The Top Ten Financial Metrics Builders and Remodelers Need to Track

Managing a residential construction company is a monumental task because it involves a million moving parts, each of which can directly impact how successful and profitable the company is. 

This is why accurate financial tracking is so important at the project and company levels. 

But where do you start, and what should you focus on?

In this article, we'll break down the top ten financial metrics you can use to measure the financial health of both your projects and your company.

We call these metrics KPIs or Key Performance Indicators, and using them is vital to maintaining your remodeling or custom-building business's financial health.

What Are Financial Metrics and Why Do You Need Them

Simply put, financial metrics are quantifiable measures you put in place to track your residential construction company's ability to perform against your estimate.

Also known as KPIs, these measures are often tracked on a project-by-project basis as well as on the company level to measure overall performance. Every residential contractor may choose to track different metrics, but the most common performance indicators in the construction industry revolve around financial KPIs, like total revenue, expenses, net cash flow, and overall profitability. These numbers are essential for making informed decisions, planning for growth, and avoiding financial trouble.

As a business owner, you need these metrics in place for many reasons, such as:

• Making informed decisions about your processes and how to optimize them

• Ensuring you are profiting on all construction projects by tracking revenue and expenses

• Keeping your company's finances on track by managing cash flow and cost management

What Happens if You Aren't Tracking Key Financial Metrics?

Tracking your financial metrics helps you stay in control, make wise decisions, and keep your business profitable. So if you aren't using them, you're basing your business decisions on incomplete information.

Running a residential construction business without financial visibility from key performance metrics is like building a house without any plans—you won't know if you're on the right path until it's too late. Without clear financial data, you may face several challenges that could threaten your company's success.

Poor Decision-Making

Every business decision you make should be based on solid data, but without tracking key financial metrics, you're relying on guesswork. You won't have accurate insights into costs, revenue, and profit margins, which can lead to underpricing jobs, overcommitting resources, or taking on projects that drain your cash flow. These mistakes can quickly add up and put your business in a dangerous financial position.

Unclear Job Profitability

One of the biggest risks to construction companies of not tracking financial metrics is losing sight of which projects are profitable and which aren't. Every remodeling or custom home-building project has many variables that can increase costs.

If you're not tracking your expenses against revenue for each job, you might complete projects thinking they're profitable, only to realize later that they weren't.

Cash Flow Problems and Bankruptcy

Consistently losing money on projects can lead to mismanaging cash which leads to serious financial trouble. If your expenses exceed your income for too long, you may struggle to pay your construction teams, trade partners, vendors, or even yourself. Over time, this can result in mounting debt, missed payments, and bankruptcy. Many construction businesses fail because they don't realize they're in financial trouble until it's too late.

The Top Ten Financial Metrics Residential Contractors Should Track

Tracking the right financial metrics helps you understand your profitability, manage costs, and make informed decisions for growth.

In this section, we'll outline the top ten metrics residential contractors should be tracking, explain why they matter to the overall health of your remodeling or custom building business, and show you how to calculate them properly.

1. Gross Profit Margin

Gross Profit Margin % is the percentage of revenue left after subtracting the project's direct costs, including labor, materials, and trades. Also known as the Cost Of Goods Sold (COGS). This is the top-level profit before adjusting for e interest, taxes, depreciation, and amortization (EBITDA). It's an important metric to track because it shows the profitability of your projects before considering overhead expenses and net profit margin.

Gross profit margin is typically calculated like this:

A healthy range for fixed-cost builders is 30-35% gross profit margin. In cost plus, we tend to see this range between 22-26%. If you're not hitting these targets and want to change that, click below.

Click here to learn more about why knowing your gross profit margin is important and how to calculate it.

2. Net Profit Margin

Net Profit Margin % is the percentage of revenue remaining after deducting all overhead expenses. Very often net profit margin is conflated with Owner's Compensation. This is inaccurate. If you are on payroll within your company, then the Net Profit Margin on your Income Statement takes this into account. If you are taking dividends/distributions, then you should subtract this amount from the net profit shown on your income statement to have an accurate representation of your company's net profit.

This is how you calculate your net profit margin:

You should aim for an 8-10% net profit margin to ensure your business has funds to reinvest in its growth. Remember, this is NOT the owner's compensation, as that should be factored into the overhead.

If you're struggling to turn a net profit, then click here.

Click here to read more about how markup and profit margins are connected and how you should be using your markup to ensure you're getting the right net profit. 

3. Overhead Percentage

Overhead percentage is the proportion of revenue spent on overhead costs, typically including expenses like office rent, salaries, marketing, utilities, and insurance. High overhead can reduce profitability, even if gross profit margins are strong. 

Tracking this percentage helps business owners decide whether all of their overhead expenses are required, what they can adjust, or whether they need to increase their markups to provide higher gross profits to accommodate their overhead. 

Overhead percentage can be calculated like this:

A general range for overhead percentage is between 5-15%. If you fall outside of this range, that is fine as long as you are still showing 8-10% in net profit margin.

If this isn't your reality, then it's time to evaluate your overheads, increase your markup, and likely increase your gross revenue as well. 

Want to chat with me to understand your numbers?

4. Job Cost Variance

Job Cost Variance is the difference between a project's estimated and actual costs, making it a key metric for evaluating financial performance. A significant variance can reveal inaccurate estimating, increased material costs, or labor overruns. By tracking this metric, contractors can refine their estimating process, improve cost control, and enhance profitability on future projects.

The calculation of estimated to actual costs is dependent on different conditions. For example, if the project or the cost code is incomplete, you can use the estimated to actual baseline calculation; however, this merely shows you how much you have left in the category to spend and doesn't necessarily indicate if you've already overspent.

