Backlog is an important measure of the health of a construction company. Here’s what contractors need to know about backlog and how it can help (or hurt) their profitability.
What Is Construction Backlog?
Construction backlog is the amount of planned work that a construction company is contracted to do but hasn't started. You can measure backlog in dollars (for profitability and financial metrics) or time (how far out work is scheduled).
What Should I Know About Backlog?
Balance is key when it comes to backlog. While having backlog is a good thing, there are a few important things to keep in mind.
Backlog & Economic Positioning
A higher amount of backlog in dollars generally means a better economic position for the company. Having a healthy backlog means that the company is winning new contract bids and there is a steady flow of work ahead.
However, there’s a fine line between the organic growth of a business and prioritizing fast growth by taking on lots of new projects in a short amount of time. Be careful not to take on too much too fast to avoid putting pressure on managing the backlog.
Make it a priority to have a solid understanding of what level of backlog is good for your company based on your market and project management style.
Size of Backlog
If your backlog is too small, it could mean that there isn’t enough work coming in. That could lead to difficulty in being selective in pursuing profitable projects going forward. If your backlog is too big, your customers may question if you’re able to finish in a timely manner. An oversized backlog could also mean you aren’t saying “no” to certain jobs and customers, which can affect profitability.
It’s important that your company’s financials are in good order so you can make decisions with up-to-date information.
Sureties
Sureties use backlogs as one of the factors, along with work in progress (WIP) and overall financial statements, in deciding to approve bonding on a project. To better understand what sureties consider, read What Do Sureties Look At When They Review A Contractor’s Financial Statements?
Smaller contractors will eventually need to make an investment in a construction-specific accounting and job costing software to help them better manage their workflow and meet the reporting needs of sureties.
Backlog as an Economic Indicator
It’s a good idea to keep an eye on the conditions in the national construction industry and your local market. One way to do that is to use the Associated Builders and Contractors’ Construction Backlog Indicator, an economic report developed from the results of confidential surveys sent to contractors on a monthly basis. This report uses a formula to convert the reported survey results from dollars into months of available work, and often correlates with potential booms or busts in the economy as a whole.
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