Turnover. What is it? And what does it have to do with construction?
Simple enough questions if you ever get around to asking them. But like so many words in this oddball language of ours, “turnover” actually refers to several different things, more than a few of which directly impact the business of construction.
Today, we’re going to zoom in on the concept of turnover and tease apart why some of its various meanings are important to construction finance, labor, asset management, and project completion. By the end of this article, you will hopefully walk away with a deeper understanding of how this one seemingly innocuous word can be wielded as a powerful tool for measuring and improving the efficiency of your construction business.
So what is turnover and why should you care? If you’re a contractor or construction manager who’s serious about growing your business, it might not hurt to take a moment to find out.
Working Capital Turnover
As you will soon see, understanding the various dimensions of “turnover” in construction will also require a basic knowledge of some other key concepts.
Let’s begin by diving right into the deep end of the corporate finance pool with the term “working capital.”
Here’s how Investopedia defines it:
Working capital is “…the difference between a company’s current assets and its current liabilities.”
Working capital is a measure of a company’s liquidity, efficiency, and short-term financial health.
Before we can calculate working capital turnover, we have to figure out what your working capital looks like. It’s actually very easy: Get a pen and write down how much stuff your company has. These are your current assets, things like real estate, cash on hand, tool and equipment inventories, building materials stock, and other less tangible items like marketable securities. Then right next to it, write down all the bills that you owe—stuff like debt, employee wages, and payments to suppliers and subcontractors. Those are your current liabilities.
Now figure out the monetary value of each and subtract your liabilities from your assets. Bam, you’ve calculated your working capital.
Simple enough so far. But where does turnover come into play?
Working capital turnover is a measure of how effectively a company leverages its working capital (remember: assets – liabilities) to make more money over time.
Think of “working capital” as a photograph and “working capital turnover” as a video file. One shows a still image of a single moment. The other shows a series of moments strung together over a longer period of time (by the way, this metaphor works for most of the definitions of turnover that follow).
Calculating your current working capital is a good place to start if you need to convert assets to cash fast. For contractors looking for a more complete picture of how revenue and cashflow is generated (or lost) over a period of time, figuring out your working capital turnover is a must.
To calculate your working capital turnover on an annual basis, you’re going to need to determine your average working capital, or the average of working capital measurement taken on a monthly basis over a 12 month period. That average is called your net working capital. Take that number and drop into this formula:
Working Capital Turnover = Net Revenue ÷ Net Working Capital
The higher your working capital turnover ratio, the better. For instance, a working capital turnover ratio of 10 means that your construction business generates $10 for every $1 of working capital it uses. To get an idea of how your business stacks up: The average working capital turnover for contractors in 2021 that made up to $50 million in annual revenue was 5.7 and for contractors that made $50 million or more, it was 11.4, according to a recent survey from the Construction Financial Management Association.
For more on why working capital turnover is important to contractors and other construction professionals, check out this excellent resource on the subject from our friends at Procore.
Employee Turnover
We haven’t seen the last of corporate finance jargon. But for now, let’s swerve into more familiar territory and take a look at a term you probably already recognize: “employee turnover”.
Here’s how Forbes defines it:
“Employee turnover is the percentage of employees that leave your organization during a given time period.”
There are generally two types of employee turnover. Voluntary employee turnover reflects the number of employees who leave a company on their own accord, whereas involuntary turnover is the number of employees who are fired, laid off, or asked to leave.
Employee turnover is one of, if not the strongest indicators of a company’s health. Whether voluntary or involuntary, if a large number of your employees are constantly making their way to the exit, this is a clear alarm bell that something fundamental inside your company is not working.
You may have heard that the construction industry has been experiencing a bit of a labor shortage for…oh, the last ___ years. And the problem has never been worse: In 2022, the construction industry averaged more than 390,000 job openings per month, the highest level on record, according to a recent report by the Associated Builders and Contractors. A big reason why is that not enough young people are entering the skilled trades to fill the vacancies left by older workers as they enter retirement, according to ABC’s analysis. Another major determining factor, however, is employee turnover.
In 2018, the employee turnover rate in construction reached a staggering 66.1% according to data from a survey conducted by the the Bureau of Labor Statistics. For comparison, the national average that same year was about 27%, according to the Work Institute’s 2019 Retention Report. That means employee turnover in construction was more than double the national average in 2018.
