What Is an Engineering KPI?
An engineering Key Performance Indicator (KPI) or metric is a clearly defined quantifiable measure that an engineering firm uses to gauge its success over time. With engineering being a very broad field, KPIs are employed in a variety of ways, ranging from company-wide analysis to project specific performance metrics. Company wide KPIs can be used to compare companies in the same industry, while project specific KPIs should be used internally to evaluate project performance.
Breaking it Down: Engineering Reporting Strategy
Engineering is the application of scientific principles to design and build new things such as machines and structures. In this post, we are going to focus on four of the larger engineering industries and explore the different engineering key performance metrics used in each industry. These KPIs will give you a fundamental understanding of what performance metrics are important to each industry, and how they can impact the business. We will also discuss how engineering dashboards are imperative for tracking KPIs and can streamline a reporting process.
Research and Development Engineering KPIs
Most companies that develop products in-house will have their own research and development engineering team. This team is responsible for making design decisions that ultimately shape the final product that the company will deliver to clients. Here are some engineering KPI examples that you can apply to your research and development team:
- Existing Product Support Cost – This engineering KPI tracks how much it costs your company to support existing product lines relative to how much revenue they generate each year. If the support costs are eating too much of the profit, it may be worth discontinuing a product.
- Engineering Effectiveness – Is your engineering team working effectively? This engineering key performance metric measures how much the engineering team costs relative to the number of projects they support, or number of products sold.
- R&D Cost/Benefit Ratio – This is a very straightforward engineering key performance indicator. It takes the total R&D engineering costs and compares it to the potential financial gain the project will bring. If the ratio is too small, the proposed R&D will be cancelled, and new options will be explored.
- Payback Period – The payback period performance metric can be used to see how long it would take to pay off the efforts of your engineering team. There is a bit of estimating here, but you take the total cost of R&D and divide it by the profit of each product sold. This tells you how many units need to be sold to break even. By dividing this by expected annual sales volume, you can determine the payback period in years.Payback Period = Initial Investment / Annual Cash Inflow
- Outsourcing Rate – How much of your engineering work is outsourced vs. being completed in-house? This engineering KPI measures the total number of external staff to the number of in-house staff. There has been a large move to outsourcing as it means that companies do not have to keep full time staff that they may not need all the time.Outsourcing Rate = (# of External Staff / Total # of Staff) * 100
- Engineering-on-Time Delivery – What is causing delays on your projects? Is it the engineering team? This performance metric measures the rate at which your engineering team meets its deliverables on time.On-Time Delivery = (# of Projects Delivered on-Time / Total # of Projects Delivered) * 100
- Cost Performance Indicator (CPI) – This engineering KPI metric is used to determine how well a project went from an engineering cost perspective. To do this, the CPI takes the budgeted cost of work performed and divides it by the actual cost of work performed. A value greater than one is favorable, as it means the project came in under budget.CPI = Budgeted Cost of Work Performed / Actual Cost of Work Performed
- Schedule Performance Indicator (SPI) – Similar to the CPI mentioned above, this engineering performance metric measures the budgeted cost of work performed by the budgeted cost of work scheduled. This helps to indicate how far along a project is compared to the schedule, based on the project budget and work billed.SPI = Budgeted Cost of Work Performed / Budgeted Cost of Work Scheduled
These examples of KPIs in research and development engineering will give you a solid foundation of metrics to use when gauging your engineering department’s performance. However, when you eventually decide to add more engineering performance metrics to your engineering dashboard, there are several things that you should take into consideration.
Knowing What Makes a High-Quality Engineering Key Performance Indicator
The engineering sector is constantly evolving with the advent of new technology. We now have engineering disciplines that didn’t exist 40 years ago. While this has given birth to many new engineering KPIs, it doesn’t change what makes for a high-quality key performance indicator. Here are some of the factors that you should consider when reviewing an engineering metric to see if it is a good fit for your team:
- A goal. This is the foundation of a KPI. Each engineering key performance metric must have a clearly defined, quantifiable goal.
