The construction industry can be unpredictable, which forces subcontractors to adapt. This includes adapting the Key Performance Indicators (KPIs) they use to measure the performance of their business. At any point in the year, it’s worth reassessing the health of your current KPI dashboard to gauge whether it’s giving you an all-encompassing look at your business. We spoke to Luke Matelan, a senior consultant for FMI Corp, to hear his take on the most important KPIs that subcontractors should examine.
Matelan asserts that when it comes to KPIs, every company uses them differently. While some have KPIs that help ensure their strategic plan is on course, most have KPIs that are more focused on financial metrics at the project or enterprise level. While the KPIs mentioned are not meant to serve as a replacement to your existing KPI dashboard, you should highly consider incorporating any that you don’t currently track.
Table of Contents
1. Operating Profit Percentage
What It Is: A measure of a company’s profitability, calculated by dividing operating profit by revenue and expressing it as a percentage.
Calculation Method: 
This metric can be evaluated job-by-job and at a company level. Matelan recommends that you maintain this KPI on a monthly basis.
Why it Matters:
- Operating profit percentage (OPP) serves as a barometer for your operational performance.
- OPP will help you gain insights into monthly financial performance.
How to Improve OPP:
- Efficient labor management and waste reduction are key strategies for improving this KPI.
- Matelan previously did a presentation for Billd on how to become an operationally superior contractor by shaving just a few minutes off certain tasks.
- Being more efficient with labor and constantly working to save hours and minutes in the field – that’s how best-in-class subs think.
- Aim for a double-digit figure (10% and above) to be considered a best-in-class contractor.
2. Net Overbillings
What It Is: The amount by which a subcontractor has billed a client in excess of work performed. This data is closely monitored by controllers and CFOs.
Calculation Method: Net Overbillings = Billings – Revenue Recognized
Why it Matters:
- Everyone looks at receivables as a KPI, which is a good thing to do. Net overbillings is a more granular data point that can reveal whether your project managers are actually invoicing customers – it is tough to get paid if you are not even billing your customers!
- Delayed billing ultimately strains cash flow.
How to Improve It:
- Preach to Project Managers (PMs) to be aggressive with their billings.
- According to Matelan, some GCs will push back on a sub for billing too much, but this should not deter subs from being aggressive with their billings, within reason.
According to Matelan, there are a few considerations here. It goes without saying that pay-when-paid contracts add a layer of complexity; you’ll find you have an easier time overbilling for lump sum jobs.
3. Days Sale Outstanding
What It Is: The average number of days it takes a company to collect payment after a sale, indicating both its cash flow and the efficiency of its accounts receivable (AR) management.
Calculation Method: 
Why it Matters:
- Keeping an eye on cash flow via DSO helps you ensure you’re collecting in timely manner after you bill.
- Cash is the oxygen that keeps a company alive. Timely collections are essential for survival.
How to Improve It:
- Use AR aging reports to monitor how many receivables are over 30 days, 60 days, 90 days etc. Once they’ve crossed a certain threshold, outline and implement a more aggressive procedure to get paid.
- Keep AR under 45 days if possible.
- Empower project managers to take charge of collections, leveraging their relationship with the general contractor for prompt payment.
- Have PMs balance being polite, yet assertive, when asking to be paid.
- Good GCs know they’re only as good as their trade partners. Without good subs, they’re nothing. Seek out GCs who know that and will work to get you the payments you need to keep your business moving, and get every promise in writing.
4. Labor Dollar Variance on Trailing 12 Months
What It Is: The difference between actual labor costs and budgeted labor costs over the past 12 months, which reflects the effectiveness of labor cost control measures.
Calculation Method: (Actual # Hours Worked x Actual Rate) – (Planned # of Hours Worked x Budgeted Rate)
Why it Matters:
- Subs are in the business of labor management. Jobs that manage labor well perform well from a market standpoint.
- When you set both the labor budget and number of hours worked from the very beginning of the project, it not only ensures that you’re on budget, it gives you an opportunity to potentially beat your budget.
How to Improve It:
- Everyone from estimating to PMs to foremen should circle back to an estimate after winning a job and identify what kind of cost structure they want. It might align with the estimate, but they’ll want to break down that sizable labor estimate into more bite sized pieces that reflect how a job is going to be built.
- It goes without saying that crews should turn in daily time cards.
- Younger companies can get away with disorganized processes, but $30-40M is the tipping point where disorder becomes unmanageable. This is when short interval, pre-job and exit planning become more important, and you should treat your team’s adherence to these processes as a trackable KPI of its own.
Pro Tips on KPI Management
- Keep it Simple: Determine the top 5-10 KPIs that are true drivers of your business, track them with rigor and review them frequently – display them if possible.
- Rectify Quickly: If a KPI shows underperformance, don’t drag your feet. Put some time on the calendar, get your team together, analyze the root cause, and implement corrective measures as quickly as you can.
- Coordinate with the Field: In construction, tons of KPI data depend on seamless coordination with the field. Talk to your field team to get buy-in on adhering to the processes you set in place. They need to know why they’re tracking this data. Ensure regular communication channels with the field to prevent info from falling through the cracks.
In the world of subcontracting, mastering KPIs is a strategic imperative for sustainable growth. By embracing and excelling in their chosen KPIs, subs can navigate the complexities of the industry, optimize their operations and achieve excellence in project delivery.
