Key Performance Indicators Drive Best Practices for General Contractors

By Ken Roper and Michael McLin

unning a profitable construction firm is a difficult business.

R Faced with an unprecedented number of external pressures

such as eroding profit margins, higher owner expectations,
rapidly changing technology, and a dwindling workforce,
only contractors who follow best practices will achieve a higher return
on investment (ROI) and reduce their risk.
The following eye-opening figures illustrate the difficulty of this
industry:
According to Dun & Bradstreet, more than 10,000 construction
firms fail annually.
Ken Roper
The surety industry lost $3.4 billion between 1998 and 2003.

Most failures are attributable to poor operational execution, nei-

ther bad strategy nor the external market.
Many general contractors are just one difficult project away from
bankruptcy.
Given the difficulty of the construction market, FMI Corporation and
Microsoft Business Solutions explored what best-of-class general
contractors use as key performance indicators (KPIs) for business
evaluation and decision-making. KPIs are meaningful yardsticks that
Jerry Jackson contractors can see and use to effectively communicate the day-to-day
Michael McLin operations of the business, supported by the best practices of general
construction. FMI has found that the best-of-class contractors have
fine-tuned their organizations by aligning people, processes, and
FMI Corporation technology to produce results that are better than the industry aver-
age. Best-of-class contractors are in the top 25 percent in profitability
and ROI relative to their peers.
5171 Glenwood Avenue
Suite 200 The construction industry has generally accepted KPIs that indicate
Raleigh, NC 27622 the overall health of a firm. However, the definition and understand-
Tel: 919.787.8400 ing of each of these KPIs varies widely since a typical general contract-
ing firm has a complex combination of legacy software, disparate
Fax: 919.785.9320
software systems, and a proliferation of spreadsheets that are used to
operate the business.
55 Madison Street
Suite 410 Key Performance Indicators (KPIs)
Denver, CO 80206 The following are the KPIs identified by FMI and Microsoft Business
Tel: 303.377.4740
Solutions as used by best-of-class contractors:
Fax: 303.377.3535 1. Liquidity indicator
2. Schedule variance indicator
5301 West Cypress 3. Work-in-process (WIP) reporting
Suite 201 a. Margin variance indicator
Tampa, FL 33607 b. Project cash flow indicator
c. Unapproved change-order indicator
Tel: 813.636.1364
d. Committed cost indicator
Fax: 813.636.9601 4. Backlog indicator
5. Scorecard indicator.

www.fminet.com
Key Performance Indicators Drive Best Practices for General Contractors Page 2 of 8

No one single KPI can provide a complete picture of on contracts). The funding can be in the form of
business performance. Viewing all KPIs as a group equity or borrowed money.
provides a more accurate total picture. With this
information, managers can understand the pulse of Conversely, the contractor is funding his WIP with
their business at a glance and determine if action is the project owner’s money if the current liability
required. Therefore, KPIs prod management to drive accounts exceed the current asset accounts. The
organizational behaviors since they require specific difference in this equation will be one of three
business processes to make them meaningful perfor- possibilities:
mance measurements.
1. Zero, in which case the funding and asset accu-
Complete integration of people, processes, and mulation are in balance.
technology is an important first step in building
best-of-class performance. The increasing sophistica- 2. A positive number, in which case cash is being
tion and competition within the industry will force applied to operations. That is, the general con-
firms seeking improved performance and operational tractor is financing the WIP.
excellence to be early adopters of technological
improvements. This early adoption will drive pro- 3. A negative number, in which case cash is being
cesses and produce the best results. provided by operations. That is, the owner com-
bined with subcontractors and/or vendors are
The following details each KPI, including its defini- financing the WIP.
tion, uses, calculation, and significance to your firm.
The current asset and liability accounts can be
Liquidity Indicator converted to the equivalency of a number of days’
Cash is the single most important asset that keeps a revenue outstanding by dividing annualized revenue
contracting business operational; all sins are forgivable by the 365 days in a year producing an average
but one, and the unforgivable sin is running out of daily revenue amount. The average daily revenue
cash. The complexity of contracting makes forecasting amount is also the amount of cash that can be
cash flow difficult at best. Late owner payments, generated from operations if improvements are
schedule delays, invoice processing, change-order made in the ratio, or relationship, of these key
approval, vendor/subcontractor payments, labor costs, accounts of current assets to current liabilities.
and numerous other factors affect the timing and
ultimate receipt and disbursement of cash. Dividing the current asset accounts and current
liability accounts by the average daily revenue pro-
Understanding cash flow is of critical importance duces the days outstanding for each account. Those
and is discussed in detail in the WIP section. One numbers can then be totaled to determine the net
key aspect of cash flow is cash demand or liquidity impact. The net impact is the average number of
which is discussed here. A manager should have the
ability to evaluate organizational liquidity and then
be able to drill down and see which projects are
providing liquidity and which are using liquidity.
Once liquidity at the project level is known, an
organization can work to improve it.
The next step toward liquidity improvement is to
identify actions that will improve the cash generation
process. A project that is losing money may still be
generating positive cash flow. Conversely, a project
that is making money may produce negative cash
flow. A positive cash flow can be achieved improperly
by not paying subcontractors and vendors, for ex-
ample. Therefore, causes of both negative and positive
cash flow require investigation and analysis.
Looking at cash flow from a contractor’s perspective
reveals six key balance sheet accounts that are largely
controlled by project managers. A contractor is
funding his WIP with his own cash if the current
asset accounts of accounts receivable, retainage re-
ceivable, and under billings (costs and earnings in
excess of billings) exceed the current liability ac-
counts of accounts payable, retainage payable, and
over billings (billings in excess of cost and earnings
Key Performance Indicators Drive Best Practices for General Contractors Page 3 of 8

