Financial Ratios and KPIs for Your Construction Company

Financial statements are an essential part of understanding the operating results for every contractor.

Between the balance sheet, income statement, and statement of cash flows, financial statements can provide a large amount of data, but that data is only a snapshot of the results for a specified period (typically a month or year). How can you leverage this data to provide you with some key financial ratios or key performance indicators (KPIs)?

Decision-makers should analyze and monitor performance on a contract-by-contract basis. By examining the financial ratios and KPIs discussed below and conducting a regular comparison to industry standards and benchmarks, you will be able to monitor performance. Regular evaluation of these can help to identify areas of opportunity or improvement and influence business decisions. 

Backlog

Backlog is essentially your pipeline. Your backlog indicates the amount of future revenue that you will be able to generate from the contracts you currently have in place. When looking at this backlog-specific ratios, you might break them down into more precise detail and look at the following:

The Number of Months You Have in Backlog 

Current Backlog / (Annual revenue/12)

A good figure to try and maintain here would be 6-9 months. This indicates that you have enough remaining revenue to replace approximately half of your annual revenue. However, if this ratio gets too high, it could show that you are overextended.

Backlog to Working Capital

Backlog / (Current Assets - Current Liabilities)

This measure essentially takes into account how productive your backlog is in generating a return and meeting your current obligations. Working capital is your current assets less current liabilities. A good figure to strive for here would be less than 5:1.

Backlog Gross Profit

Backlog Contract Revenues - Backlog Contract Costs

This measure is useful to look at to verify that the remaining contract revenues to be recognized are more than the estimated costs to complete. Ideally, the number here would be large enough to cover any fixed general and administrative expenses such as payroll, rent, insurance, etc. as well as be at least equal to your historical amounts.

Liquidity Ratios

Liquidity ratios indicate your company’s ability to pay off short-term debt using your current assets if all of your short-term liabilities became immediately due. Ratios that are too high may indicate that assets aren’t being used efficiently to generate returns. In such cases, companies might consider investing excess cash in vehicles like mutual funds or brokerage accounts for potentially higher long-term returns. 

Current Ratio

Current Assets / Current Liabilities

This ratio is also called working capital and is a key metric in the construction industry, especially for bonding and surety purposes.

Typical current assets include cash, accounts receivable, contract assets, prepaid expenses, inventory, and investment accounts. Typical current liabilities include short-term debt, accounts payable, contract liabilities, and accrued expenses. The current ratio uses all current assets in the numerator and all current liabilities in the denominator. A commonly accepted benchmark for a healthy ratio is 1.6:1.

Quick Ratio

(Cash + Accounts Receivable) / Current Liabilities

This ratio, also called the acid-test ratio, is similar to the current ratio but more conservative.

Current assets for this ratio include only cash and accounts receivable, excluding contract assets, inventory, and prepaid expenses because they take longer to convert to cash. Current liabilities include short-term debt, accounts payable, and accrued expenses, excluding contract liabilities and overbillings. By removing slower-turning assets and certain liabilities, this ratio gives a clearer picture of a company’s short-term liquidity. A healthy benchmark is 1.4:1.

Efficiency Ratios

These ratios really focus on how well you utilize your assets and liabilities.

Days Revenue in Accounts Receivable

(Accounts Receivable / Annualized Contract Revenue) x 365

 This ratio measures how long it takes, on average, to collect your billings. While it varies by contract terms, a good benchmark is around 40–50 days, or roughly 10–15 days longer than your standard collection terms. Ideally, you should aim for less than 75 days. 

Days Expenses in Accounts Payable

(Accounts Payable / Annualized Cost of Construction) x 365

This ratio shows, on average, how long it takes you to pay your job-related expenses. Since cash is “king” in the construction industry, you generally want this number to be greater than your Days Revenue in Accounts Receivable to avoid paying for costs before receiving payment. Timing may vary based on vendor terms and discounts, but a good benchmark is 45–60 days. 

Days in Cash

((Cash + Securities) x 365) / Revenue

This ratio shows, on average, how long it takes to turn cash into revenue. It requires balance: a higher number indicates ample cash to sustain operations without external financing, while a lower number shows greater efficiency in generating revenue. A typical benchmark is 60–90 days. 

Profitability Ratios

These ratios indicate how well your company is doing at generating profit utilizing its assets, equity, or just your general ability to turn revenue into profit or control overhead expenses.

Gross Profit

(Contract Revenues - Contract Costs) / Contract Revenue

This is one of the most common ratios, and generally, the higher the number, the better. It should be analyzed both overall and on a contract-to-contract basis, ideally at least monthly. If you have different scopes of work or divisions, review it at those levels as well. Look for reasons gross profit might be declining and get explanations from the project management team to identify issues or opportunities—such as potential change orders—early. 

Return on Assets

Net Income / Total Assets

This ratio indicates how profitable a company is relative to its total assets. It shows how effectively the company is converting invested capital into net income. The higher the ratio, the better, with a typical benchmark of 6–8%. 

Return on Equity

Net Income / Total Equity

This ratio measures how effectively management uses the company’s net assets to generate profit. Like Return on Assets, the higher the ratio, the better. Since it uses net assets instead of total assets, it should ideally be higher than your company’s Return on Assets, with a typical benchmark of 15–20%. 

G&A Expenses to Revenue

General and Administrative Expenses / Revenue

This ratio provides insight into your cost structure and how effectively you manage general and administrative expenses. Generally, the lower the ratio, the better, as it indicates strong control over overhead costs. A good benchmark is 8–15%.

Use Financial Ratios to Drive Smarter Business Decisions

Benchmarking and financial ratio analysis are key to understanding your business, spotting trends, and uncovering opportunities. While financial statements show cash balances, gross profit, and net income, ratios provide deeper insight.

Compare results over time and benchmark against peers to identify areas for improvement. Need help analyzing your ratios? Reach out to us today and let our team guide you toward smarter, data-driven decisions. 

To learn more about LGT and how we can serve you, contact us here.