- A holistic approach. Before implementing a new engineering metric, take a moment to think about its impact. How will this new KPI impact the company? It is best to utilize KPIs that help the entire company, rather than improving the process in one business unit and negatively impacting another.
- Aligns with company processes. Most companies have an existing business framework. A KPI is best utilized when it can integrate easily into this framework. The concept of “it is only a temporary disruption” is not a valid excuse when trying to implement new engineering metrics.
- Creates a company culture. Most people only associate KPIs with measuring performance, making company culture seem like a strange consideration. However, the metrics a company sets reflect what they value. The best KPIs for your engineering department will encourage and reward people for taking actions that benefit the company.
- Easy reporting. This is one of the most important aspects of a KPI. A KPI will only provide benefit if you are able to collect and interpret the data. We recommend the use of a KPI dashboard, as it can automatically collect data and produce reports.
- Helps make informed decisions. Ultimately, the goal of implementing key performance indicators is to help make informed business decisions. As such, the implemented KPI should be able to shed light on company operations, as opposed to just being another metric that measures for the sake of measuring.
Now that we have established what makes a high-quality engineering key performance indicator, let’s look at some examples of KPIs in consulting engineering.
KPIs for the Consulting Engineering Industry
The consulting engineering industry is very broad; however, the most common form of consulting engineering is in the construction industry. Every jurisdiction will have codes and standards that you must follow when designing and building a project. As such, it is often cheaper to hire consultants who specialise in these projects than train internal staff. Here are some consulting engineering KPI examples that you should be aware of:
- Number of Clients – One of the key components to consulting engineering is clients. This engineering performance metric tracks the number of active clients a firm has over a specified time period. A higher number is often perceived as being better, but this is not always the case. It is important to have high quality clients that are good to work with.
- Number of New Clients – Building on the previous engineering KPI, it is important that a firm can differentiate revenue streams from new and existing clients. While new clients can help a company grow, it often costs a substantial amount of money to acquire new clients.
- Percentage of Revenue from Existing Clients – Revenue from existing clients is generally a lot cheaper than revenue from new clients. Working with existing clients can also be more efficient, as you already know how they function, leading to further financial gain. As such, it is important to track how much is being generated from each stream.Percentage Rev. from Existing Clients = (Revenue from Existing Clients / Total Revenue) * 100
- Repeat Business Rate – This engineering metric is used to determine how many times a client will come back to you for work after the initial relationship has been established. This is a very important KPI to consider when determining how much effort should be put into acquiring new clients.Repeat Business Rate = Avg. # of Repeat Interactions / Total # of Clients
- Billings – The billings engineering KPI is used to measure how much a firm was able to bill clients over a time period. This performance metric is used to gauge how much work a firm should be bidding on, as well as giving a monthly revenue figure.
- Project Margin – Each project that a consulting firm works on will have a certain level of assumed profit built into the fees. The project margin metric measures the profit of a certain project relative to revenue. There needs to be a fine balance of healthy profit, but not so much that clients feel they are being ripped off.Project Margin = ((Project Revenue – Project Costs) / Project Revenue) * 100
- Utilization Rate – This metric is the bane of most consulting engineers. Every firm is obsessed with achieving an unreasonably high utilization rate, which measures the amount of time billed toward a client vs. total working time.Utilization Rate = Actual Billed Hours / Maximum Possible Billed Hours
- Average Fee Per Hour – When you are working on projects with other engineers of different experience levels, some of the billing rates can be different. The average fee per hour engineering KPI blends the rates of all the consultants on the job to determine what the hourly rate for the job is. This helps the team with budgeting hours for the project.
Consulting engineering is one of the more traditional engineering fields that people commonly worked in. However, over the past thirty years, another field has really come to the forefront. This is of course software engineering.
KPIs for the Software Engineering Industry
In the 90s, software engineering exploded with the Silicon Valley tech boom. Now that the industry has become more established, a whole new set of engineering KPIs has emerged. Here are some of the software engineering performance metrics you should be tracking in your engineering dashboard:
- Number of Developers – You might wonder why the number of staff really matters, but this engineering KPI can be used in conjunction with other KPIs to see the impact of headcount. Adding more staff doesn’t always mean a higher output level.