days of liquidity applied to or provided by WIP by contractors with the ability to meet and deliver
each account. The accounts receivable and accounts projects quickly have a major competitive advantage.
payable days outstanding can be compared to indus- The goal of scheduling is to create a tool that can be
try averages such as that compiled by the Construc- used to drive the project and build credibility with
tion Financial Management Association (CFMA) or all the participants, particularly the owner. Quality,
Risk Management Associates (RMA) for general safety, communication, planning, coordination, and
contractors to determine positive and negative com- resource utilization are all enhanced through the
parisons to similar size general contractors. scheduling process, which includes updates to it and
(See Exhibit 1.) integration of input from all project participants.
Scheduling and its value in communication to own-
Exhibit 2 is a general contractor with annual revenue ers sets expectations, seeking owner satisfaction with
of $86.6 million, which converts to an average daily the project’s execution.
revenue of $237,300. If this contractors is able to
accelerate over billings and improve collections of Project schedules represent a detailed plan of indi-
accounts receivable a net improvement of five average vidual activities, sequencing, duration, and interde-
revenue days or equivalency, $1,186,500 (5 days X pendence. Many project schedules are prepared
$237,300) in generated liquidity would result. simply at the inception of the project. Though most
Exhibit 2 also compares actual results to RMA data. owners require submission of these schedules as part
of the contract, not all general contractors leverage
the full advantage of schedules by using them con-
tinuously to drive projects to successful completion.
The integration of subcontractors into project sched-
ules is critical to effective scheduling.
Schedules that are loaded with costs, resources, and
labor hours help identify cash flow and overall re-
source requirements. These schedules are invaluable
in developing an aggressive schedule of values that
are then submitted to owners for payments on
progress billings.
Effective scheduling techniques include the integra-
tion of subcontractor schedules into a master sched-
ule from which project execution is driven. This
process establishes and communicates critical mile-
stones, critical paths, and delivery dates.
Most change orders have schedule implications.
Change orders can be directed by owners, generated
from changes in the field, or necessitated by environ-
mental changes in the construction process. General
contractors who correctly maintain an updated
schedule that reflects changing conditions increase
their ability to manage the construction process and
scheduled completion dates. Using the schedule to
proactively manage change orders increases the
general contractor’s ability to identify and commu-
nicate favorable and unfavorable performance vari-
ances to all project parties. Schedules also document
The range of days outstanding of accounts receivable completion dates, which helps minimize the impact
and accounts payable for a general contractor within of damages.
a certain volume range varies significantly within the
industry. The goal for your firm should be to rank in Schedule performance can be evaluated by simply
the top 25 percent of firms in this comparison sur- looking at the variance in terms of days. The variance
vey. These firms have best-of-class financial manage- is calculated by taking the original planned comple-
ment practices. tion duration minus the current forecasted comple-
tion duration. The difference is the number of days
Schedule Variance Indicator the schedule is ahead or behind. But that provides
Construction project owners are demanding faster only a partial perspective.
construction, cutting the typical project duration
dramatically. This schedule compression has made Contractors should also evaluate what the variance
scheduling today of crucial importance. General means as a function of the remaining duration on
Key Performance Indicators Drive Best Practices for General Contractors Page 4 of 8

