Benchmarking is the process of comparing one’s business processes and performance metrics with your own historical data or those of other, similar companies. Through this process, you can identify the “best in class” business practices in the construction industry, or in another industry where similar processes exist, and compare these approaches and results with your own. In doing so, you’ll hopefully learn how to enhance your operations.
The first thing to know about benchmarking is that it’s an effective management tool. Benchmarking tells you how your company is performing and shows you where you can improve.
Internal benchmarking, or tracking your own performance, is your guide to weaknesses and opportunities within your operation. If, for example, your long-term debt-to-equity ratio (an indicator of your ability to pay long-term debt) is rising, benchmarking will alert you early on so you can determine why it’s happening and bring it back into proper alignment. Similarly, if your repeat business percentage is declining, benchmarking can give you a heads-up so you can identify and correct the problem.
External benchmarking helps you understand how other construction companies like yours have performed. For instance, how does your time to completion compare with those of similar businesses? Industry organizations, such as trade associations, can be a good source of information, though they tend to have a regional focus.
Indeed, be wary of the source and content of any benchmarking studies you review. National benchmarking, while informative, may not be useful for a locally or regionally focused contractor, because construction practices vary widely across the country. Similarly, a contractor with national reach would likely find local or regional data to be less helpful or even misleading.
Pick your data points
The specific benchmarks you use should be those that have the most effect on your company. A plumbing contractor, for example, is unlikely to be as concerned with capital equipment costs as an excavator will be.
In deciding which benchmarks would be best for you, pick your data points carefully. For example, a comparison of estimates to historical averages using a three- to five-year period typically creates a representative sample size.
You might also look at how gross profit in backlog compares to historical averages or how profit recognized to date compares to historical averages. You’re also likely to examine labor costs (including overtime), overhead, materials and equipment costs, and other metrics.
In addition, surety information — how your bonding compares to that of your peers — is valuable. Your bonding company is likely to be one of the most important users of your financial statement, and any benchmarks you establish in that area can only help your capacity, especially if you can demonstrate that you’re working to improve.
Gather complete information
Once you’ve established your benchmarks, you’ll need to assemble the data you need to measure them. Make sure you’re working with complete information that’s relevant to what you’re measuring. A single financial statement from five years ago won’t provide an accurate representation of what you were doing back then, and a marketing summary that confidently predicts you’re going to double your gross revenues next year isn’t a reliable guide to the future.
Last, when you’ve collected all the information, keep it together — benchmarking should become a regular part of your financial operations. If you report financial information every quarter, benchmark every quarter, too.
Benchmarking can help you move forward at a risk-reduced, carefully measured pace. For best results, work with a financial advisor. He or she can help you choose and calculate the optimal performance metrics.