BENCHMARKING: How Do You Stack Up Against Your Competition

BENCHMARKING:
How Do You Stack Up Against Your
Competition

Construction Industry Overview
3rd largest segment of
World economy
2nd largest employer
2nd highest failure rate
3 CBIZ & MHM
Benchmarking - Construction Industry

Construction Industry Overview
Top Five Greatest Challenges
Challenge %
Shortage of trained field help 60%
Sources of future work 16%
Healthcare insurance costs 10%
Lack of qualified project
managers 9%
Financial condition of federal,
state or local government 5%
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• “Business as Usual” – Pre 2008
• “Business as Usual” – Now:
• Continual Improvement
• Learning to perform better, faster and with fewer
resources
• Staying ahead of the competition
• Benchmarking is the key to continual improvement

Definition: “Benchmarking is the
continuous process of
measuring products,
services, and practices
against the toughest
competitors or those
companies recognized
as industry leaders.”
David T. Kearnes, CEO, XEROX Corporation

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As famed management thinker Peter
Drucker is quoted as saying:
“You can’t manage what you can’t
measure”
and/or
“If you can’t measure it, you can’t
improve it”
Peter Drucker - Management consultant,
educator, and author, whose writings and
work turned modern management theory
into a serious discipline.

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• Measuring a performance against a
standard
• Identify the best firms in industry and
compare to them, i.e. “best in class”
• Performance measurement
demonstrates whether you're achieving
continuous improvement
• Like the dashboard in a car – quick way
to determine the health of a business

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• Financial health examined more than ever
by creditors, banks, sureties, customers,
and government agencies
• Banks and sureties use certain financial
benchmarks to determine whether to
extend credit or bonds
• Compare metrics over time to identify
trends
• Ability to spot areas that need improvement
• The desire to improve your Company’s
chances for success
Why to consider benchmarking:

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In the current market, your Company’s
financial health will be examined more than
ever…
With so many eyes on your company’s
financials, it becomes increasingly important
to know how you stack up against the
competition.

1. Desire to improve your chances for success
2. Start with your balance sheet and income statement
3. Calculate important ratios
4. Perform Self-Comparison Benchmarking
1. Analyze current period ratio results with historical
2. Analyze current period ratio results against standards
3. Unit of measure productivity assessments
4. Comparative financial statements to look for positives and for
warning signs
5. Perform Performance Benchmarking
1. Compare results with peers in the construction industry
6. Don’t forget the sureties
7. Measure Operating Performance
8. Be proactive in implementing improvement
Steps for Success:

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Four broad ratio categories:
• Liquidity - A Company’s ability to meet its
short-term financial obligations on time
• Profitability – A Company’s ability to generate
earnings
• Leverage – A Company’s reliance on debt to
finance operations
• Efficiency – Managements’ effectiveness in
operating the company
Ratios:

Liquidity
Ratio Formula Interpretation
Current Ratio – the extent current
assets are available to satisfy current
liabilities
Current Assets
÷
Current Liabilities
Generally, 1.0 is a minimum current
ratio , which indicates that current
assets at least equal current liabilities
Quick Ratio – the liquid assets that are
available to satisfy current liabilities
Current Assets less Inventory and
Prepaid Expenses
÷
Current Liabilities
A quick ratio of 1.0 is generally
considered a liquid position
Working Capital Turnover Ratio – the
amount of revenue supported by each
$1 of net working capital
Revenue
÷
Current Assets minus Current
Liabilities
A ratio exceeding 30.0 may indicate a
need for increased working capital to
support future revenue
A Company’s ability to meet its short-term financial obligations on time

Profitability
Return on Assets Ratio – the profits
generated by the assets
Net Earnings before Taxes
÷
Total Assets
A higher ratio reflects a more effective
use of Company assets
Return on Equity Ratio – the profit
generated by the net assets, which
reflects stockholders’ return on
investment
Net Earnings before Taxes
÷
Total Net Worth
A very high ratio may indicate an
undercapitalized situation or,
conversely, a very profitable company
Time Interest Earned Ratio– a
Company’s ability to pay interest
expense from operations
Net Earnings before Tax plus
Interest Expense
÷
Interest Expense
A low ratio may indicate an over-
leveraged situation and a need for
more permanent equity
A Company’s ability to generate earnings

