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How To Calculate and Improve Operational Efficiency in Construction

Micke Paqvalén
13 December, 2023

Building Site

In 2022, productivity in the USA's construction industry dipped, meaning construction projects required more hours worked for less output. 

Productivity and efficiency in construction have always been a core element of successful projects, yet across the US, UK, and Europe, productivity and efficiency have improved very little, with only minor ups and downs over a 50-year period.

Key Takeaways

  • Construction industry productivity
    • In 2022, US construction productivity declined
    • Limited improvements in efficiency observed over the last 50 years
  • Calculating operational efficiency
    • Operational efficiency is vital for cost-effective, timely, and quality project completion
    • Involves assessing the ratio of input to output in business operations
    • Use the formula Operational Efficiency Ratio = (Operating Expenses + Cost of Construction) / Net Sales to calculate the operational efficiency ratio
  • Improving construction efficiency
    • Includes planning, equipment maintenance, employee training, field management tools, lean principles, supply chain management, sustainability practices, and continuous adaptation

What Is Operational Efficiency?

At its core, operational efficiency is the ability of a construction company to complete projects in the most cost-effective and time-effective way, without sacrificing quality.

But before you start increasing your operational efficiency, you need to know how efficient you already are. This means assessing the ratio between the output derived from the business and the input required to run business operations. 

By working to improve that ratio you are also directly working to improve your operational efficiency.

Typical inputs include:

Typical outputs include:

 
  • Money (cost)
  • People (full-time equivalent)
  • Time and effort
  • Revenue, margin, or cash (money)
  • Net new business
  • Customer loyalty
  • Quality of work
  • Speed of work
  • Opportunities
 

Some ways that construction businesses improve operational efficiency are:

  • Reducing the idle time for their project teams
  • Using task management software to:
    • streamline and automate manual tasks
    • reduce defects, change orders, and rework
    • Improve billing/invoicing rates
  • Minimize waste

How to Calculate Your Operational Efficiency Ratio

You can calculate your business Operational Efficiency Ratio by using this formula:

  • Operational Efficiency Ratio = (Operating Expenses + COGS) / Net Sales

 

What each variable in the formula mean?

Operational Efficiency Ratio: This is a performance indicator. A decline in your business's operational efficiency ratio indicates a significant reduction in operating costs. The lower the operational cost, the more proficient your business becomes in generating profit. 
Operating Expenses: These expenses refer to the ongoing costs that your business incurs to maintain and run your day-to-day operations. Operating expenses are distinct from the direct costs associated with your construction projects, including insurance, admin wages, building or office rent, legal fees, and other general day-to-day costs.

COGS: Cost of Goods Sold refers to the direct costs directly associated with your construction project. These costs are directly tied to the production of goods or, in the case of construction, the completion of a project. In construction, the term "Cost of Goods Sold" might not be used as commonly as in retail or manufacturing. Instead, the construction industry often refers to various cost components that contribute to the overall cost of a construction project, such as material, labor, equipment, or subcontractor costs.

In construction, you might hear terms like "Cost of Construction” instead.

The formula for calculating COGS is:

  • COGS = Beginning Inventory of Goods + Purchases during the Period − Ending Inventory of Goods

Net Sales: Refers to the total revenue that your company generates from its primary business activities after deducting any returns, allowances, and discounts.

  • Net Sales = Total Sales − Returns − Allowances − Discounts

 

Operational Efficiency Ratio Example:

To make the formula easier to comprehend, let's take the example of a carpentry company with $3 million in net sales per year.

  • Operating expenses: $375,000 per year
  • Cost of Construction: $1.5 million per year

Using the formula defined above, the operational efficiency ratio is:

  • (375,000 + 1,500,000) ÷ 3,000,000 = 0.625 = 62.5%

What does 62.5% mean in this case?

Essentially, this means that 62.5% of the business's net sales are soaked up by operating costs. This is notably higher than the desired ratio of 50% or lower. 

When the input is high in relation to the output it suggests that a significant portion of the revenue is being used to cover the cost of planning and executing the projects, which impacts the overall profitability.

By breaking down the cost of construction and your operating expenses, you will have a better understanding of which elements dominate the costs outlined in the formula's numerator. 

Why Efficiency in Construction Is Crucial

Precision and attention to detail are critical due to the potential cascading effects of errors in measurements or placement. Diverse materials, each with specific installation requirements, demand a nuanced understanding and expertise. 

There are, however, many ways to increase the efficiency of your construction business and projects without sacrificing the precision and quality workmanship you deliver.

Alongside many other things on the to-do list,  project management is one of the most important parts of your construction project if you want to increase efficiency.

Inefficiencies in any part of the process can lead to delays, increased costs, and diminished overall quality of work. Operational efficiency in construction ensures that projects are completed on time, within budget, and to the satisfaction of clients. In the construction industry, where precision and attention to detail are crucial, optimizing operations becomes even more critical.