- Number of Releases – Typically, a higher number of releases is associated with a higher level of productivity. However, there are instances where a large release takes more time, resulting in a lower KPI value. This is a good software engineering KPI for monitoring productivity.
- Developer Delta – Ever thought your team size hasn’t changed, it doesn’t mean that your team members haven’t. This key performance indicator aims to measure how many team members change. A high turnover rate will likely lead to project delays and inconsistencies.
- Number of Comments per Pull Request – This metric can be a little bit harder to interpret at times. If a pull request has a lot of comments on it, it could mean that there are lots of changes to be made, or there is something wrong with the submission. Conversely, zero comments on it can mean that things have not been reviewed very thoroughly.
- Number of Bugs – How many bugs come up during production? Are there a lot? It might be worth using a specialized engineering dashboard to keep track of the number of bugs that come up, and rate them as low or high priority.
- Running Costs – This software engineering performance metric tracks how much it costs to keep a team functioning. These costs typically include things like development tooling and environment costs.
- Average Downtime – No one likes it when a service is down. It is a very easy way to lose customers. This software engineering metric measures the average amount of time a service is down over a weekly, monthly, or annual timeframe.
Now that we have established quite a few different KPIs, we should probably talk about the best ways to track and report these performance indicators using engineering reporting software.
Managing Your Key Performance Indicators and Streamlining Your Reporting
Regardless of what engineering industry your company operates in, the collection of KPI data and reporting is made easier with the use of specialized software. At insightsoftware, we realize that a lot of this data is already collected and stored in ERP solutions that are difficult to manipulate. As such, we have come up with a solution for you. Outlined below are the benefits of using our engineering reporting and financial intelligence software:
- Automated data collection. insightsoftware’s engineering reporting solution is able to automatically collect data from your existing ERP. This allows for seamless KPI analysis and reporting.
- Centralized data. The use of an engineering KPI dashboard helps to consolidate your data by bringing everything to one centralised location. With this feature, you won’t find yourself frustrated from waiting on data from someone else.
- Prebuilt KPI templates with ERP interface. Our engineering dashboard software comes ready to use with prebuilt KPI templates that automatically interface with your existing ERP. This allows you to hit the ground running from day one.
- Instant Reports. In the hustle and bustle of corporate life, everyone wants everything done yesterday. But we all know that is impossible, so we are here to give you the next best thing. Since our engineering reporting solutions are constantly pulling data and storing it in one central location, up-to-date reporting is just one click away.
As you can see, the use of an engineering reporting solution can drastically reduce the burden of managing KPI data and reporting. As such, let’s get back into more KPIs that you can use in manufacturing engineering, and in the finance department of any engineering firm.
Manufacturing and Lean Engineering KPIs
When people think of manufacturing, they just think about products being produced in mass quantities at high efficiency. This is actually a very accurate portrayal of the manufacturing industry; however, these production lines didn’t become efficient on their own. It took years of engineering innovation and design to bring manufacturing to what it is today. Here are some lean engineering KPI metrics to help bring your production process to the next level:
- Throughput – This lean engineering metric is commonly used to measure the output capacity of a machine, line, or plant over a period. This data can then be used to gauge how much extra capacity is available for new work.
- Cycle Time – The cycle time engineering KPI is very closely related the throughput metric. Cycle time represents the average amount of time it takes to produce a single product. This can be helpful when analysing the efficiency of a production line.
- Production Attainment – Is your company meeting its production goals? This manufacturing metric calculates the percentage of time that target production levels are met.Product Attainment = (Operational Time Meeting Targets / Total Operational Time) * 100
- Avoided Cost – Who doesn’t love saving money? This engineering key performance metric estimates how much money is saved by spending money. For example, how much equipment maintenance costs were vs. how much repairs would cost if the machine broke down, plus lost production revenue.
- Changeover Time – How long does it take your workers to change a production line from producing one item to another? That is exactly what the changeover time metric measures. This time represents lost revenue and should be reduced as much as possible.
