Key Performance Indicators With Construction – Production Reports (Part 1 of 3)

Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!

The primary key performance indicator with construction is the annual financial income statement (profit and loss statement). For most traditional contractors, the bottom line, net profit after taxes should be no less than 7% with an average of 9.4%. If the contractor desires to be in the upper 10% of the industry, net profit must be greater than 12%. For those involved in the trades, minimum net profit should be greater than 10%, with the average being 14% and the upper tenth percentile bracket having greater than 18% net profit. Again, after income taxes are paid.

However, a year is a long time to wait to review performance. In the interim there are other key performance indicators to identify trends and provide feedback to the management team. They consist of three distinct groups of indicators:

  1. Production Reports
  2. Backlog/Pipeline Information (Part 2 of 3)
  3. Interim Financial Statements (Part 3 of 3)

All three groups of reports have key performance indicators that provide the necessary information to the construction management team of overall performance. All the reports must be taken into consideration as a synergetic system of feedback. The following subsections illustrate the top three reports for production and the corresponding best methods to interpret the data. This article is an introduction to the field production reports with key performance indicators. The sequential series of articles on this website cover backlog and pipeline of future work finishing up with interim financial statements. Other articles on this website go into greater detail, evaluation techniques and of course, analytical procedures. This is Part 1 of 3 articles introducing the respective key performance indicator reports for construction.

Production Reports

During interim periods, production reports are the superior set of key performance indications due to their strong connection to actual field activities. The overall goal is to understand if field production is complying with preset goals of production, thus ultimately producing financial results as forecasted. Production reports consist of three key statements. The first is the overall field productivity report, i.e. the change in percentage of completion from the prior interim period. It is a relatively simple report and evaluation is quick and easy. A second auxiliary report is a full job productivity report tied to individual jobs but presented in a full spreadsheet. The last and critical to identifying the underlying issues are the individual job performance reports. With this set of performance indication, each active job is evaluated by comparing actual job costs against estimated job costs and the associated change during the interim period of time.

The following explain each in detail and illustrate with some examples.

Overall Field Production

This report provides an overall snapshot of field activities by active jobs. There are three required data fields per job: 1) overall contract value, 2) prior period percentage of completion, 3) current estimated percentage of completion. with this data, the management team can evaluate the change in production during the interim period. For smaller contractors, those with sales less than $20 Million per year, the most common interim period is a calendar month. Larger construction companies use quarterly feedback to evaluate overall field production.

The formula to calculate change is as follows:

Overall Contract Value                                                             $Z,ZZZ,ZZZ
Prior Period % of Completion                                                            X%
Current Period % of Completion                                                        X%
Change in Completion (Production % of Contract)                           X%
Value of Production During Interim Period                                 $ZZZ,ZZZ

As an example, XYZ Construction has a contract with a hospital system to add a dining hall to the east wing. The agreed upon contract is for $6,783,200. At the end of the prior interim period, XYZ Construction was 58.2% complete with the contract. At the end of the current interim period, the contract is now 69.4% complete. Here is the report for this one project:

Overall Contract Value                                                             $6,783,200
Prior Period % of Completion                                                        58.2%
Current Period % of Completion                                                    69.4%
Change in Completion (Production % of Contract)                       11.2%
Value of Production During Interim Period                               $759,718

This is presented along with all other projects to introduce overall production for XYZ Construction during the interim period. Here is the report for XYZ Construction:

XYZ Construction Inc.
Interim Period Production Report (Key Performance Indicator)
Month of May 2020
                                                                          Dining Hall    Pump Station #2     Pultz Middle School Auditorium     Lewis Rd. Fire Station     Total
Overall Contract Value                                      $6,783,200      $2,414,800                   $4,691,100                                       $8,081,500           $21,970,600
Prior Period % of Completion                               58.2%                71.0%                          6.3%                                                 22.6%                 Various
Current Period % of Completion                          69.4%                 87.7%                        13.5%                                                 41.0%                 Various
Change in Completion (Production %)                11.2%                  16.7%                          7.2%                                                 18.4%                 Various
Value of Production During Interim Period        $759,718           $403,272                    $337,759                                          $1,486,996            $2,987,745
Interim Period Budget                                                                                                                                                                                             $2,500,000
Production Performance in Excess/(Deficit) of Budget                                                                                                                                             $487,745

The primary goal of the report is to identify the overall anticipated revenue during the period along with actual field production against estimated production. Any difference from anticipated can be further evaluated with other key performance indicator reports, specifically full job productivity. With the above report, XYZ Construction had an excellent month with production. Novice or immature business owners often believe that performance of this nature indicates financial success. Sophisticated business owners and managers need more information to form an opinion about actual field production and the long term outcomes from this better than anticipated production during May. 

