For the past few years, one popular metric for financial data analysts has been Revenue Per Employee (RPE), sometimes also known as Employee Efficiency. What started out as a simple calculation has morphed into one of the better top line comparison indicators within industries. RPE provides perspective on overall employee efficiency and is free from the ambiguity of operating expenses. It isn’t a perfect gauge of efficiency, but when used to for year-over-year comparison within a company and side-by-side with industry averages, it is an excellent tool for goal setting and productivity planning. It is also more useful that profit per employee in many cases because profit is tied to an increasing set of financial variables.
If your accounting isn’t up-to-date, employee data and revenue tends to be accurate. Just make sure to use RPE in context.
Revenue / Number of Employees (in revenue period) = Revenue Per Employee
RPE works best as a tool when applied within an industry group. I’ll go through some of the challenges preventing RPE being a top tier KPI a little later in the this post. Business sectors have a variety of requirements and different demands on employee efficiency that cause there to be dramatic variations in RPE. For instance, businesses with the highest RPE are in the oil and gas industry (over $2 million per employee) and those in the fast food industry round out the lowest RPE (often less than $70,000 per employee).
Some of the factors causing this disparity include: revenue opportunity per employee, gross production costs, labor and wage costs, gross profit opportunity per employee, and industry business cycles. Many companies within an industry have competitive wage and production opportunities that influence top line revenues. For instance, capital intensive industries like oil and gas require significant investments to generate end products – a pipeline, drilling equipment, and extraction rights are expensive. Meanwhile, a relatively few number of employees oversee these huge capital investments. As a result, they appear to “produce” more revenue per employee. Conversely, low-wage service industries rely heavily on human capital to produce revenue which controls top line opportunities.
Comparing standardized public financial statements is hard enough, but the variety of data, corporate entities (S corp, C corp, LLC), and volume forces some challenges not seen in other industries. There is also a distinct lack of publicly traded home improvement businesses, so most of the data we are using is derived from a database of non-standardized home improvement financial statements mixed with the publicly traded corporations we could identify.
Side note: The Harvard Joint Center for Housing Studies has a fantastic white paper about Scalability in the Remodeling Business. It’s worth a look.
For the publicly traded companies, we used data for:
Here is the latest data on Revenue Per Employee Benchmarks for the Construction Industry as of 2018:
Before you jump into the housing market, it’s important to review some of the contributing factors to the variations in this table. There are several important factors that help clarify these numbers.
RPE is highly correlated to industries, but it also fluctuates significantly based on revenue volume. For example, there are economies of scale within any industry. This is especially true in the home improvement business where some companies are sole proprietors and others have employees in the hundreds if not thousands. The vast majority of businesses have fewer than 10 employees, and there are plenty of sweet spots in that 1-10 employee zone that contribute to significant swings in RPE. See article from 2/17 Remodeling Magazine about this.
Depending on the type of construction business you have, there are certain expenses that tie to every job. In some cases, like for kitchen remodeling, a large portion of the project is committed to purchasing product. This goes for high labor businesses as well as subcontractor dependent businesses. Looking at several home builder income statements, there are major expenses at every corner from design to labor to materials and subs. It’s important to understand how these might influence your revenue per employee and it’s exactly why I chose to look at RPE by trade.
Some of the data used included a residential/commercial mix within some companies. Typically commercial construction companies, including subs, have a higher RPE than comparable residential contractors, however, they often deal with heavier grade materials and components.
I hope this data helps you benchmark revenue per employee and get you started paying attention to this simple KPI. I encourage you to look at it on a monthly basis and overlay the data with the number of full-time employees in your firm. You’ll start to see “sweet spots” for efficiency and see where you might need to command higher margins or you have capacity for revenue.
Ben Lindberg, CR is a partner in Lion Tree Group, a digital marketing agency in Madison, WI. His expertise is in multi-platform brand messaging with a focus on inspiring consumers. His agency specializes in website design and comprehensive branding solutions. He regularly blogs at his company’s digital website news blog: The Bark and Roar.
This post is part of a series about KPI benchmarks for the remodeling and construction industry. For additional posts, go here.
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