Financial Insights | Industry-Specific KPI Explanation Series, Vol. 3
To get straight to the point: If cash flow is your top priority, the first KPI you should monitor is DSO (Days Sales Outstanding).
This article introduces seven KPIs across the construction project lifecycle. While each KPI serves a different purpose, DSO deserves particular attention because it reflects cash that is actually tied up in receivables. In contrast, indicators such as construction progress and cost overruns are early warning signs. We’ll return to this point later in the article.
Why Construction Problems Are Often Detected Too Late
While the manufacturing industry produces the same products every month, the construction industry completes projects—each with its own unique conditions—over a period ranging from several months to several years.
Many construction projects are accounted for using either the completed-contract method or the percentage-of-completion method. However, even under the percentage-of-completion method, weak cost control can prevent companies from identifying gaps between estimated and actual costs, causing deteriorating profit margins to become apparent only when the project is completed.
Cash flow presents another challenge unique to the construction industry. While payments are typically collected upon project completion or according to the project’s progress, material and subcontracting costs must often be paid upfront. As a result, construction companies can find themselves profitable on paper but short of cash, making cash flow problems more common than in many other industries.
Construction Project Lifecycle
The life cycle of the construction industry consists of the following sequence: winning a contract → construction → completion and handover → collection of payment. It is only after passing through these four stages that figures such as “revenue,” “profit,” and “cash” are realized.
The important thing to remember is that if problems arise at an earlier stage, it will inevitably affect the next stage.
Construction delays → rising costs → lower profit margins upon completion → delayed billing → cash shortages. The role of management is to break this chain as early as possible.
7 KPIs to Watch (by Lifecycle)
For each life cycle, here are the seven key metrics to watch:
It may seem complicated, but it becomes easier to understand if you think about what you want to know from each of these numbers.
| Phase | KPI | What can we learn from this? | Calculation Formula | Guideline* |
| Orders & Estimation | Order Backlog | How much future work has been secured? | Number of Months of Backlog = Order Backlog ÷ Average Monthly Completed Project Value | 6 to 12 months’ worth of completed project revenue |
| Construction | SPI (Schedule Performance Index) | Is the construction proceeding as planned? | Actual Progress Rate ÷ Planned Progress Rate | 95–105% |
| Construction | Cost-Overrun Rate | Are we over budget? | (Actual Cost − Budgeted Cost) ÷ Budgeted Cost | Less than 5% |
| Construction | Labor Productivity | Are we using our staff efficiently? | Total Value of Completed Projects ÷ Number of Workers | 15 to 25 million yen per person |
| Completion & Handover | Completed Project Cost Ratio | Was the construction project profitable? | Cost of Completed Project ÷ Completed Project Revenue | 85–90% |
| Cash Collection | DSO (Days Sales Outstanding) | Are sales proceeds being held up? | Accounts Receivable ÷ (Total Construction Revenue ÷ 365) | 60 to 90 days |
| Cash Collection | CCC (Cash Conversion Cycle) | Are we managing our working capital efficiently? | DSO for Accounts Receivable + DSO for Costs on Uncompleted Projects − Days Payable for Construction Projects | 90 to 120 days |
① Order & Estimation Phase ➜ Is there enough work?
The order backlog is a figure that indicates how much work lies ahead. If it has been declining for three consecutive months, this is a cause for concern. If you increase your workforce while new orders are declining, you’ll be left with higher fixed labor costs despite having less work. As a general rule, it’s advisable to maintain an order backlog equivalent to 6 to 12 months’ worth of completed project revenue.
② Construction Phase ➜ Is the project proceeding as planned and staying within budget?
The construction phase is the longest stage of the project and has the greatest impact on profitability. We recommend continuously monitoring the following three KPIs during this phase.
- SPI: An indicator that shows how much progress has actually been made compared to the planned schedule. A range of 95–105% is generally considered a healthy level, but if the figure falls below 100%, the cause is likely a labor shortage, material delays, or design changes. A figure below 90% is considered a critical level, requiring immediate action.
- Cost Overrun Rate: An indicator showing the extent to which actual costs have exceeded the budget. A rate of less than 5% is considered healthy, but a rate between 5% and 10% should already be viewed as a warning sign, and we recommend beginning to identify the causes. A rate exceeding 10% is a sign that profitability is at risk.
- Labor Productivity: A metric that shows how much revenue each employee generates. This metric helps illustrate that simply increasing the number of employees isn’t always the best approach.
③ Completion & Handover Phase ➜ The project’s profitability is finalized
The Completed Project Cost Ratios is a figure that indicates how much profit (or loss) the project ultimately generated. Delays and cost overruns during the construction phase are ultimately reflected in the Completed Project Cost Ratio. Since costs are finalized upon project completion, they cannot be adjusted at that point. Therefore, it is crucial to identify any issues early on during the construction phase.
④ Cash Collection Phase ➜ Even after sales are finalized, the money won’t come in for a while
DSO is a metric that indicates the amount of payment for completed projects that has not yet been collected. The longer this period is, the more funds remain outstanding and tied up outside the company.
CCC refers to the number of days between paying for materials and outsourcing costs and actually receiving payment for the construction work. The shorter this period, the more effectively the company is managing its operations with limited cash on hand.
If a warning signal appears, act immediately.
Setting not only “goals” but also a threshold for “immediate action when this occurs” will help stabilize your business.