 

10 Ways You Can Maximise Your Construction Efficiency

Increasing your efficiency within each construction project directly boosts your business in many ways. From improving your cost management to completing projects quicker and helping your customer satisfaction in the construction industry, efficiency is often the missing secret sauce to help you grow.

But how exactly do you achieve it?

Here are 10 ways you can easily improve operational efficiency:


1. Comprehensive planning and scheduling

Effective planning and scheduling are foundational to construction site efficiency. By thoroughly mapping out the project timeline, allocating resources strategically, and considering potential obstacles, you can minimize delays and enhance overall productivity. 

Though a manual approach is still useful, you can improve your efficiency even further by utilizing software for contractors and other construction professionals. 

These construction management tools such as Buildbite offer useful time management tools and task management tools, providing robust scheduling to help you manage detailed plans, helping you and your team stay on track.

 

2. Maintaining your equipment

Neglected equipment is one of the most avoidable ways of losing money. Looking after your tools such as tile cutters or carpet stretchers can help you save money and time in the future, extending the life of your tools significantly.

Even better is using predictive maintenance, which essentially means regularly checking equipment to analyze what might need fixing, before it breaks. According to the US Department of Energy, this method can lead to 12 - 18% cost savings compared to regular maintenance.

 

3. Invest in employee training and skill development

Investing in the training and skill development of construction teams is a direct investment in construction site efficiency. Well-trained workers are more productive, make fewer errors, and are better equipped to handle challenges on-site. 

This not only boosts your business’s efficiency but also helps with construction risk management. Additional training can reduce the risk of health incidents by up to 20%. Regular training sessions ensure that teams stay updated on the latest industry standards, techniques, and safety protocols.

 

4. Utilizing field management tools

Field management tools play a crucial role in streamlining on-site operations. These tools, often accessible through mobile devices, enable real-time communication, task assignment, and progress tracking. 

By reducing paperwork and automating routine processes, using the right tools for field management in construction will enhance overall efficiency, allowing your team to focus on the actual construction work.

 

5. Implementing lean construction principles

Adopting lean construction principles involves eliminating waste, optimizing resources, and improving collaboration. 

By identifying and minimizing non-value-added activities, you can enhance efficiency throughout your construction process. Lean construction also emphasizes continuous improvement, fostering a culture of innovation and adaptability that will help you continue to optimize as you grow.

 

6. Prefabrication and modular construction

Prefabrication and modular construction techniques involve assembling components off-site before transporting them to the construction site. 

This approach reduces on-site construction time, minimizes waste, and enhances overall project efficiency. Some construction elements can be pre-made, ensuring precise measurements and faster installation, leading to significant time and cost savings.

 

7. Establish performance goals and accountability

This can be a powerful motivator for your workforce. Define clear performance metrics that are easy to follow and comprehend, and explore the possibility of offering a small financial bonus for each achievement. 

This approach serves as a motivational tool and enhances communication within your team, leading to increased efficiency, especially when employees are working towards well-defined performance objectives. Consider implementing various performance metrics, such as punctuality at the job site, completing tasks ahead of schedule, and other key indicators. It incentivizes timely project completion, proactive problem-solving, and the overall quality of work.

These metrics are not only valuable for evaluating individual performance, but they also foster positive collaboration between colleagues.

 

8. Identifying potential supply chain problems

A well-optimized supply chain is crucial for construction projects. Construction is not for the faint-hearted, and one of the greatest challenges for any construction professional is ensuring that materials are available on-site when needed. By staying updated with your material suppliers, you can efficiently and effectively prevent delays and keep the project on schedule. 

 

9. Environmental sustainability practices

Incorporating sustainable practices not only aligns with global environmental goals but also contributes to operational efficiency. 

Utilizing eco-friendly materials, adopting energy-efficient construction methods, and minimizing waste can result in cost savings and increased efficiency in construction over the long term, as less rework will be needed to match emerging environmental regulations.

 

10. Continuous monitoring and adaptation

Efficiency is an ongoing process that requires continuous monitoring and adaptation. 

Regularly reviewing project performance, analyzing data, and seeking feedback from clients enables businesses to identify areas for improvement. 

By staying flexible and adapting to changing circumstances, you can optimize operations for greater efficiency.

The Role of Field Service Management Tools in Enhancing Operational Efficiency in Construction

Field service management tools play a pivotal role in optimizing construction projects. These tools facilitate real-time communication, task tracking, and collaboration among team members, ensuring everyone is on the same page. 

The benefits of using such tools include improved communication, enhanced productivity, reduced errors, and increased overall efficiency.

Increasing operational efficiency in construction involves a holistic approach that encompasses planning, technology adoption, and continuous improvement. 

By leveraging field management tools, teams can significantly enhance overall efficiency, resulting in timely, cost-effective, and high-quality project delivery.

Through a holistic package of task management features, centralized communication, project documentation, and more. Buildbite offers you all the tools you need to efficiently manage your business operations and projects.

Check out our free trial, and discover exactly how you can pave the way to increased efficiency for your construction business with Buildbite.