the project. Taking the schedule variance in days and riod. Similar comparisons for the cumulative costs on
dividing it by the total remaining duration in days the project can also be made. (See Exhibit 4.)
shows the variance as a percentage of remaining
duration. This information enables the contractor to The margin variance is calculated by comparing
evaluate the significance of the schedule variance. A various margins. The forecast margin percentage is
negative variance of five percent of the total remain- obtained by taking the forecast gross margin and
ing duration is clearly easier to make up than a 35 dividing it by the forecast revenue. The actual gross
percent variance. (See Exhibit 3.) margin on closed jobs is divided by the actual rev-
enue on closed jobs to get the completed contract
A well-built schedule saves time and money for all gross margin percentage. Work-in-process gross
the parties when used to develop a fully integrated, margin is divided by revenue on WIP to calculate
collaborative solution. the WIP gross margin percentage. Finally, all con-
tract gross profit for the period is divided by all the
contract revenue for the period to find the total WIP
gross profit percentage.
This KPI identifies the company gross margin per-
formance, provides a comparison to business plan
objectives, and promotes accurate estimates of cost-
to-complete on projects.

Work-in-Process (WIP) Reporting

Project execution is the heart of every construction
business. Measuring and monitoring WIP ensures
timely corrective actions and confirms project execu-
tion according to plans. Four of the most important
project execution results are: gross margin, cash flow,
change orders, and project buy-out execution (in- Project profitability is the core of general contractor
cluding procurement contracts). A KPI is presented profitability. Timely and accurate tracking of project
for each of these critical project execution functions. profitability is also critical to success in the field. A
Together, the status of these indicators gives the good analogy is that of an airplane cockpit, loaded
general contractor and owner a global project perfor- with dials and gauges that provide instantaneous
mance perspective. The stage is set for risks to be feedback to the pilot. The pilot responds to the
minimized and margin enhancement opportunities feedback with corrections or maintains the current
to be leveraged proactively. Positive project cash flow course and headings. If your field superintendents
is maximized as well. had instantaneous feedback information systems,
how much better could they perform? Identifying
Margin Variance Indicator current and cumulative margin variances and making
The calculations for margin variance compare gross immediate corrections leads to control of project
margins on in-progress projects, completed projects, profitability.
WIP, and annual business forecasted. This big-pic-
ture approach gives the owner an understanding of Project managers must know their estimated costs-
how their total work program is performing relative to-complete each project phase and throughout the
to the annual plan. The general contractor can then entire project. While knowing this information is an
analyze gross margin variances by project, comparing important part of their job, there is an art to it.
the actual performance to the estimate for the pe-
Key Performance Indicators Drive Best Practices for General Contractors Page 5 of 8

A one percent overstatement on percentage of

completion for a $5 million project creates a profit
overstatement of $50,000. (See Exhibit 5.) When
this error is subsequently identified, there will be a
corresponding $50,000 reduction in the next
period’s profit.

Unapproved Change-Order Indicator

The goal of the change-order process is to inform the
owner of changing conditions that impact cost and
schedule. Costs incurred through unapproved
change-orders identify possible financial exposure so
contractors should be diligent in communicating
these to owners and seeking early approval. Contrac-
tors successful at early notice and timely approvals of
change orders ultimately reduce their financial risk
and increase client satisfaction.

The accumulation of costs incurred on unapproved

Project Cash Flow Indicator change-orders is separately identified as a KPI. The
Project cash flow is another principal element of the sum of these costs represents a significant financial
project manager’s responsibilities. This indicator exposure for general contractors. Comparing these
answers the question: Are your projects providing costs to the total forecasted gross margin dollars for
cash or consuming it? A project’s cash position is a the work represents the percentage of gross margin at
key measure of WIP and project profitability. risk to the business owner. (See Exhibit 7.)

