Key to Success

KPIS FOR CONSTRUCTION 01You can use numerous KPIs to improve your processes.   

By Timothy Donaghy

Whether they are lump sum, cost plus, time and materials, or unit pricing, contracts are the backbone of your organization. Building solid contract management processes is key to the success of your business. Given the wealth of data contained in contracts, you can use numerous key performance indicators (KPIs) to evaluate and improve your processes. This will enable you to mitigate risk, decrease cost and increase revenue.

Below are seven KPIs that construction, architecture and engineering businesses can use to optimize contract performance:

1. Average Total Number of Days in Contract Lifecycle

From the first meeting to the final handshake, the total number of days involved in a contract varies across projects, contract types, and client or vendor situations. That’s why you should determine an acceptable timeframe for each contract category. Then you should measure the average time it takes to execute a contract from start to finish. This will allow you to generate benchmarks by contract type, company division, client or vendor type, or other categories. Doing so will enable you to optimize your contract management processes and decrease the time it takes to produce an executed agreement.

2. Average Time to Reach and Execute Contract Milestones

Establishing a set of milestones in your contract management process is key. Examples could be drafting the agreement, a series of internal approvals, negotiation and redlining with the client or vendor, and execution of the contract. You may also have situations where post-execution milestones are reflected, such as when the project ends. Whatever those milestones are, you need to define and tailor them to your specific contract needs. From there, you can measure the average time it takes to reach each milestone in your process.

3. Number of Missed Contract Milestones

Once you’ve defined the milestones for each step and benchmarked the average time required to accomplish them, you can track how often milestones are missed. This can be done by contract type, department, or individual to identify where process bottlenecks occur. Maybe you’ve uncovered that it’s taking too long to draft contracts for a certain type of commercial build, or the review cycle for residential supplier contracts gets tied-up at a certain stage. Regardless, this KPI is an effective way to identify opportunities to optimize your processes. 

4. Number of Improperly Executed Contracts

Certain contracts may require additional measures of control or compliance such as a higher level of authorization or a different Limitation of Liability clause. In the rush to meet a strict deadline, it’s easy to miss one of these control measures, resulting in an improperly executed agreement. This can undermine compliance, impact the bottom line and produce other undesirable outcomes. Strive to determine when measures are required vs. optional by contract type. This allows you to identify contracts where risk exists, uncover unneeded steps so you can streamline the process, and flag individuals or departments that fail to meet requirements. 

5. Average Time Required for Overall Contract Approval

Of all the contract process milestones that can be benchmarked, the one that everyone tends to sweat the most is the approval.  Sometimes a single individual is responsible for the approval and other times multiple individuals are required. Regardless, it is critical to identify exactly where the approval process begins and ends and benchmark the average amount of time between those two points. This will help you set the appropriate approval time expectations with the client and uncover opportunities to accelerate them. 

6. Frequency of Deviation from Pre-Approved Contract Language

Anyone drafting agreements typically leverages the most appropriate, pre-approved contract clauses to create documents faster and minimize risk. However, it’s important to know if or when someone errs beyond acceptable ranges. To do so, track the number of instances when deviation from pre-approved clauses and ranges occurs. This KPI helps expose certain contract types, departments, or individuals causing deviations to take place, or if certain clauses are frequently modified. This insight is useful to identify the need to modify the standard language, or the need to educate certain individuals as to why they must adhere to it.

7. Percent Value of Change Orders Compared to Initial Contract Amount

Change is inevitable when it comes to construction projects. Clients change their mind, architects modify designs and job sites present unforeseen challenges. Given that, change orders are key to any contract management process. In addition to tracking the number and type of change orders, it’s important to understand and report on the percent value of change orders compared to the initial contract amount. This KPI provides insight into how much the contract evolved over the course of the project. It also helps you forecast and plan for future change orders and their impact on final contract values.

Takeaway

Contracts contain a wealth of data that can provide you with valuable insights into your contract management processes. Dates, numbers and other data points can be used to create key performance indicators and establish benchmarks for evaluating and improving your contracts management processes. Implement these seven KPIs and you’re on the way to making 2019 a high-performance year for your contracts. 

Timothy Donaghy, chief technology officer of software provider Contract Logix, heads the development and maintenance of the company’s suite of products. Contract Logix enables legal, procurement, financial, sales and administrative professionals to manage their contracts efficiently while minimizing their legal and financial risk. Tim can be reached at [email protected]

 

 

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