I am often asked what the most important Key Performance Indicators (KPIs) are for the construction and real estate development industries. Key Performance Indicators (KPIs) measure how well a business performs compared to its objectives. In my suggested order of priority, these are the most common KPIs that construction companies monitor.

Cash Flow. Positive net cash flow shows the company is bringing in more than it spends. Conversely, negative net cash flow typically means the business spends more cash than it makes. Contractors use net cash flow to measure money moving through a business during a specific period and projected cash flow to provide a forward-looking view of money that will enter and leave a business. If you have not started projecting cash flow, let's have a strategy session to review the first steps.

Debt Compliance Ratios. All banks have specific ratio ranges that the construction company must adhere to in order to continue borrowing money. These are just a few: 

• Leverage ratios, including debt to equity, are usually less than 2.75.

• Equity, also known as tangible net worth, typically requires a minimum amount.

• Minimum liquidity is usually a minimum amount of cash and cash equivalents reported on the balance sheet.

Income Statement. 

• Cost of Sales. There are many different views, but the industry standard is to include materials and labor necessary to build the home. This EXCLUDES indirect construction costs, financing costs, and commissions.

• Goals: 

Builders with land <78%

Builders/no land <85%

Remodelers <80%

• Gross Profit. If you can only focus on one ratio, choose this one because it shows how sales prices and costs relate. 

Builders with land <22%

Builders/no land <15%

Remodelers <20%

• Indirect Construction Costs. Compensation for production, ranging from assistant superintendents to the head of production, includes compensation for architecture, estimating, and purchasing, as well as monthly expenses related to the field. Most companies also include compensation for warranty personnel and amounts paid to trade partners and suppliers. Goals: 

Builders with land <4%

Builders/no land <4%

Remodelers <6%

• General and Administrative.

Builders with land <6%

Builders/no land <6%

Remodelers <6%

In upcoming blogs, we will discuss Balance Sheet Ratios and WIP reports, but before we do, let's consider this crucial point: the most successful construction companies ensure clear accountability in three areas: tracking the metric, monitoring its performance, and implementing corrective action when necessary to achieve the goal. Although this seems like a lot of work to track and review, there are a number of excellent dashboards and reporting products that can help track and display your most important metrics.