Buildwise is the only software on the market that shows you this in our advanced yet simple-to-use job cost reporting system, so you know very early if you're in trouble.

You should always be reconciling your costs to ensure you are never more than 5% over your estimated plus change order amounts for any one cost code, and project overall.

5. Revenue Per Employee

Revenue Per Employee tracks the revenue generated for every employee in your company.

It's an important financial metric because it measures how efficiently a company generates revenue relative to its workforce size. It helps contractors understand productivity levels, assess and optimize labor efficiency, and make informed decisions about hiring, training, and workflow improvements.

Depending on your business structure, there are a few different methods for calculating your revenue per employee:

While this KPI isn't necessarily a pure indication of profitability, if you use the Superintendent calculation and are seeing a value of less than $1 million per super per year, then you should evaluate your business model. This means seeking larger projects and ensuring that superintendents or project managers can each handle between $1-1.5 million per year. 

6. Backlog Revenue

Backlog revenue is the total value of signed pre-construction and construction contracts not yet completed. Tracking this metric is important because it forecasts future revenues, allows you to make strategic decisions surrounding hiring, and ensures a healthy pipeline. This value is also key in setting your company's annual budget.

The Master Projects Calendar is the most important spreadsheet you need to manage your company. Join the Build and Profit Academy, and learn how to use it and calculate your backlog revenue in the first five days of working with us. 

7. Cash Flow Forecast

Your Cash Flow Forecast is a financial projection that estimates the amount of cash you expect to receive and spend over a specific period. It helps predict future cash availability, ensuring you can meet your financial obligations, such as payroll, trade partner or vendor payments, and operating expenses.

Tracking cash flow forecasts is crucial because it helps residential contractors avoid cash crunches. Maintaining a clear cash flow projection keeps you from having to borrow from one project to fund another, which is one of the top two reasons why construction businesses fail.

Managing cash flow in your business is crucial and involves systematizing how you pay employees, trades, vendors, and overhead-related expenses. Without a proper cash flow system, you are gambling with your business daily. 

Learn more about managing cash flow here and join the Build and Profit Academy to learn how to implement a simple cash flow worksheet to spot issues with your invoicing and bill payments quickly.

8. Quick Ratio

Quick Ratio is a simple calculation that divides your current assets by your current liabilities to track your under-or-overbilled status. Underbilled means that you have performed more work versus what you've been paid and is a very dangerous position to be in as you're headed for a massive cash crunch. Overbilled means that you've taken in more revenue than work performed. 

This position, while it might seem advantageous, needs to be managed properly as the overpayment amounts need to be kept on hand to pay for the COGs that will eventually need to be paid when they occur. 

For residential construction businesses, the ideal range is between 1.0 to 2.0 when it comes to Quick Ratio. If you are lower than 1.0, it means you are very underfunded, which is the number one cause of business failure. If you are over 2.0 you should have the right cash on hand to pay for all COGs. Exercise caution when overfunded, as it's easy to think you have "extra money" for that new truck, tools, or shop space.

Learn more about calculating your quick ratio here to determine if you're overbilling or underbilling here.

9. Work In Progress

Work in Progress (WIP) is similar to Quick Ratio in that it is a financial tracking tool that helps you see if your projects are properly funded or not. Where it differs from Quick Ratio is the WIP tracks the revenue "earned to date" versus how much you've spent on it, and factors in the financial percentage of completion. 

Generally speaking, you should be just slightly overbilled on your projects. If you find yourself underbilled on projects it's important to adjust how you do business in terms of structuring your client payments and that you implement a proper cash flow management system.

If you need to start tracking WIP but don't where to start, click here to download our WIP template. Once you've populated this, it's best to have your bookkeeper update your Quickbooks account on a monthly basis to reflect accurate profitability on your income statement.

Learn why measuring work in progress is important and how to master it. 

10. Unbillable Costs Ratio

In any cost-plus construction business, there are costs associated with a project that will not be charged to the client for one reason or another. Or, if you're a fixed-cost builder, there will be project costs that are incurred but not added to the total project cost paid by the client.

We call these unbillable costs, and they are important to track because they directly affect your bottom line. Minimizing unbillable costs in either pricing model is crucial to running a profitable business.

You should strive for as low of an unbillable ratio as possible (<3%). The ultimate goal is to have none; however, the residential construction world is not a perfect world. A pro tip is to accommodate known unbillables that will help to minimize this, including estimating with buffers in categories of construction you tend to underestimate (i.e., on-site internal labor) and to also add both Warranty and Errors into your estimating practice.

Managing unbillables in a cost-plus business is complex. Buildwise is the only software on the market that provides cost-plus builders with a proper way to manage unbillable costs.

The Bottom Line on Tracking Financial Metrics

Managing a residential construction business is complex, and every decision impacts the success of your projects. 

Tracking key financial metrics is crucial for staying on top of your finances and ensuring that each project is profitable. Without these insights, you risk underpricing jobs, running into cash flow shortages, and struggling to remain profitable.

But it's also important to understand what each metric does and determine which ones are right for your remodeling or general contracting business. 

Tracking every KPI isn't realistic, but we've outlined the crucial ones in this article. Start with the first three from your income statement to get a high-level view of your profitability. Then, it's time to dig into number four - Job Cost Variance - using Buildwise, the only financial management software on the market that provides easy workflows to provide real-time numbers. 

Buildwise is a financial management tool created by a builder for builders that excels at giving you real-time insights into your financial performance on projects so you can estimate projects accurately and ensure you're profiting on every job. 

Try Buildwise FREE for 14 days.