Business metrics provide objective data for making decisions that help you achieve your business goals. In the area of production metrics, what can you measure to give you valuable data for improving your management decisions?
Production metrics fall into two categories: job costing and productivity. Job costing is probably the most common metrics category used by remodeling companies. Productivity metrics are less frequently recognized but are easy to calculate and are very useful for business-model analysis and organizational planning.
Job costing provides valuable feedback on the accuracy of your estimating process, as well as enabling comparisons of relative profitability between project types, lead carpenters, project managers, or salespeople. Raw job costing data comes from your accounting system and staff time records, and is summarized into a report. A good job cost summary will include:
• Job price, including change orders;
• Direct labor hours;
• Direct labor costs, both in dollars and as a percentage of total cost;
• Material costs, both in dollars and as a percentage of total cost;
• Subcontractor costs, both in dollars and as a percentage of total cost;
• Project management costs, both in dollars and as a percentage of total cost;
• Total costs, both in dollars and as a percentage of total price.
Know Your Numbers
Many companies collect this raw data but never use it to compile a summary for each completed job. If you haven’t yet done this, it will be time well spent to develop an individual job cost report form that you can use for analyzing and improving your production efficiency.
Productivity metrics identify the value of production output per unit; for instance, output per direct labor hour, output per lead carpenter, or output per project manager. Calculating productivity metrics is easy: simply divide the total value of work produced by the number of direct labor hours, the number of lead carpenters, or the number of project managers. The resulting answers will tell you how many hours it typically takes to produce a project of $X value, or how many carpenters (or lead carpenters or project managers) you will need next year to meet your production goals of $Y. The range of business models in the industry means there will be a wide range in these metrics. Remodeling’s 2008 Big50 roster reveals a dramatic variance in output per direct labor hour (OP/DLH) between these successful companies, ranging from $53.92 to $722.38. Some companies are highly labor-intensive while others use project managers and no in-house labor.
Every project estimate is based on anticipated costs, and because the feedback loop is so tight remodelers are more likely to measure performance in production than in any other area. There is no industry standard for key production metrics, so it’s important to understand your own and to track them over time. How many direct labor hours are needed to meet your goals? How many lead carpenters? How many project managers? And most importantly, how does this data help you identify improvements that would enable you to meet your company goals?
Richard Steven is president of Fulcra Consulting, which advises remodeling companies on management plans; www.fulcraconsulting.com. To request a copy of the job cost report, contact him at firstname.lastname@example.org.