Leverage
Debt to Equity Ratio – the relationship
between creditors and owners
Total Liabilities
÷
Total Net Worth
Generally, a ratio of 3.0 or lower is
considered acceptable
Revenue to Equity Ratio – the level of
revenue supported by each $1 of equity
Revenue
÷
Total Net Worth
Generally, a ratio of 15.0 or less is
considered acceptable
Fixed Asset to Net Worth – the extent
an owner’s cash is frozen in the form of
fixed assets
Net Fixed Assets
÷
Total Net Worth
Generally, a ratio of 0.75 or higher is
undesirable as a higher ratio may
indicate a lack of funds for current
operations
A Company’s reliance on debt to finance operations

Create a financial benchmark worksheet
 Financial ratio to be measured
 Formula
 Interpretation
 Actual calculation – ratio results
Example Worksheet – Lets Review

Steps for Success:
1. Desire to improve your chances for success
2. Start with your balance sheet and income statement
3. Calculate important ratios
4. Perform Self-Comparison Benchmarking
1. Analyze current period ratio results with historical
2. Analyze current period ratio results against standards
3. Unit of measure productivity assessments
4. Comparative financial statements to look for positives and for
warning signs
5. Perform Performance Benchmarking
1. Compare results with peers in the construction industry
6. Don’t forget the sureties
7. Measure Operating Performance
8. Be proactive in implementing improvement

SIC NAICS____
 Industrial & 1541, 1542 236210, 236220
Nonresidential
 Heavy & Highway 1611, 1622, 237110 to 237990
1623, 1629
 Specialty Trades 1711-1799 238110 to 238990
Website: www.naics.com
Contractor Classifications

Identify Data Sources
 RMA (Risk Management Associates, formally Robert
Morris Associates)
 www.rmahq.org
 PAS (Personnel Administrative Services)
www.pas1.com
 FMI (for customized benchmarking)
www.fminet.com
 Trade Associations
 Industry Focus Groups
 Sureties
 CFMA
www.financialbenchmarker.com

Financial Benchmarking Resources
www.financialbenchmarker.com

Create a financial benchmark worksheet
 Financial ratio to be measured
 Formula
 Interpretation
 Actual calculation – ratio results
 Add column for industry average
 Add column for industry best
 Comments/action plan

Average vs. best-in-class
 Average is just average
 Best-in-class is a goal worth achieving

Best in Class – Definition Per CFMA
Best in class companies refer to the top 25% of
all survey respondents, based upon a composite
ranking of the following ratios:
1. Return on Assets
2. Return on Equity
3. Debt to Equity
4. Fixed Asset to Net Worth
5. Working Capital Turnover

Best in Class – CFMA results
All Companies
Ratio 2015 2014
Return on Assets 17.4% 17.3%
Return on Equity 45.5% 44.1%
Debt to Equity 1.5 1.3
Fixed Asset to Net Worth 14.9% 12.7%
Working Capital Turnover 12 9.7
2015 data generated from the CFMA 2015 published survey

Best in Class – CFMA results
By Category
Ratio Heavy &
Highway
Industrial &
Nonresidential
Specialty
Trade
Return on Assets 15.2% 12.3% 20.7%
Return on Equity 32.5% 44.8% 46.5%
Debt to Equity 0.8 2.3 1.1
Fixed Asset to Net
Worth
53.1% 11.0% 16.3%
Working Capital
Turnover
9.3 20.1 8.7
2015 data generated from the CFMA 2015 published survey

Don’t forget the Sureties
Backlog to Equity – indicates
relationship of signed or committed
work to total stockholders’ equity
Backlog
÷
Equity
Generally, a ratio of 20 or less is
considered acceptable. A higher
ratio may indicate the need for
additional permanent
equity
Underbillings to Equity – indicates
the level of unbilled contract volume
being financed by the stockholders.
Underbillings
÷
Equity
Usually stated as a percentage; a
ratio of 30% or less is considered
acceptable
Backlog to Working Capital – the
relationship between signed or
committed work and working capital
Backlog
÷
Working Capital
A higher ratio may indicate a need
for an increase in permanent
working capital
Days in Accounts Receivable –
indicates the number of days to
collect accounts receivable
Net Receivables x 360
÷
Revenue
A lower ratio indicates a faster
collection of receivables, i.e., more
liquidity.
Before sending your financials to the sureties, have an idea of the
additional ratios they are going to be using – Efficiency Ratios:

Operating Performance Measures:
 Other half of a comprehensive overall performance measurement
system
 Looks at operating statistics
 Can flow from financial performance measures
 Provides a more detailed analysis of specific operational areas

Example Key Operating Indicators:
 Labor productivity (how many bricks can be laid in a
day)
 Equipment productivity (how many hours is a piece
of equipment utilized)
 Subcontractor performance
 Vendor quality
 Productivity of project managers
 Jobs completed ahead of schedule (with minimal
punch list)
 Jobs completed with profit fade

Successful companies manage
their businesses by tracking
performance of their services,
evaluating whether particular
strategies worked well, allocating
resources to drive better results,
and continue to monitor to
produce the best results

Recap – Key Benefits of Benchmarking:
Focuses improvement efforts on issues critical to success
Ensures that improvement targets are based on what has been
achieved in practice, which removes the temptation to say, “it can’t
be done”
Provides confidence that your organization’s performance compares
favorably with best practices

The Final Recap – The Main Ingredients for Benchmarking to
be Successful:
A clear understanding of what needs to be improved and why
- Analysis is usually senior management’s responsibility
- Must align with the company’s objectives
Careful selection of who to benchmark against
Clear understanding of the reasons for any difference in performance
Establishment of goals and targets that are both challenging and achievable with
effort
A willingness to change and adapt based on the benchmarking findings
PERSISTENCE! Results will not necessarily come quickly and easily

Other Potential Warning Indicators
 Cash to overbillings < 1 to 1
 Average age of receivables > 60 days
 Underbillings to equity > 20 %
 Fixed assets to equity > 1 to 1
 Average age of payables > 45 days
 Debt to equity > 3 to 1
 Revenue to working capital > 20 to 1
 Interest bearing debt to equity > 80 %
 Overhead to equity > 1 to 1
 Job profit fade/slippage > 10%

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QUESTIONS
?
??
36 CBIZ & MHM

Speakers
Please contact Joyce with any questions at:
816.945.5121 or jfarris@cbiz.com
Joyce Farris, CPA, CGMA
Shareholder, Mayer Hoffman McCann
Managing Director, CBIZ MHM, LLC
37 CBIZ & MHM
Joyce, who has more than 30 years of accounting experience, serves as a CBIZ MHM, LLC
Managing Director and Mayer Hoffman McCann P.C. Shareholder in the Kansas City office. Joyce
is responsible for managing the entire client relationship as she coordinates the attest work with
tax and consulting services. The majority of her clients are entrepreneurial-owned and privately-
owned companies in the construction, real estate, and whole-sale distribution industries.
Joyce’s primary responsibility is to manage and direct the firm’s regional Construction Industry
Services Group. From the day she started with the Firm, Joyce has been involved with clients in
the construction industry from performing audits and preparing tax returns to consulting on
mergers and acquisitions and transition planning. Joyce serves a variety of construction clients
including general contractors, heavy/civil contractors, specialty contractors, engineering firms,
landscape architectural/land planning firms, home builders and real-estate developers. Her
clients have local, national, and international operations.
During her career, Joyce took a leave from the Firm to pursue an opportunity as a CFO in private
industry. This unique experience has provided Joyce with an in-depth knowledge of and respect
for the issues affecting her clients and their respective COOs and CFOs.

Speakers
Please contact Austin with any questions at:
816.945.5235 or adelimont@cbiz.com
Austin Delimont, CPA, CCIFP
Audit Manager
38 CBIZ & MHM
Austin is a Manager in the Attest division of the Kansas City office. Austin has served a variety of clients
including general contractors, construction managers, heavy highway contractors, specialty contractors
and real-estate developers.
He is responsible for various private company engagements for the Kansas City office ranging in size from
small development-stage to those with in excess of $600 million in revenue. With a heavy concentration
in construction and real-estate clients, he has specialized in construction and real-estate accounting.
Austin manages the day-to-day activities of attest engagements, assists in designing the approach to
audits, and guides the field staff in their auditing efforts. He works with clients to understand their
organization, procedures, and internal policies. Austin has provided consultation to clients on various
accounting and reporting issues including revenue recognition, leasing, joint ventures, variable interest
entities, interest capitalization and evaluation of change orders and claims.
His previous experience working in the accounting department of a construction company allows him a
unique inside perspective.

BENCHMARKING: How Do You Stack Up Against Your Competition

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