Construction Industry Alert: Benchmarking – A Key Construction Financial Management Performance Tool

Have you ever wondered how your company’s performance measures up against the best in your industry? Using a process called benchmarking, companies can compare their operating results to other companies in the same industry.

The first step in effective benchmarking is to identify a peer group for your company. This can be subjective, but ideally you want to focus on companies that are similar in size, compete in a similar industry segment as well as geographic market and, otherwise share common operating characteristics.

The next step is to determine what benchmarks you will use to compare your company to the industry. Benchmark data can be measured against information taken directly from your financial statements, such as total net worth, revenues, gross profit margin, operating profit margin, and net margin. Benchmark ratios are also commonly used to compare performance and typically are classified in the following categories: liquidity ratios, profitability ratios, leverage ratios, and efficiency ratios. These ratios are commonly referred to as Key Performance Indicators.

Once your company identifies its position in relation to the best companies in the industry, benchmarks can be used as a tool to initiate change within the company. Management can meet with employees and set both short and long term goals toward improving its Key Performance Indicators. Once goals are set, management should monitor the KPIs on a monthly basis to track the progress toward achieving set goals.

Benchmark data for use in comparing a company’s performance can be obtained from third party reference sources such as CFMA’s Annual Construction Industry Financial Survey and Benchmark Reports service. Many bank and bonding companies use RMA’s Annual Financial Statement Studies and will often share the information used in their analysis of a customer’s financial data upon request.

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Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.