Full Job Productivity Report

The interim production period report focuses on overall company wide production via volume of completed work in dollars. However, this doesn’t indicate if the value is good or bad; it just simply identifies overall production volume. Therefore, a secondary report clears up whether the volume of work performed will generate the overall contribution margin (dollars necessary to offset indirect costs of construction, overhead and finally contribute to the desired profit) needed for the company. Thus, a more detailed report is required. This report takes the above overall field production and includes accumulated costs during the same time period. The concept is similar, but there are more rows of information.  The end goal is to identify if the respective jobs met the budgeted contribution, i.e. job profit expectation at the job level and for the company overall.

In addition to the three pieces of information from the production report above, three other additional parts are necessary to generate this report. The first additional piece of information is the estimated hard costs of construction. The second piece comes from the accounting software, it is the accumulated hard costs to date and the prior interim period’s accumulated hard costs to date. The result is an indication of progress of job profitability. Is it on track to meet its respective budgeted profit? Here is the overall formula:

Overall Contract Value                                                                                       $Z,ZZZ,ZZZ
Contract’s Estimated Hard Costs                                                                        $Z,ZZZ,ZZZ

Estimated Contribution Margin (Job Profit)                                                       $Z,ZZZ,ZZZ
Prior Period % of Completion                                                                                      X%
Current Period % of Completion                                                                                  X%
Change in Completion (Production % of Contract)                                                      X%
Value of Production During Interim Period                                                           $ZZZ,ZZZ
Prior Period’s Accumulated Direct Costs                             $Z,ZZZ,ZZZ
Accumulated Direct Costs End of Current Period               $Z,ZZZ,ZZZ
Increase in Direct Costs During Current Period                                                    $ZZZ,ZZZ
Contribution Margin (Job Profit Earned) During Current Period                          $ZZZ,ZZZ
Actual Job Profit Earned Through Prior Period                      $ZZZ,ZZZ
Budgeted Job Profit Based on % of Completion to Date        $ZZZ,ZZZ
Actual Job Profit Less Budgeted Profit to Date (Excess Profit/(Deficit))                $ZZ,ZZZ

The goal of this report is to identify if the respective job added additional contribution or decreased the expected contribution to date during the calendar month. In effect, management wants to validate that the project is staying on budget and if it improved or negatively impacted anticipated job profit during the period under review.

To help the reader better understand, the following illustration continues by using the dining hall project example from above and adding the additional required data fields. Here is the report:

XYZ Construction, Inc.
Job Productivity Report – Dining Hall Project
May 2020

Overall Contract Value                                                                                       $6,783,200
Contract’s Estimated Hard Costs                                                                        $4,829,600

Estimated Contribution Margin (Job Profit)                                                       $1,953,600
Prior Period % of Completion                                                                                    58.2%
Current Period % of Completion                                                                                69.4%
Change in Completion (Production % of Contract)                                                    11.2%
Value of Production During Interim Period                                                           $759,718
Prior Period’s Accumulated Direct Costs                             $2,901,814
Accumulated Direct Costs End of Current Period               $3,389,424
Increase in Direct Costs During Current Period                                                     $487,610
Contribution Margin (Job Profit Earned) During Current Period                          $272,108
Actual Job Profit Earned Through Prior Period                                                  $1,046,008
Actual Job Profit Earned Through Current Period                $1,318,117
Budgeted Job Profit Based on % of Completion to Date      $1,355,798
Actual Job Profit Less Budgeted Profit to Date (Excess Profit/(Deficit))        ($37,681)
Actual Job Profit Less Budgeted Profit Prior Period (Excess Profit/(Deficit))      ($90,987)
Current Period’s Change in Actual to Budgeted Profit to Date:                       $53,306

This report informs management of two important evaluation points related to this specific job. First, what is the current over/under position related to expected job profitability to date. In this case, the job is underperforming $37,681 to date. The second piece of critical information is how much the most recent calendar period impacted this job profitability to date. In this case, the current period improved the overall job profitability by $53,306. In effect, XYZ Construction was expecting job contribution towards profit of $218,801 and it earned $272,108. Thus, the job performed really well during May assuming all factors (construction costs, milestone achievements, etc.) were normal or reasonable during May. But this is often not the case over the short time period; the shorter the time period for this type of report, the greater the volatility with its results. Thus, this report is much more stable with its results for a three month period than a 30 day cycle. 

