June 14, 2022
General
Mae Angeline

How to Calculate Billable Utilization (and Why You Should)

If you're in the world of professional services and you don't yet understand how billable utilization works, let's turn that around right now. You'll be glad that you did.

As a project manager, making sure you allocate the right resources to a project is key for it to succeed. But for your company to be profitable, you also need to make sure you're using those resources efficiently, so that you'll see a return on your investment.

Organizations can employ multiple utilization measures to assess how well their staff time is being used, and one key aspect for a professional services firm is to assess is how many billable hours are being clocked. Whether you're running a project-based company, a digital agency or a marketing organization, billable utilization should be your go-to performance indicator.

In this article, we're going to guide you through the basics of billable utilization, what a healthy billable utilization target looks like, and why you should track it.

What does billable utilization mean?

First, let's define billable and non-billable work. Billable hours contribute directly to increasing profit margin, as this is where your staff are working directly on client projects. Non-billable hours, on the other hand, is the time spent on administrative tasks, internal projects, support services, and training sessions.

In its simplest form, billable utilization is the proportion of time spent on billable tasks. It illustrates how much time has been spent on revenue-generating work, and identifies which of your resources are the most productive and beneficial for business development.

Billable utilization rate is one of the essential utilization rates an organization can use to analyze its business position. The billable utilization rate differs from the resource utilization rate as it's explicitly focused on the billable hours of each employee, rather than on the use of resources in general. Resource utilization rates, on the other hand, look at the hours the employees work versus their total capacity, regardless of whether those hours can be billed or not.

Both team utilization rates provide valuable insights into underutilized or overworked resources and their role in the company's profitability.

What is the formula for calculating billable utilization rates?

The formula for calculating the billable utilization rate goes as follows:

Formula for billable utilization

And here is an example of a billable utilization calculation in practice:

For this week, employee A is only free to work for 30 hours. She spent 2 hours on an administrative task, say, organizing reports for the month, and another hour attending a meeting. She also had a couple of hours of mandatory webinar training. Employee A also spent 30 minutes per day for two consecutive days answering phone calls and replying to emails. The rest of her time was spent on activities directly related to client projects.

Based on the sample above, we can identify 6 hours of non-billable work. This leaves her with 24 hours of billable work during the week.

Knowing that employee A's billable hours are 24, and her total available hours are 30, we can use the billable utilization formula:

24 / 30 = 0.8 x 100 = 80%

Therefore, the billable utilization rate of employee A during that particular time period is 80%. This means 80% of employee A's total hours for the week can be charged as client work.

What does a healthy billable utilization target look like?

Now that you know what a billable utilization rate is and how to calculate it, you also need to know what your target should be. Is it reasonable to hope an employee's utilization rate to be in the high 90s when we're looking at billable hours?

There may not be a one-size-fits-all answer since it still varies from one industry or role to another, but it's important to keep expectations reasonable. If you have high billable utilization targets, you may be charging more than you or your client can pay. On the other hand, if your billable utilization target is too low, you may not be producing enough billable work to meet your profit margins.

Experts say ideal utilization rate for billable hours should be around 70-80%. This is where the company reaches the highest possible profit with an optimal hourly charge.

Why should you care about your billable utilization rate?

While an overall utilization rate may be quicker to calculate, the time spent on billable projects is a critical metric for several reasons.

It helps in gauging which resources are efficient and profitable

A business needs to track and measure billable utilization rate because it is directly related to your profits. Comparing employees utilization rates helps you analyze and evaluate your resources, and see who is bringing in a return on investment.

It helps improve clarity around roles

Bringing awareness to the concept of billable time and non-billable time also helps your staff consider how many hours they are spending on non-billable activities. It might be common practice for billable employees to take on extra non-billable tasks that end up costing you overtime. However, knowing that those hours will be reviewed in utilization calculations can be an incentive for your staff to delegate those non-billable tasks to the right person.

It helps you prevent serious financial troubles

Tracking your utilization rates helps you realign your company's profit margin. It gives you a closer look at the details while acknowledging their effects on the big picture. So if the billable utilization rate starts to drop, you can look at project resource management factors such as poor scheduling or outdated capacity planning that may be affecting it. In other words, you can take steps to improve billable utilization rates before they start affecting your bottom line.

It helps with long-term planning

In the long run, billable utilization is an opportunity to employ multiple measures that address the organization's capacity utilization rate. For example, past data on billable utilization rates can be used to forecast high-demand periods that require hiring, training, and promotion.

How to get started with billable utilization

Creating a billable utilization plan may seem daunting, but we have two tips to help you get started.

Use utilization reports

A billable utilization report is an important part of tracking your productive utilization. It helps you keep track of previous data and create baselines and targets, whether you choose to look at employee utilization on an individual level or as a team. Keeping track of this accurate information is key so that you can compare historical records with current figures, and inform your next steps.

billable utilization

Use software that helps monitor billable activities

One of the biggest obstacles when you decide to calculate utilization rates is having to comb through hours recorded by staff to work out which hours are spent on billable activities and which are not. Instead, use resource management software which includes tracking for billable and non-billable hours. That way, you can organize your records and utilization reports, keep progress in sight, and analyze data in real-time.

Final thoughts

Billable utilization rate is a key metric in project management, as it relates directly to the company's bottom line. Optimizing resource utilization without considering billable hours may keep your employees happy, but may not be sustainable in the long term. By tracking your billable utilization rate against team targets will help you achieve your business profitability goals.

At Runn, we equip your organization with the ability to perform at its full capacity and reach your target utilization rates in no time. Book a demo with us today.

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