Beyond Finance Metrics in Construction

Gross Margin, Net Cash Flow, Profit/Loss, Cost in Excess—these are just a few of the many financial metrics commonly used in the construction industry to measure performance, secure bonding capacity, and define success. Their importance cannot be overstated, and this article is not meant to diminish their significance. However, it’s worth exploring the metrics that go beyond these traditional financial measures, which I believe are the real needle-movers when coupled with the finance measures above.

Safety: The Priceless Metric

Let’s start with safety, a topic that hits close to home for me. Early in my career, my older brother, who served in the military, including deployment in Operation Desert Storm, and is now seeking his fifth term as Chief of Police, told me, “You cannot put a price on safety.” This principle is ingrained in our national defense strategy and is equally applicable at the local level in high-quality-of-life areas. When he first shared this with me so bluntly, I was taken aback because I had seen several safety budgets and knew that there was indeed a "price" on it. However, my perspective changed a few years later when I experienced the first construction site fatality of my career.

From an IT perspective, a site fatality triggers numerous data inquiries on both the legal and operational fronts, and internally as well as externally. We needed to understand whether we had done everything possible within our program parameters to prevent it, and if not, what went wrong. I spent countless hours sifting through disparate sources of data, and I didn’t mind doing it. The incident profoundly affected me and crystallized my understanding of my brother’s point: when a life is at stake, no effort or material cost is too great to prevent that loss or provide closure to the victim’s loved ones.

A proactive safety culture has never led to an unsafe job site.

This is the part where I could throw out basic metrics like Incident Rate (incidents per hours worked), Near Miss Rate per 100 employees, or LTFIR (Lost Time Injury Frequency Rate). However, let’s take this a step further. What metrics can truly reflect your firm’s commitment to a safe work environment? Consider Safety Training Hours per FTE, Penalties Paid, or Perception Survey Results. Even more challenging, what about identifying preconditions that could lead to increased safety risks? Investing in identifying and capturing these metrics is paramount if we are serious about fostering a proactive safety culture.

Quality and Logistics: The Cost of Getting It Right

Next, let’s delve into quality and logistical metrics within construction projects. In operations, you want every task done right the first time. The methods to achieve this goal can vary widely. In IT project management, this might mean choosing between Agile and Waterfall methodologies. In construction operations, it could involve deploying Six Sigma, Total Quality Management (TQM), Lean Construction methods, Building Information Modeling (BIM) and/or a hybrid approach with all of them.

In today’s economy, where material costs are rising alongside wages, the cost of rework has become increasingly hard to stomach. It’s ironic that the “QC guy” showing up at your job trailer often gets more side-eye than the “IT guy” these days. As with safety, there are standard indicators such as Defect Rate, Rework Cost, Non-Conformance Report (NCR) Count, and Warranty Claim Count that most companies should be able to capture quickly.

Taking these measures to the next level involves integrating them with the cost and safety measures that we already track. This integration gives rise to advanced indicators like the Quality-Cost-Safety Correlation (QCSC). QCSC analyzes whether an increase in defects correlates with a rise in project costs and safety incidents. Understanding the financial and safety impacts of quality issues enables targeted interventions. Additionally, implementing a Cost of Quality (CoQ) framework can help balance the cost of quality measures against their impact on project outcomes. Long-term profitability is often the by-product of diligently pursuing these types of measures.

Cost: Bringing it Full Circle

Throughout my career, I have had the privilege of working with brilliant construction financial minds. I have witnessed CFOs and controllers achieve remarkable outcomes with limited resources, making it look effortless, and challenging me to do the same. Let's bring this conversation full circle back to cost measures, tying them to the themes of safety and quality that we've discussed earlier.

While the previous sections provide a glimpse into the metrics outside of finance that should be part of your analytics considerations, it's crucial to revisit the fundamentals. Management guru Peter Drucker’s most frequently quoted statement is: "The purpose of business is to create and keep a customer." However, this quote is often taken out of context. The full statement reads:

"Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business."

There’s a lot to unpack in that quote, some of which is better suited for a future discussion. For now, let’s focus on the second function: innovation.

Innovation doesn’t always mean discovering new ways to fill the same need. In the context of cost metrics, it often involves driving a deeper understanding of existing needs—both those of our external customers and our internal stakeholders. Elevating financial metrics isn't just about cutting costs; it's about understanding the relationships and ratios that underlie performance metrics, which in turn can lead to more strategic decision-making.

One technique I use to enhance financial metrics is by exposing these relationships and ratios. For instance, the Risk Index per $1,000 in revenue is a composite metric that reflects safety and quality performance indices per dollar earned. By analyzing such metrics, an organization can gain insights into how different aspects of the business impact overall financial performance. This, in turn, allows the organization to be more proactive in its business strategy, addressing potential risks before they affect the bottom line.

Moreover, integrating cost metrics with other key performance indicators (KPIs) like safety and quality can lead to a more holistic view of project health. For example, understanding how cost overruns correlate with safety incidents or quality defects can reveal underlying inefficiencies or areas where process improvements are needed. This kind of insight is invaluable for making informed decisions that not only reduce costs but also enhance overall project outcomes.

In summary, while cost metrics are often seen as mere numbers on a balance sheet, they represent much more. When analyzed in conjunction with safety, quality, and other operational metrics, they can provide a powerful tool for driving innovation and strategic growth. By focusing on the relationships between these metrics, we can move beyond mere cost-cutting and towards creating real value for our customers and stakeholders.

How Tilson Can Help

By now, you might be feeling confident about your analytics progress, envisioning a daunting list of measures to capture, or perhaps wrestling with data quality issues. This is where Tilson can step in. We understand the intricacies of the analytics landscape, especially within the construction technology space. Our team, with decades of experience and notable work for many ENR 400 construction companies, is poised to guide and/or implement a strong analytics strategy for your organization.

From KPI discovery to analytics stack maintenance, we’ve got you covered. Leveraging the latest, current, and emerging technologies, Tilson is dedicated to transforming raw data into actionable insights, enabling your organization to make data-driven decisions that drive efficiency, reduce costs, and enhance project outcomes.

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