

Schedules that are loaded with costs, resources, and labor hours help identify cash flow and overall resource requirements. These schedules are invaluable in developing an aggressive schedule of values that are then submitted to owners for payments on progress billings.

Effective scheduling techniques include the integration of subcontractor schedules into a master schedule from which project execution is driven. This process establishes and communicates critical milestones, critical paths, and delivery dates. Read more »