The above report is submitted for all jobs in a column presentation similar to the overall field production spreadsheet. This allows the management team to identify the most likely jobs that contributed to any discrepancy (whether an improvement or reduction in expected profitability) during the time period. 

Although a key performance indicator, management should not purely rely on its results due to the volatility with short duration periods. It is still informative, but not as reliable as longer time period cycles. A third more detail KPI report with production is much more reliable with short duration time periods. This is the job profitability versus estimated profitability by construction phase.

Job Profitability by Phase

Within the batch of key performance indicators for production with construction companies, the job profitability by phase report is the most detailed of the group. There are more detailed reports, but they are not considered key performance indicators because they transition from an overall view of production to more specific areas of performance within a respective job. This report is designed to point out a problem area or a potential problem area within a job in order for management to either understand and accept the discrepancy or request additional detailed reports to dig into the problem or positive outcome. In most cases, management rarely desires to want additional detail related to outstanding performance with a phase of construction until the project is 100% completed. During interim periods, negative discrepancies are addressed.

The report takes a job’s current actual direct costs of construction and compares it against estimated direct costs of construction. In general, most jobs go through phases of construction. For example, with the dining hall project from above, it has 17 phases of construction (sometimes referred to as milestones). The job is approximately 70% complete which means that several latter phases of construction may not have even started yet. Many of the early stages of construction are completed and their results can be evaluated. There are several stages of construction that are ongoing and these are the ones that management will want to understand as to their overall effectiveness. 

To help the reader understand, let’s take a closer look at the dining hall job and their respective phases of construction along with the overall percentage of the entire contract.

XYZ Construction Inc.
Phases of Construction – Dining Hall Contract
Expected Date of Completion – September 2020
Phase of Construction               % of Contract
Demolition                                         3%
Site Preparation                                 4%
Underground Utilities                        5%
Foundation                                         7%
Pad                                                     3%
Course Walls                                      5%
Roof Structure                                    6%
Utilities                                             13%
Exterior                                             10%
Doors/Windows/Skylights                4%
Coolers                                              5%
Kitchen Equipment/Ventilation       11%
Interior                                              7%
Trim-Out                                           5%
Furniture/Fixtures                             7%
Landscaping/Hardscaping                2%
Cleanup/Testing/Finishing                3%

With most reports of this nature, the phases of construction have a high correlation to the timeline of construction. Thus, for this dining hall, most likely the doors/windows/skylights phase is 100% done and most likely trim-out has not started yet. Thus, management would expect to see coolers, kitchen equipment/ventilation and the interior work in process since the job is around 70% completed. When evaluating this report, the key is to focus in on the actual costs to date for the respective phase along with estimated costs and the overall phase’s percentage of completion. Here is the report for the dining hall:

XYZ Construction Inc.
Job Profitability by Phase – Dining Hall Contract
Through May 31, 2020
Phase of Construction               % of Contract         Actual Costs       Estimated Costs      Actual (Over)/Under    Completed
Demolition                                         3%                   $147,208               $144,900                   ($2,320)                       Yes
Site Preparation                                 4%                      192,628                 193,200                        572                          Yes
Underground Utilities                        5%                      243,617                 241,500                   (2,117)                         Yes
Foundation                                         7%                      351,001                 338,400                 (12,601)                         Yes
Pad                                                     3%                      153,902                 144,900                   (9,002)                         Yes
Course Walls                                      5%                      240,406                 241,500                    1,094                          Yes
Roof Structure                                    6%                      326,907                 290,000                 (36,907)                        Yes
Utilities                                             13%                     643,848                  627,800                 (16,048)                        Yes
Exterior                                             10%                     459,818                  483,000                   23,182                         No
Doors/Windows/Skylights                 4%                      212,212                  193,200                  (19,012)                       No
Coolers                                               5%                        91,410                  241,500                 150,090                         No
Kitchen Equipment/Ventilation        11%                      291,403                  531,300                 239,897                         No
Interior                                                7%                          8,121                 338,100                 329,979                         No
Trim-Out                                             5%                           0                       241,500                 241,500                     Not Started
Furniture/Fixtures                               7%                        26,943                 338,100                 216,386                         No
Landscaping/Hardscaping                  2%                           0                         96,600                   96,600                     Not Started
Cleanup/Testing/Finishing                 3%                            0                      144,100                  144,900                     Not Started
                                                                                   $3,389,424           $4,829,600   