The following are early warning signs that often appear before problems surface in financial statements. We recommend establishing a system for weekly and monthly monitoring at the job ledger level.
| KPI | Threshold | First Things to Do |
| Order Backlog | A decline for three consecutive months | Strengthening Sales Activities and Reevaluating the Prioritization of Quotation Requests |
| SPI | Less than 90% | Identifying the Causes of Delays and Reviewing Processes |
| Cost Overrun Rate | More than 10% | Review the cost management spreadsheet and verify whether there have been any contract changes |
| DSO (Days Sales Outstanding) | Company Average + More Than 15 Days | Review of the Inspection and Billing Process |
| CCC | Company Average + More Than 30 Days | Utilizing Interim Payment Claims and Reducing Expenses for Uncompleted Projects |
How to Conduct KPI Reviews: Analyzing from Two Perspectives—by Project and Company-wide
We recommend conducting KPI reviews for the construction industry on two levels: by project (for profit and loss management of individual projects) and on a company-wide monthly basis (for reviewing performance at management meetings).
1. By Project: Weekly to Monthly
We use the construction ledger and cost management spreadsheet to check the SPI and cost overrun rate for each construction project.
Any construction work in which issues are detected will be addressed on a case-by-case basis at that time. Even if problems are discovered after completion, there is little room for improvement.
2. Company-wide Monthly Report: A 4-step monthly process
Step 1: Review Results
First, review the value of completed projects, the gross profit margin on completed projects, and operating income. Assess “current month’s results” by comparing them to the previous month and the same month last year.
Step 2: Identify the Cause
If the results are good, analyze the reasons why; if they are poor, investigate the causes. For projects completed in current month, review the trends in SPI and cost overrun rates during the construction period to see how they affected the completed project cost ratio. This enables you to explain the factors behind fluctuations in profit.
Step 3: Looking Ahead
Review the order backlog, DSO, and CCC to assess risks and opportunities for next month and beyond. This step is often overlooked, but it is actually the most important one.
Step 4: Decide on a Course of Action
Clearly define “who, what, and by when.” Looking at the numbers is not an end in itself. A KPI review only becomes meaningful when it leads to decision-making.
Anomaly detection by project and company-wide monthly management decisions. By linking these two layers, on-site data can inform management decision-making.
Summary
KPIs in the construction industry are not isolated from one another; they are interconnected within a single workflow that spans from order receipt to payment collection.Construction delays drive up costs; rising costs squeeze profits; and late invoicing strains cash flow. Therefore, it is important to view KPIs not in isolation, but within this flow—understanding “at which stage a problem arises and how its impact ripples through to the next stage.”
To summarize the seven KPIs introduced in this article, they are as follows.
| Phase | KPI | Key Points to Check | Impact on Management |
| Orders & Estimation | Order Backlog | Are we securing future construction revenue? | Future Performance |
| Construction | SPI | Is the construction proceeding as planned? | Construction Schedule and Costs |
| Construction | Cost-Overrun Rate | Is it exceeding the budgeted cost? | Completed Project Cost Ratio |
| Construction | Labor Productivity | Are we making effective use of our skilled workers? | Profitability |
| Completion & Handover | Completed Project Cost Ratio | Are production costs being properly controlled? | Gross Profit Margin on Completed Projects |
| Collection | DSO | Are there any outstanding construction payments? | Cash Flow |
| Collection | CCC | Are we managing our working capital efficiently? | Capital Efficiency |
Financial statements reflect past results. In contrast, the seven KPIs introduced in this article provide a multifaceted view of construction progress, profitability, and cash flow, serving as indicators to help identify changes in future performance and cash flow at an earlier stage.
You don’t have to manage everything perfectly all at once. Start by identifying the areas where your company is most vulnerable, and begin managing your KPIs from there.
Frequently Asked Questions
1. What is the most important KPI in the construction industry?
The three most important metrics are SPI (Schedule Performance Index), DSO (days sales outstanding), and CCC (cash conversion cycle); but if I had to pick just one, it would be DSO.
While a deterioration in SPI or the cost-overrun rate serves as a “warning sign” that will only be reflected in profits once the project is completed, DSO indicates the “result”— that cash is actually tied up outside the company—and allows you to directly assess the impact on cash flow.
That said, since these three metrics are interrelated, I recommend continuously monitoring each one to identify changes in profit and cash flow as early as possible.
2. Why do executives and finance professionals need to monitor frontline KPIs?
This is because financial statements reflect past results, whereas on-site KPIs are leading indicators that predict future changes in performance.
For example, a deterioration in the SPI or a rise in the cost-overrun rate could lead to a worsening of the project cost ratio or a decline in profit margins by the time the project is completed and recorded.
By understanding on-site KPIs, you will be able to explain the factors driving fluctuations in profit and cash flow more accurately.
3. What level of cost overrun should be considered acceptable?
Generally, a rate of less than 5% is considered
a healthy level. However, the acceptable range varies depending on the scale of the project and the type of contract (e.g., fixed-price or cost-plus).
What is important is not just the specific figures, but determining whether the cause of the overrun can be absorbed by design changes or is due to the company’s own management shortcomings.
4. What problems arise when DSO (Days Sales Outstanding) are long?
When DSO increase, payment for completed projects is not converted into cash, causing cash flow to deteriorate.
Furthermore, the longer it takes to collect payments, the higher the risk of uncollectible accounts due to a deterioration in the client’s financial condition.
It is not uncommon for a situation where “the company is profitable but struggling with cash flow” to be caused by an increase in accounts receivable or a buildup of costs on uncompleted projects.
5. How should we differentiate between project-specific KPI management and company-wide KPI management?
Project-by-project management is designed to detect anomalies in individual projects early on and take corrective action before completion. We review this information using project ledgers and cost control sheets during weekly meetings or progress meetings.
Company-wide monthly management consolidates the results of multiple construction projects to inform management decisions. We recommend reviewing leading indicators—such as the order backlog, DSO, and CCC—at least once a month. By implementing
both levels of management, you can achieve a balance between detecting anomalies on-site and making management decisions quickly.
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[Industry-Specific KPI Explanation Series, Vol. 4]
The KPI Guide to Retail Industry