- Machine Downtime Rate – How effectively is your equipment being used? This manufacturing engineering metric measures the amount of downtime a machine has, be it scheduled or unscheduled.Machine Downtime Rate = ((Scheduled Downtime + Unscheduled Downtime) / Total Time) * 100
- Percentage Planned Maintenance – Continuing on the topic of downtime, this KPI looks at the ratio of scheduled maintenance and compares it to the unscheduled maintenance. It is useful in identifying assets that require more preventative maintenance.Percentage Planned Maintenance = (Planned Maintenance Hours / Total Maintenance Hours) * 100
- Downtime to Operating Time – Another engineering maintenance metric, the downtime to operating time KPI measures exactly what the name implies. If an asset is down more than it is operating, either a new maintenance schedule is required, or a replacement asset should be considered.
- Capacity Utilization – This lean manufacturing metric is used to determine the production capacity being utilized as a function of total production capacity. Maintenance engineering teams will monitor this KPI to ensure operations are running optimally and use the data for preventative maintenance.Capacity Utilization = (Actual Output / Max Possible Output) * 100
- First Pass Yield – This is one of the most important lean engineering metrics. It measures how many products produced meet specification on the first quality control inspection. Failing inspection would result in the product being reworked to specification or being scrapped.First Pass Yield = (# of Units That Pass Inspection the First Time / Total # Units Produced) * 100
After implementing and tracking some of the engineering KPI examples mentioned above, you should see different areas where efficiency can be increased, and cost savings implemented. To track these performance increases from a financial perspective, we can use financial KPIs that have been tailored to the engineering industry.
Financial KPIs for the Engineering Industry
Just like any other industry in the world, understanding your financial position is extremely important. However, engineering companies need to look at some specific financial KPI when conducting business. Check out these examples of financial KPIs in engineering:
- Operating Cash Flow – This financial KPI is important for all engineering companies, regardless of sector. It measures the amount of money a company generates from its regular day-to-day operations.Operating Cash Flow = EBIT + Depreciation – Taxes – Change in Working Capital
- Net Present Value (NPV) – The NPV engineering metric is commonly used when determining the profitability of a potential project. This calculation determines the present value of all future cash inflows and outflows. A positive number means that a project will theoretically be a profitable endeavor.Net Present Value = Today’s Value of Expected Cash Flows – Today’s Value of Invested Cash
- Break-Even Point (BEP) – All manufacturing companies will use this financial KPI. The BEP metric calculates the number of products you need to sell in order to cover all your costs, including R&D engineering. After the BEP, a company makes a profit on each item sold.Break Even Point = Fixed Costs / Gross Profit Margin
- Internal Rate of Return (IRR) – When deciding if an engineering company should take on a project or not, they often conduct an IRR calculation along with their NPV calculation. The IRR metric determines the rate of return that results in a NPV of zero. If the IRR is greater than the company’s desired rate of return, it is likely worth taking on.
- Net Profit Margin – This engineering KPI is one for the CFO of the company. The net profit margin is commonly referred to as the “bottom line,” measuring the total net profit relative to revenue. Ideally, this figure is above ten percent.Net Profit Margin = Net Income / Net Sales
- Interest Coverage Ratio – This financial KPI is used in the engineering industry by companies that take on debt in order to facilitate their growth and expansion. The interest coverage ratio measures how many times a company can cover its interest expenses with its earnings before interest and taxes (EBIT).Interest Coverage Ratio = EBIT / Interest Expense
- Return on Assets (ROA) – Depending on what kind of engineering firm you work for, you may have a large amount of assets (manufacturing), or very few (consulting). However, that doesn’t change how important this engineering performance metric is. The return on assets KPI measures how efficiently a company uses its capital, by comparing net income to total assets. This metric should only be used to compare companies in the same industry as the results would vary greatly if we compared a manufacturing company to a consulting firm.Return on Assets = Net Income / Total Assets
We hope that you found the top 40 engineering KPIs and metrics for your 2020 reporting to be informative in both determining what KPIs you need to implement, as well as how reporting software can streamline your reporting process.
If you have any questions about the KPIs mentioned above, or what reporting solutions insightsoftware has to offer, please contact us. One of our insightsoftware product experts would be more than happy to help in any way possible.