Net project cash flow is computed by comparing all The best time to establish change-order procedures
cash receipts on a project less all cash disbursements. is at the inception of the contract. Following a stan-
Over billings and under billings affect this result in dard change-order process increases the percentage of
the long-term. The KPI is calculated by finding the approvals. However, delays in processing, meeting
net of all positive and negative project cash flows.
The result gives the project manager a clear picture
of how his or her work program is directing cash
flow for the company. (See Exhibit 6.) It also identi-
fies company cash flow from project execution,
communicates potential project execution problems,
and promotes project billing and collections on
projects.
A common technique for contractors experiencing a
cash crunch is to fund one project with another
project’s cash flow. This practice is a sign of serious
trouble. The same is true for subcontractors; a
subcontractor’s positive cash flow is essential to their
ability to complete work on time and with quality.
Margins in the industry provide little room for collec-
tion or credit risk problems with subcontractors.
Key Performance Indicators Drive Best Practices for General Contractors Page 6 of 8

notification requirements, and confronting changes

causes significant challenges to the successful nego-
tiation of changed conditions. Lack of detailed
point-of-impact documentation on schedules and
costs (contemporaneous records, in legal terms)
weakens a general contractor’s legal position. Owners
prefer to do business with contractors who can be
trusted to provide timely information and who show
supporting analysis for all schedule and cost implica-
tions on their projects.

Change-order management is an integral part of

project management. Approximately 15 percent of
the final contract value in this industry comes from
change orders. The process is known and understood
by general contractors and subcontractors, yet many
firms still struggle with the process. The unapproved
change-order indicator serves to alert business man-
agers when the process is headed out of control.
Senior managers are not always intimately involved
with the project’s details, and they need an indicator
to promptly capture this data. The KPIs of margin variance, project cash flow,
unapproved change-orders, and committed costs
General contractors must also track costs on change provide a general contractor with a global perspective
orders separately from the base contract and ap- on WIP. The indicators set the stage for risks to be
proved change-orders. General contractors need to minimized and margin enhancement opportunities
know the amount of margin generated by the base to be leveraged in a proactive and timely manner.
contract vs. that generated through change orders in
order to answer the question: Did gross margin Bringing all elements of the WIP process together
improve or fade on change-order work? allows for timely payments of change-order work for
changing conditions on contracts. Delays caused by
Committed Cost Indicator material shortages and non-delivery of key compo-
The final WIP KPI for best-of-class contractors is the nents can be avoided and schedules can be main-
committed cost indicator. Effective job buy-out tained. Most importantly, project management
includes executing purchase orders for materials and personnel maintain their communication with own-
executing contracts with subcontractors. The finan- ers and are assured that the client service is at opti-
cial exposure, or contingent liability, comes from mal levels.
material price increases and subcontractor pricing
prior to contractual commitment of suppliers. Both Backlog Indicator
can escalate out of control if ignored. Contract General contractors adept at backlog management
length can be several years in duration and material position themselves well to select those business
price escalations, without supporting contract provi- opportunities that will ultimately provide the most
sions for cost increases, leave the general contractor margin. The reverse is also true since construction-
with significant financial exposure. Where price industry cycles dictate that if backlog decreases to a
escalators are not feasible, contingent costs must be point where losses are expected, cost reductions have
included to provide some protection to the contrac- to occur to maintain profitability.
tor with a fixed-price contract.
The KPI for backlog is calculated by adding the total
Exhibit 8 shows the impact of open commitments of all gross margins forecasted for projects minus the
when contract buy-out processes have not been fully total earned gross margins on all projects. Gross
executed, reflecting the contractor’s potential expo- margin on awarded but unsigned contracts can be
sure. Corrective actions can be initiated when owners added to this total. The indicator identifies gross
are aware of these financial exposures and decisions margins on future projects and serves as an early
are made on how to mitigate potential financial warning indicator of profit fade.
losses.
Variations of this calculation exist in the industry,
The calculation of uncommitted costs is the total of and some include an expected value estimate of
all uncommitted costs in WIP divided by the total potential projects using the probabilities for securing
available committed costs on all projects, subject to these projects. The total of gross margins in backlog
buy-out on all contracts. The KPI serves to identify is then compared to selling, general, and administra-
company exposure to price increases and promote tive expenses budgeted for future periods.
early execution of project buy-out procedures. (See Exhibit 9.)
Key Performance Indicators Drive Best Practices for General Contractors Page 7 of 8