Although this report identifies the respective phases, actual costs incurred to date along with estimated costs; it doesn’t explain the sourcing of the $37,681 actual costs in excess of budgeted costs. Why? Those phases in process but not completed yet have costs incurred but no reported percentage of completion as to that stage. Thus, the management team can not evaluate any potential problem within the phases currently in process. The management team can only evaluate those phases completed to date. In the above case, through utilities. To illustrate, the report is modified to show only completed phases through the report date and their respective contribution towards the over/under budgeted expected profit in the aggregate. Review the modified report below:

XYZ Construction Inc.
Job Profitability by Completed Phase – Dining Hall Contract
Through May 31, 2020
Phase of Construction               % of Contract         Actual Costs       Estimated Costs      Actual (Over)/Under    Completed
Demolition                                         3%                   $147,208               $144,900                   ($2,308)                       Yes
Site Preparation                                 4%                      192,628                 193,200                        572                          Yes
Underground Utilities                       5%                       243,617                 241,500                   (2,117)                         Yes
Foundation                                        7%                       351,001                 338,400                 (12,601)                         Yes
Pad                                                     3%                      153,902                 144,900                   (9,002)                         Yes
Course Walls                                      5%                      240,406                 241,500                    1,094                          Yes
Roof Structure                                    6%                      326,907                 290,000                 (36,907)                        Yes
Utilities                                             13%                      643,848                 627,800                 (16,048)                        Yes
Totals                                                                        $2,299,517             $2,222,200               ($77,317)

This report tells management that the current accumulated loss to date is driven by the losses incurred from completed phases of construction. Thus, the current in process phases are performing in excess of estimated costs by the difference of the job loss to date and the accumulated loss for completed phases. In this case, current in process work is performing approximately $39,636 better than budgeted to date ($77,317 loss to date from completed phases less the current job profit loss to date of $37,681 from the full job productivity report above). There are currently six phases of this job in process with various percentages of completion at this point in the job’s timeline.

*Note From the Author: “It has been my experience that costs lag actual percentage of completion due to various circumstances. In effect, project managers and supervisors overestimate percentages of completion with ongoing phases; thus increasing the accrual revenue without the associated costs being recorded for the respective phase. Therefore, the management team would give greater reliance on actual completed phases and the loss or gain accrued to date through completed phases of construction and not include in process phases with their expected job profitability. In effect, key performance indicator reports are simply indicating a trend. With the above example, the management team would interpret the available data to indicate that it is possible that current in process work and future phase work MAY recover the underperformance with expected job profitability. But, this is unlikely. Performance to date would indicate that this job’s actual profit will most likely come in around $125,000 less than the anticipated job profit of $1,953,600.”

The key to reading key performance indicator reports related to field activities is tied to actual performance to date for completed phases. Any significant (>3%) change over the estimated amount should be investigated, discussed and a lessons learned fact sheet presented by the estimator and project manager. Thus, this mistake is not repeated in the future. With the above example, only the roof structure phase should be discussed and detailed out as to why its costs exceeded 103% of the estimated costs.

Field production reports as key performance indicators only indicate a trend. Management must be conservative with their respective interpretations of these reports. In addition, management must take into consideration other available data to gain a consensus of the company’s overall performance. In addition to actual work in process (field production reports), another batch of reports helps management understand the future of the company. In Part 2 of this series, backlog and potential pipeline of jobs are explained and evaluated.

Summary – Field Production Reports as Key Performance Indicators

There are three field production reports in construction that serve as key performance indicators. The first is an overall picture of financial revenue earned per project for the entire portfolio of projects in process. It is referred to as the overall field production report. Its purpose is to indicate overall volume of work completed during the interim period of reporting. For smaller contractors, this is a monthly report. For larger organizations, this is a quarterly report.

The overall field production report only identifies the revenue earned during the period, it does not indicate the total contribution (job profits) towards the company’s overhead and desired profit. To gain a better understanding, a second field production report is necessary. Most contractors rely on the full job production report which identifies not only the revenue earned, but the aggregated direct costs for the interim period of time and the cumulative revenue and direct costs to date. The end goal of this report is to identify a trend as it relates to actual expected job profit given the current percentage of completion against the estimated job profit as a percentage of completion. Each job is reported in a column format and totaled for all jobs. This assists the management team with identifying discrepancies by job. Those jobs with significant discrepancies, i.e. greater than 3%, are further evaluated at the job level.

A job level key performance indicator is the job profitability by phase report. Here, the job is broken down into phases or milestones of completion along with the actual and estimated hard costs of construction. Any significant discrepancy is reviewed in detail. The overall goal is establish a trend or pattern of performance and extrapolate that trend out to the job’s completion. This helps management understand and if necessary, make changes prior to completion. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

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