If you’re like most busy construction business owners, you have plenty on your plate. Adding anything more to it is likely a tall order unless that item is going to make a real difference in your company’s success. Well, here’s something to snack on: benchmarking.

There are many ways to go about benchmarking. It’s essentially a research-based process for comparing your construction business’s current results (in whatever measures you choose) to either your past results or those of similar companies.

Know where you stand

The purpose of benchmarking is to help business owners and their leadership teams more effectively manage their companies and engage in better strategic planning for the future. It provides context for how your construction business is performing and shows you where you might improve.

Internal benchmarking — comparing current performance to historical results — highlights what you’ve done well but also points out potential risks. For example, a benchmarking study might indicate that your long-term debt-to-equity ratio is rising. This means your ability to pay long-term debt may be weakening. Knowing this can prompt an investigation as to why it’s happening and enable you to bring that ratio back into proper alignment.

External benchmarking helps you understand how other construction companies like yours have performed over a given period. For instance, how does your average time-to-completion metric compare with those of similar businesses over the last three years? Is your profit margin in line with comparable competitors?

Choose your benchmarks

The specific benchmarks you choose should be those that have the biggest financial impact on your company. A plumbing contractor, for instance, is unlikely to be as concerned with capital equipment costs as an excavator.

In deciding which benchmarks would be best for your construction company, consult your leadership team and professional advisors. Reach a consensus on which data points to benchmark.

For example, you might compare your estimates to historical averages over a three- to five-year period. Or you could look at how gross profit in backlog, or profit recognized to date, compares to historical averages. Other points to consider include:

• Labor costs, including overtime,
• Overhead and indirect costs,
• Materials and equipment costs,
• Cycle time, and
• Change orders.

In addition, you might want to consider benchmarking bonding-related information. How does your bonding capacity today compare to three years ago? Or how does it compare to your competitors’ average capacity? If you do decide to benchmark any such points, be sure to let your surety know. Demonstrating that you’re working to improve your bonding status should be a major point in your favor.

Gather the data

Once you’ve chosen your benchmarks, you’ll need to gather the data to measure and compare them. If you’re engaging in internal benchmarking, you should be able to rely on regularly generated business documentation such as your financial statements, tax returns, accounts receivable and payable records, and bank statements.

For external benchmarking, look to reputable sources such as industry reports from construction trade associations and government agencies; publicly available data from competitors’ websites, annual reports, and press releases; and online benchmarking tools and databases. Just make sure you’re working with accurate information that’s relevant to what you’re measuring. Construction industry organizations can indeed be reliable sources, but they tend to have a national or regional focus. You may need to drill down further to get local data.

The hardest part is getting started. Once benchmarking is a regular part of your financial operations, it should become easier as you establish trustworthy data sources and sound processes.

Explore the concept

There’s no doubt that benchmarking takes time and resources, which may not be easy for busy contractors to give up. But, done properly, it’s a practice that can take growing construction companies to the next level. If you’re interested in exploring the concept further, contact your CPA.

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