capacity limitations can make strategic decisions

about project acquisition, which results in proactive
business management.
Scorecard Indicator
Because most organizations have a tendency to look
only at objective, quantifiable indicators, it is easy to
overlook the importance of qualitative measures that
are less calculable. Best-of-class organizations realize
the importance of evaluating their qualitative perfor-
mance. As a result, many implement a process by
which they evaluate softer skills. We have termed
this the “Scorecard Indicator.” (See Exhibit 10.)
Identifying the soft skills lacking in project person-
nel is challenging. Scorecard indicators provide a
non-confrontational way to identify skill gaps. By
evaluating the qualitative performance of the organi-
Backlog tells a business manager a great deal about zation, problems can be identified earlier, preventing
an organization’s future performance. Backlog in- the escalation of the “paper war” with owners, sub-
cludes signed contracts in process, awarded propos- contractors, and other project stakeholders.
als, and some percentage of outstanding proposals
relative to the firm’s historical hit rate. The backlog Organizations that use scorecard indicators generally
provides some assurance of future revenue and gross have better safety records, higher productivity, im-
margin opportunities. The backlog makes a solid proved quality, employee retention, and client satis-
foundation for contractor decision-making. faction. The project-delivery scorecard also helps
identify training and development needs.
Contractors with too little backlog will likely accept
work at lower margins in hopes of just “covering The scorecard is a list of important “success factors”
overhead.” Conversely, contractors with a strong that are weighted according to importance and
backlog can frequently demand pricing premiums scored according to performance. Such a scorecard
since they have the confidence of a strong business represents a qualitative assessment of the processes
book. Contractors’ hit rates may go down with the driving high productivity and margin enhancement
higher pricing, but the contractors’ gross margins on projects by various project team member roles. A
increase. high score indicates a higher probability of successful
project execution.
Backlog management, supported by effective market-
ing and business development practices, is critical to The scorecard provides a methodology to evaluate
a contractor’s success. By understanding what oppor- key aspects of organizational performance. The same
tunities have been captured and what opportunities principles can be applied to numerous other aspects
are on the horizon, a contractor can make informed of a project that are less quantifiable. Examples
decisions about what projects to pursue and how to include project documentation such as submittals,
price them. Most general contractors consider a RFIs, and correspondence, along with subcontractor
backlog of six to 12 months, with adequate margins management, customer satisfaction, quality, safety,
to cover overhead and profit, desirable.
It is equally important that general contractors
understand their capacity. Growing too quickly
without trained personnel to execute the work leads
to major financial risk. FMI coined the expression
“Volume kills, profit thrills,” to underscore the
hazards of rapid growth. Two major causes for busi-
ness failure are failure to understand the business
thoroughly and growing too quickly. A key function
of management is to ensure that capacity, both
financial and staffing, is not exceeded.

Effective backlog management also allows a contrac-

tor to evaluate their performance against the business
plan. A firm should be able to evaluate their revenue
and margin performance by business segment. Gen-
eral contractors who assess backlog while considering
Key Performance Indicators Drive Best Practices for General Contractors Page 8 of 8

