By Alicia Rader, Greenwalt CPAs
Even if your construction company has been profitable for the last few years, you probably desire to do better. And, if you have been running in the red, you definitely need to determine ways to improve your company’s operations. How can you increase the likelihood that your company will become more efficient? One methodology that has gained wide acceptance within the construction industry is benchmarking.”
Essentially, benchmarking (also referred to as “best practices” in some circles) requires you to compare your firm to other companies operating within the same part of the country. If conducted properly, benchmarking can provide results that can trickle down to the bottom line.
In the past, construction firms have generally used standard accounting methodology to monitor productivity and cost-efficiency. For instance, the estimate for a particular renovation project may be based on the correlation of historical data to actual labor hours. While this process provides valuable insights, it is not a complete indicator of the productivity required for future projects.
The premise behind benchmarking is that measurement is fundamental to improvement. By establishing higher standards to achieve, your company will be
better positioned to attain its goals.
Of course, the exact components of a benchmarking process may vary, but the basic steps are as follows:
- Set the goals to be achieved.
- Measure performance against other construction firms.
- Determine when performance does not achieve the stated objectives.
- Establish procedures that address the deficiencies in measured activities.
- Recognize improvement as a result of the procedures.
- Continue to meet benchmarked standards.
What are the specific types of measurements used for a construction firm? Naturally, these will vary, but consider the following: the accuracy of estimates (expressed as a percentage variation of estimated cost versus actual cost); the percentage of time heavy equipment is working versus time spent at the job site; the percentage of on-site labor hours for redo work to total hours; the percentage of dollars of change orders to overall contract value; the duration of the actual project compared with the initial schedule; and the time and day of highest job productivity.
Since construction companies are exposed to special risks related to profitability and costs that may be caused by weather delays, equipment failures, labor issues and numerous other factors, these variations should be accounted for when averages are computed in benchmarking measurements.
In summary, benchmarking and accounting work hand in hand. Develop a plan with the assistance of your internal accounting staff to define your company’s benchmarking strategies. Greenwalt CPAs would be pleased to brainstorm important areas to track.