Construction niche audit partner, Jay Montalbano’s article, Build Your Competitive Intelligence with Benchmarking, was published in the May issue of Associated Builders and Contractors, Inc–Pelican Chapter newsletter.
Competitive intelligence is easy to joke about. “You mean corporate espionage,” many contractors might joke. Not exactly. Legally and ethically gathering relevant data on your competitors can be a valuable, productive practice, and construction companies can go about doing so in a variety of ways.
Among the simplest ways to build your competitive intelligence is to benchmark key metrics of your construction business against those of similar companies. That way, you can get an idea of whether you’re lagging behind in important areas or perhaps excelling in ways you didn’t even realize.
Where to start
In and of itself, benchmarking doesn’t have to be a competitive intelligence effort. In its most basic form, internal benchmarking compares your construction company’s past performance with its current performance.
Many contractors, however, want to know how they stack up against their competitors. Thus, competitive benchmarking involves analyzing your company’s metrics against those of other construction businesses in a given market or across the industry as a whole.
You might undertake a competitive benchmarking effort by meeting with others in your niche from outside markets and then comparing notes. A national or regional builders’ association meeting, for instance, may provide an ideal setting to learn more about your peers’ operations and get some ideas about how to improve yours.
If you want a more objective approach, consider joining a trade organization that performs annual financial surveys or working with a construction consultant who has access to a large database of contractor data. Either way, the premise is the same: You’re comparing your operations to others in the construction industry to determine whether your business is where it should be.
What to track
Naturally, you need to carefully decide which metrics you want to assess. Just about anything that can be observed or measured can be benchmarked. For example, you might want to look at project quality, on-time delivery, safety record and job costs.
Choose the specific metrics on which you wish to improve. If you want to improve safety, for example, look at the number of accidents that have transpired on your jobs, and when and where they occurred. Then compare these figures with internal data from previous years or with your competitors’ metrics.
If you want to enhance profit margins, compare actual job costs to each project’s revised budget, overbillings and underbillings to volume, and cash flow to gross margins. Four more important metrics for contractors are the debt-to-equity ratio, gross profit margin, average age of accounts receivable and working capital ratio.
Another key aspect of benchmarking and reviewing financial data is its value in planning for bonding and state licensing requirements. It can also help you better understand how your chosen measures have improved or worsened over your company’s recent history. And competitive benchmarking can, again, compare this information with competitors’ results, where available.
How to visualize
Whichever benchmarking method and metrics you choose, your company won’t realize any improvements unless you analyze the information you’ve gathered. Because it’s easy to get bogged down in the details, design a spreadsheet that lists your company’s jobs throughout the year and displays columns for each benchmark. (Your CPA can help you with this task.) Doing so will allow you — and anyone else interested in your company’s performance — to visualize where you stand in light of the metrics you’ve chosen.
After setting up your spreadsheet, follow its format consistently with each subsequent benchmarking effort. But also realize that it’s not set in stone: Once you’ve established a baseline, you must tweak it occasionally to get the information you need.
What’s going on
No construction company is an island. Competitors are everywhere, be they old rivals or startups. Fortunately, there’s plenty of information to go around. Benchmarking can help you get and stay informed on where you stand and what’s going on around you.
Jay Montalbano is an audit partner with Hannis T. Bourgeois, LLP, Certified Public Accountants and is in charge of the HTB construction niche. He is a CPA, a Certified Construction Industry Financial Professional (CCIFP) and a Certified Valuation Analyst (CVA). He can be reached at email@example.com or (225) 928-4770.