There are many factors that can lead to high employee turnover, whether it’s an unsafe or toxic work environment, or too much work and not enough pay. Whatever the case may be, it’s important to remember that construction cannot and will not happen without the labor of workers. That’s just a fact. So it’s in your best interests to keep your workers happy and healthy. Consider, for instance, how much time, money, and resources it costs to recruit, on-board, and train a replacement employee. Here’s some hard numbers from Gallup: Replacing a single employee can cost a company between half to two-times that employee’s annual salary. So a company that employs 100 people at an average salary of $50,000 can expect employee turnover to cost up to $2.6 million per year.
Ask yourself: Would you rather have a crew of happy, healthy, and seasoned workers who know all the ins-and-outs of the job? Or a constantly revolving and expensive door of greenhorns who are driven off the job site before they have a chance to learn anything or add value to your company?
For an idea of how your company stacks up, here’s a 5 step guide from the Society for Human Resource Management on how to calculate the monthly employee turnover rate for your company:
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Get the total headcount of employees for each week of a given month (that’s the number of employees as it stood at the end of each week that month).
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Calculate the average by adding each weekly headcount and dividing the sum by the number of weekly headcounts. For example, let’s say the four headcounts you took for the four weeks in the month of August were 100, 130, 90, and 125. For the average, add up those numbers to get 445, then divide the sum by 4 (the number of weekly headcounts) to get 111.25
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Figure out the number of separations, or how many employees have permanently left your company, either voluntarily or involuntarily, within the month you’re looking at. Let’s say in our example that separations = 4.
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Divide the number of separations by the average number of employees. In our example, this would be 4 ÷ 111.25 = 0.036
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Calculate the turnover rate by converting the answer from Step 4 into a percentage. For example: 0.036 x 100 = 3.6%
Voila! Your monthly employee turnover rate is 3.6%, or 3.6 separations per 100 jobs every month. To get your annual turnover rate, simply add up the monthly turnover rates of all 12 months in the year. For simplicity’s sake, let’s say your monthly turnover rate is 3.6% for every month of the year. This would give you an annual employee turnover rate of 43.2% –not great compared to the national average, but not terrible compared to the construction average.
If you’re a construction manager looking to retain employees, you can’t go wrong with offering competitive salaries and benefits while also ensuring a safe work environment. For more help calculating the annual employee turnover rate of your construction business, check out this spreadsheet provided by the Society for Human Resources Management.
Asset Turnover
If you’re in the construction business, you know perfectly well how vital it is to have your tools, equipment, and building materials at your fingertips at all times. But asset inventories are not static blocks. They’re fluid and constantly in motion, full of dozens, hundreds, thousands of constituent parts flowing through warehouses, onto trucks and loading vans, on their way to and away from job sites, shifting in and out of service and changing hands all along the way.
Given this complexity, how do you know if your assets are being used efficiently? One way to find out is to calculate your asset turnover ratio.
Here’s a definition from Investopedia:
Asset turnover is a measurement of “how effectively a company uses its assets to generate revenues or sales.”
Unlike employee turnover, the higher your asset turnover ratio, the better.
To calculate your asset turnover ratio, you first need to calculate your average total assets. That’s the average of total assets of the beginning and end of the period being examined. Take that number and drop it into this formula:
Asset Turnover Ratio = Net Sales ÷ Average Total Assets
Efficient leveraging of all the assets in your inventory can make or break the success of your construction business. That’s why it’s important to have a reliable method for organizing and tracking all the tools and equipment in your inventory. We humbly suggest that you consider using ONE-KEY™, a free and easy-to-use inventory management platform that you can use to customize, track, and manage your tools from the the screen of your computer or mobile device.
Building Turnover
We’re going to shift gears now and talk about how turnover affects the completion of your construction projects.
So far, we’ve been discussing “turnover” as a measurement of change over time. Now we’re going to explore a whole other side of the word, with “turnover” in this instance referring to a “hand off” or transition from one state to the next.
Let’s say you’ve completed a construction project. One of the last steps ahead of you post-construction is the building turnover phase (also referred to as project turnover).
Building turnover is the term used to describe the process of transferring a completed structure from the contractor to the team that will be responsible for the building’s lifecycle operation and maintenance.
It isn’t just about handing off the keys to the physical structure itself. Building turnover is also about sharing the functional and structural knowledge of the building’s various systems and other important features, which often comes in the form of documentation.
Well executed building turnover is essential to the ultimate success of a construction project. To learn more about building turnover, check out this example of a project turnover protocol used in Washington D.C.
Bottom Line
Turnover. What is it and why should you care? Turns out the answer is a bit more complicated than you probably thought. That can be said about a lot of things in the construction business though. Still, having a firm understanding of this one word’s various shades of meaning can help you steer your construction business to success.