The Construction Financial Management Association (CFMA) has released its 2024 Financial Benchmarker, offering invaluable insights into the financial performance of the construction industry during the 2023 fiscal year. This comprehensive analysis provides industry professionals with benchmarks to compare their companies' performance in areas such as profitability, financial management, expenses, and sales.
Survey Participation and Company Profiles
The 2024 Benchmarker Questionnaire saw participation from 1,290 construction companies, providing detailed and valid financial statements by July 2024. The respondents were classified into three main segments based on the North American Industry Classification System (NAICS) codes:
- Specialty Trade: 47.3%
- Industrial & Nonresidential: 28.6%
- Heavy Highway: 19.5%
Geographically, the Northeast and Midwest regions were the most represented, with 24.5% and 22.2% of respondents, respectively. A significant portion of the companies (45.5%) operated primarily as subcontractors, while 37.7% were general or prime contractors. Most respondents (70.5%) operated as S corporations and were privately owned within the U.S. (88.1%).
Overall Financial Performance
Despite facing challenges like moderated inflation and higher borrowing costs due to interest rate hikes, the construction industry demonstrated resilience in 2023. Key highlights include:
- Revenue Growth: Companies experienced a 10.4% year-over-year revenue increase, sustaining growth despite economic pressures.
- Profitability: Net income before taxes rose to 6.3% of revenue, up from 5.0% in 2022, indicating improved cost management and operational efficiency.
- Return on Assets (ROA): Increased from 9.3% in 2022 to 11.8% in 2023, reflecting better utilization of company assets.
- Return on Equity (ROE): Rose significantly to 31.4% from 24.3% in 2022, suggesting enhanced value delivery to shareholders.
These metrics surpass the pre-2020 five-year average net income before taxes of 4.7%, highlighting the industry's robust financial health.
Best in Class Performance
The top 25% of contractors, labeled as "Best in Class," outperformed in nearly all financial metrics:
- ROA: 28.4% compared to the overall 11.8%
- ROE: 59.7% compared to the overall 31.4%
- Gross Profit Margin: 21.8% of total revenue, significantly higher than the average
- Net Income Before Tax Margin: 11.9%, five percentage points higher than the overall average
Interestingly, while SG&A expenses were relatively similar between Best in Class companies and the overall respondents, the former achieved higher margins, suggesting that direct cost control had a more substantial impact on profitability.
Segment-Specific Insights
- Industrial & Nonresidential
- Profile: Comprises companies focusing on large-scale commercial, institutional, and industrial projects. Nearly half operate as general or prime contractors.
- Financials: Experienced a 4.1% net income before taxes. ROA increased to 9.1% from 7.4% in 2022, and ROE rose to 31.6% from 26.1%.
- Heavy Highway
- Profile: Involves companies engaged in infrastructure projects like highways and bridges. A majority operate as general or prime contractors.
- Financials: Achieved a 7.2% net income before taxes. ROA increased to 11.7% from 9.5% in 2022, and ROE improved to 25.0% from 18.7%.
- Specialty Trade
- Profile: The largest segment, consisting mainly of subcontractors providing specialized services. Revenues are spread across various NAICS classifications.
- Financials: Reported a 6.9% net income before taxes. ROA rose to 13.4% from 11.3% in 2022, and ROE increased to 31.4% from 24.8%.
Key Financial Ratios Over a Decade
The Benchmarker provides a 10-year trend analysis of key financial ratios, revealing long-term industry trends:
- Liquidity Ratios: The current ratio remained stable at 1.6 in 2023, indicating a consistent ability to cover short-term liabilities.
- Leverage Ratios: Debt to equity remained steady at 1.3 times, showing controlled leverage.
- Efficiency Ratios: Days in accounts receivable slightly decreased to 56.6 days in 2023 from 58.7 days in 2022, suggesting improved collections.
- Productivity Ratios: Revenue per full-time employee (FTE) increased to $450,086 in 2023 from $410,509 in 2022, indicating enhanced productivity.
Implications for Industry Professionals
The 2024 CFMA Financial Benchmarker results underscore the importance of effective cost management, asset utilization, and operational efficiency. Companies that excelled in controlling direct costs and leveraging assets achieved higher profitability and return on equity.
For industry professionals, these benchmarks provide a valuable tool for assessing company performance against peers and identifying areas for improvement. The data suggests that focusing on direct cost control and efficient asset management can lead to significant gains in profitability.
RedHammer's Take
The 2024 CFMA Financial Benchmarker results paint a promising yet complex picture of the construction industry's financial landscape. The sustained revenue growth of 10.4% amid economic headwinds like moderated inflation and rising interest rates underscores the industry's resilience. However, this growth rate, while robust, indicates a deceleration from the previous year's 15.0% surge, suggesting that companies should prepare for potential market adjustments.
A critical takeaway is the performance disparity highlighted by the Best in Class segment. These top performers significantly outpace the industry averages in key financial metrics, particularly in ROA and ROE. Their success is not attributed to larger size or revenue but to more effective management practices, especially in controlling direct costs and optimizing asset utilization. This suggests that companies across all sizes have the opportunity to enhance profitability by refining operational efficiencies.
Segment-specific insights reveal that while all sectors experienced improvements in net income before taxes and ROA, the strategies leading to these gains vary. For instance, Industrial & Nonresidential companies improved their ROE by leveraging assets more effectively, whereas Heavy Highway firms saw significant ROE gains through better equity utilization. Specialty Trade contractors, despite being the largest segment, showed remarkable increases in both ROA and ROE, indicating a successful focus on asset management and equity efficiency.