and other productivity drivers such as short-interval Ken Roper is a director with FMI Corporation. He may be
planning, daily huddles, and performance evalua- reached at 303.398.7218 or via e-mail at
tions. kroper@fminet.com.
Providing a methodology to evaluate qualitative Michael McLin is a consultant with FMI Corporation. He
performance is paramount. Purely financial metrics may be reached at 303.398.7255 or via e-mail at
fail to consider such key success elements as process mmclin@fminet.com.
compliance, culture, and leadership. The scorecard
indicator also provides an organizational self-assess-
ment and is a key ingredient in continuous improve- Contributing editors to this article are Microsoft Business Solutions,
ment. One Lone Tree Road, Fargo, ND 58104, Solomon@microsoft.com,
Steven James Mulka, Partner SIS Software, LLC
Conclusion 678.380.2267, ext 110, smulka@sisn.com and Craig Ward,
We have discussed KPIs including cash demand, 919.698.3162, Industry Consultant, wardcr@bellsouth.net.
scheduling, WIP reporting, backlog management,
and the project-delivery scorecard. Timeliness of
these measures is critical since early awareness of
problems provides greater opportunities for correc-
tive actions. Equally as important is the ease of
obtaining the data that flows into the timely devel-
opment of these indicators. While the numbers are
About FMI
quantifiable, the best practices themselves are the
key to execution and driving these numbers into Founded in 1953 by Dr. Emol A. Fails, FMI provides
superior performance. management consulting and investment banking for the
All KPIs need to be viewed in the aggregate total to worldwide construction industry.
properly assess organizational performance. One KPI
alone does not provide the total picture. KPIs are FMI delivers innovative, customized solutions to con-
also not a substitute for a firm’s financial statements
or the traditional ratio analysis. The intent of KPIs is tractors; construction materials producers; manufacturers
to provide meaningful indicators that contractors can and suppliers of building materials and construction
see and use to effectively communicate the day-to- equipment; facility owners, managers, and developers;
day operations of the business, supported by the
best practices of general construction. engineers and architects; surety companies; and industry
trade associations.
A typical firm’s set of disparate systems makes cap-
turing and disseminating critical information diffi- FMI's experienced professionals assist businesses with
cult at best. The implementation of a fully inte-
grated system that captures and disseminates KPIs strategic planning, leader and organizational develop-
throughout all appropriate levels of the organization ment, business development, research, mergers and
allows an organization to make more informed deci- acquisitions, peer groups, private equity placement,
sions.
project execution, and training.
Fully integrated systems establish processes by
which information will be captured. Therefore,
systems drive behavior within an organization. All
too often, excuses are provided as justification for © 2005 Microsoft Corporation. All rights reserved. Microsoft and Microsoft Business
lack of accomplishment. With so much risk and so Solutions are either registered trademarks and/or trademarks of Microsoft Corporation in
many variables, what construction firm cannot jus- the United States and/or other countries. Microsoft Business Solutions ApS is a subsidiary of
tify capturing and disseminating information to the Microsoft. The names of actual companies and products mentioned herein may be the
right parties, at the right time, to ensure intelligent trademarks of their respective owners.
decision making?
The information contained in this document represents the current view of the author on
the issues discussed as of the date of publication. Because the author and Microsoft must
Recognizing the value of and need for a fully inte- respond to changing market conditions, it should not be interpreted to be a commitment on
grated solution is only the first step. The commit- the part of the author or Microsoft, and the author and Microsoft cannot guarantee the
ment to implementation is the next. The system is accuracy of any information presented after the date of publication.
not only a long-term solution, but also a long-term
investment that is required to allow a firm to capture This White Paper is for informational purposes only. MICROSOFT MAKES NO
the associated benefits. The commitment will be WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMA-
TION IN THIS DOCUMENT.
significant in time, effort, and capital; however, the
ROI will be substantial and ensure the success of Complying with all applicable copyright laws is the responsibility of the user. Without
your organization well into the future. limiting the rights under copyright, no part of this document may be reproduced, stored in or
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Key Performance Indicators Drive Best Practices for General Contractors APPENDIX

Liquidity Indicator
Key Equations:
Accounts Receivable + Retention Receivable +Underbillings = Cash Conversion
Accounts Payable + Retention Payable + Overbillings = Cash Funding
Cash Conversion – Cash Funding = Cash Demand
Subcontractor Revenue / 365 days = Average Daily Revenue

Schedule Variance Indicator

Key Equation:
Original Duration (days) – Revised Duration (days) = Schedule Variance (%)
Total Remaining Duration (days)

Margin Variance Indicator

Key Equations:
Forecasted Revenue – Forecasted Direct Costs = Forecasted Gross Margin
Actual Revenue of Closed Jobs – Actual Direct Costs on Closed Jobs = Actual Gross Margin on Closed Jobs
WIP Revenue – WIP Direct Costs = WIP Gross Margin

Cash Flow Indicator

Key Equation:
Sum of Projects Cash Receipts - Sum of Projects Cash Disbursements = Project Cash Position

Unapproved Change-Order Indicator

Key Equations:
Sum of Costs incurred on unapproved change orders ($) = % of margin at risk
Total forecasted gross margin ($)

Committed Cost Indicator

Key Equation:
Sum of Uncommitted costs on contracts in progress = % Uncommitted Costs
Sum of All available committed costs

Backlog Indicator
Key Equations:
Sum of Forecasted gross margin – Sum of Earned gross margin = Gross margin in backlog