How to keep a constant backlog

Matt Verderamo is a consultant with Well Built Construction Consulting, a Baltimore-based firm that provides strategic consulting, facilitation services and peer-to-peer panel discussions for construction executives. The opinions are the author’s own.

If you want to grow your construction company, getting your backlog right couldn’t be more important. A strong backlog gives you the ability to plan ahead, whether it’s for hiring needs, labor needs, key strategic investments, or general cash flow for things like trucks or raises.

Backlog is a measure of how much work you have booked and haven’t yet billed for. So, for example, the day you sign a $3 million contract, you add $3 million to your backlog. After your first billing (let’s say it’s for $100,000), your backlog on this project is now (you guessed it) $2.9 million. To get your total backlog, add up the outstanding invoices from all your projects.

Since backlog is a key indicator of future billings and therefore future profits and cash flow, there are many reasons why you should do your best to maintain a steady portfolio. Here are the four main considerations you should keep in mind to ensure you use this information to better guide your business:

Follow the numbers. As with most things, people won’t focus on backlog if it isn’t quantified, tracked, and emphasized. The more you talk about and measure the backlog, the more likely you are to achieve your goals.

Set a goal based on your business’s strategic goals, then measure the backlog in your financial reports. Once you’ve started crunching the numbers, distribute updated backlog data to your estimating team at least monthly, but preferably weekly.

Consider your sales cycle. If you’re a mechanical contractor, it can take eight to twelve months from the time you bid on a project until you’re on the job and getting substantial billing. So you would say this type of contractor has a sales cycle of about eight to 12 months and should book a backlog about eight to 12 months in advance.

For example, if you’re targeting $100 million in revenue by 2025 and your sales cycle is eight to 12 months, that would mean that by January 1, 2025, you’d want to have between $80 and $100 million in delay Because if you don’t, any job you win in 2025 will likely start in 2026 and not contribute to your 2025 goals.

If you’re a smaller contractor with a shorter sales cycle (say two to three months) and a revenue goal of $35 million, you’ll only need to be about $8 million behind on January 1st. 2025, or around 25% of the target. Again, because that’s what you’d need to bill in the next two to three months to hit your goal.

Separate your delay. While all delays are great, if you win a mega project today that doesn’t start until 2026, you may hit your delay goal, but that doesn’t mean you’ll have work by 2025. I always recommend separating your overdue for the next 12 months from your overdue over 12 months. That way, you’re still tracking the two big numbers, but you’re making decisions based on the right information today.

Look at other indicators. While you should measure your lag, it’s important to realize that it’s a lagging indicator. This means that whether the backlog is low or high doesn’t tell us much, other than that we need or don’t work. What it doesn’t tell us are things like:

• Are we bidding enough work to maintain/increase our backlog?
• Do we have enough sales meetings to maintain/increase our backlog?
• Do we have enough customers to support our growth goals?
• Are we doing enough business development with new leads?

So, while backlog should serve as a goal, it’s critical to create a set of leading indicators that ensure you’re doing the things you need to do to maintain a steady portfolio. A simple process for creating advanced indicators for backlog is as follows:

1. Calculate your winning percentage.
2. Use your win percentage to create bid and sales goals. For example, if your win rate is 10% and your target portfolio is $35 million, you should bid $350 million. It also means you have to make $35 million. Companies with more than one estimator should then break down that $350 million per estimator and create an individual bid goal for each, and break down the $35 million per estimator and create an individual sales goal for each one
3. Each week, meet as an estimation team and review how much each person bid/earned the previous week and compare it to the target. Since you may not be bidding every week, you should track weekly bids and sales goals as an accountability tool, but ultimately you should measure failure/success in meeting goals against of monthly offers and total sales. Four weeks is enough time for the data to be resolved.

Follow the steps here and I promise you will be amazed at the results you get in the form of a consistent backlog that allows you to pursue your strategic goals.