Another point of interest is the industry's long-term trend toward improved liquidity and stability. The consistency in liquidity ratios and controlled leverage suggests that companies are better positioned to meet short-term obligations and manage debt. However, the slight increase in days of cash and days in inventory indicates a need for ongoing attention to cash flow management and inventory control.
From a strategic standpoint, the emphasis should be on adopting best practices from the top-performing companies. Focusing on direct cost control, efficient asset management, and leveraging technology for operational improvements can drive profitability. Additionally, with the phasing out of pandemic-era support programs, companies need to reassess their financial strategies to sustain growth without external assistance.
In the face of economic uncertainties, diversification and adaptability remain key. Companies that can pivot and adjust to market demands, optimize their operations, and manage costs effectively will not only survive but thrive. The data suggests that while the industry as a whole is performing well, there is ample room for individual companies to improve and set new benchmarks for success.
Frequently Asked Questions
What does CFMA's 2024 Financial Benchmarker reveal about overall construction industry performance?
The 2024 CFMA Financial Benchmarker shows strong construction industry performance in 2023 despite economic challenges. Key highlights include 10.4% year-over-year revenue growth, net income before taxes rising to 6.3% from 5.0% in 2022, Return on Assets (ROA) increasing from 9.3% to 11.8%, and Return on Equity (ROE) jumping from 24.3% to 31.4%. These metrics surpass the pre-2020 five-year average net income before taxes of 4.7%, demonstrating the industry's resilience amid moderated inflation and higher borrowing costs from interest rate hikes.
How many construction companies participated in the 2024 CFMA Benchmarker study?
The 2024 Benchmarker study included 1,290 construction companies that provided detailed and valid financial statements by July 2024. The respondents were classified into three main segments: Specialty Trade (47.3%), Industrial & Nonresidential (28.6%), and Heavy Highway (19.5%). Geographically, the Northeast and Midwest regions were most represented with 24.5% and 22.2% respectively. About 45.5% operated primarily as subcontractors while 37.7% were general or prime contractors, with most (70.5%) operating as S corporations and privately owned within the U.S. (88.1%).
What distinguishes "Best in Class" construction companies from the overall industry averages?
Best in Class companies (top 25% of contractors) significantly outperformed industry averages with ROA of 28.4% versus 11.8% overall, ROE of 59.7% compared to 31.4% overall, gross profit margin of 21.8% of total revenue, and net income before tax margin of 11.9%—five percentage points higher than average. Interestingly, their SG&A expenses were similar to other companies, suggesting their superior performance came from better direct cost control rather than simply having lower administrative costs. This indicates that effective management of project costs and asset utilization are key differentiators.
How did different construction segments perform in 2023 according to the CFMA study?
Each segment showed strong performance with distinct characteristics: Industrial & Nonresidential companies (focusing on large commercial and institutional projects) achieved 4.1% net income before taxes, with ROA rising to 9.1% from 7.4% and ROE increasing to 31.6% from 26.1%. Heavy Highway contractors (infrastructure projects) reported 7.2% net income before taxes, ROA improving to 11.7% from 9.5%, and ROE rising to 25.0% from 18.7%. Specialty Trade contractors (the largest segment of subcontractors) showed 6.9% net income before taxes, ROA increasing to 13.4% from 11.3%, and ROE rising to 31.4% from 24.8%.
What key financial ratios and trends emerged over the past decade in construction?
The 10-year trend analysis revealed several important patterns: liquidity ratios remained stable with current ratio at 1.6 in 2023, indicating consistent ability to cover short-term liabilities; leverage ratios stayed controlled with debt to equity at 1.3 times, showing disciplined debt management; efficiency ratios improved with days in accounts receivable decreasing to 56.6 days from 58.7 days, suggesting better collections; and productivity ratios increased with revenue per full-time employee rising to $450,086 from $410,509, indicating enhanced productivity. These trends demonstrate the industry's growing financial stability and operational efficiency.
What are the key implications for construction companies based on the 2024 benchmarker results?
The benchmarker results emphasize several critical areas for construction companies: effective direct cost control emerges as the primary driver of profitability, as evidenced by Best in Class performance; efficient asset utilization significantly impacts ROA and ROE; operational efficiency improvements can be achieved regardless of company size; companies should focus on collections management to reduce days in accounts receivable; productivity per employee should be continuously monitored and improved; and with revenue growth decelerating from 15.0% to 10.4%, companies should prepare for potential market adjustments and focus on operational excellence rather than relying solely on market growth.
How should construction companies use these benchmarker results for strategic planning?
Construction companies should use the benchmarker data for comprehensive strategic planning by comparing their performance against industry averages and Best in Class metrics to identify improvement opportunities, focusing on direct cost management and asset utilization as primary drivers of profitability, analyzing segment-specific performance to understand industry positioning, implementing best practices from top performers in areas like cost control and operational efficiency, preparing for market volatility by strengthening financial fundamentals rather than relying on external growth, and using the 10-year trends to make informed long-term strategic decisions about investments, debt management, and operational improvements.
What economic factors influenced construction industry performance in 2023?
The construction industry faced several economic challenges in 2023 that influenced performance: moderated inflation affected material and labor costs but at a more manageable pace than previous years; rising interest rates increased borrowing costs and affected project financing; the phasing out of pandemic-era support programs required companies to operate without external assistance; despite these headwinds, the industry demonstrated resilience through improved operational efficiency and cost management. The deceleration in revenue growth from 15.0% to 10.4% suggests companies successfully adapted to these economic pressures while maintaining profitability through better management practices rather than relying solely on market expansion.
Conclusion
The 2024 CFMA Financial Benchmarker serves as an essential tool for construction industry professionals aiming to gauge their financial health against industry standards. By analyzing these insights and implementing strategic changes, companies can enhance their performance, mitigate risks, and capitalize on opportunities in a dynamic economic environment.
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