How Do You Calculate Billable Utilization Rate?

What is Billable Utilization?

Billable utilization measures the percentage of available hours that employees spend generating revenue for project-based services. The utilization rate formula is defined as:

Billable Utilization % = (Number of Billable Hours / Number of Available Hours) X 100%

The billable utilization rate is one of the most important Key Performance Indicators (KPIs) measured by almost all professional services firms.

Billable utilization. Every professional services firm I’ve ever worked with—whether they’re a management consultancy, a digital marketing organization, or a technology implementer—calculates and measures billable utilization. Every professional services manager—from the executive leadership level to delivery managers to department heads—tries to improve billable utilization. Every billable consultant is, at least in part, evaluated and compensated on billable utilization.

The problem is, not everyone has a common understanding of billable utilization or how to calculate it.

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Billable Utilization Rate Formula

On the face of it, billable utilization, also known as a utilization calculation or utilization rate, is a simple concept that measures how much time people are spending generating revenue. You take the hours that people are billable, divide by the hours they’re available and come up with a percentage using this billable utilization rate formula:

Billable Utilization % = (Number of Hours People are Billable / Number of Hours People are Available) X 100%

billable utilization rate formula infographic

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Other Names for Billable Utilization

When it comes to how to calculate a utilization rate to determine an organization’s billable utilization metrics, other terms you may come across include:

  • Utilization calculation
  • Employee utilization calculation
  • Consultant utilization rate
  • Utilization rate formula
  • Billable utilization calculation
  • Consulting utilization rate
  • Effective utilization formula
  • Employee utilization rate
  • Billable rate
  • Utilisation percentage
  • Employee utilization rate

However you refer to it, when you use the formula for utilization rate, the next step is to compare that percentage to other firms, to other departments, to other people, and then (at least in theory) you have a way of measuring performance. This assumes everyone is calculating utilization the same way. 

The trouble is, things are rarely that simple if you really want to use something like professional services billable utilization to drive beneficial behaviors. Here’s what you need to think about when measuring billable utilization for your professional services firm.

Billable Utilization Formula: The Numerator

Explanation:

The numerator of the utilization calculation is driven by what behavior you want to encourage. Most services organizations take a very simplistic view and just measure billable utilization…time spent working on billable projects.

A Simple View:

Such a one-dimensional view, however, can sometimes lead to contradictory incentives. Should the less efficient consultant who spends more time on a particular task than a more efficient consultant get more utilization credit?

What about a person who does a bunch of work that you can’t charge the client for because someone else had to redo it? How do you measure people who aren’t working directly on billable projects but rather internal projects, yet are still doing work vital to the organization? Do these situations still benefit from a singular focus on billable utilization as their employee utilization rate?

A Nuanced View:

Many top-performing professional services firms take a more nuanced view, and oftentimes have multiple resource utilization measures. In addition to measuring billable utilization, they may also measure:

  • Chargeable utilization: measures time spent on billable projects, but only billable time that actually generates revenue
  • Productive utilization: measures the number of hours spent on non-billable work deemed vital to the ongoing business of the firm, such as business development or product development
  • Total utilization: measures overall utilization, for example, to make sure someone in the finance department isn’t consistently logging 100-hour weeks

Billable Utilization Formula: The Denominator

Explanation:

The denominator of the resource utilization rate is driven by how the organization defines each person’s availability. Like the numerator, how an organization calculates the denominator may also drive behavior.

A Simple View:

For example, people are generally not working on billable projects or generating revenue during company holidays or sick time. Given that, the decision of whether or not to count those hours as available hours in the denominator affects the utilization calculation. 

If people feel that taking sick time will count against them when computing their utilization, they may be less likely to stay in bed when they’re ill. In addition, since the summer months and the holidays are oftentimes peak times for vacation, including time off and holidays in the denominator can lead to variability due to seasonal effects in utilization. 

As a result, there are some advantages to keeping time away from the office out of the calculation.

A Nuanced View:

Like with the numerator, many top-performing firms will also take a more nuanced view of the utilization calculation’s denominator, depending on what they are trying to measure. 

They may want a better understanding of the capacity of their team. In other words, how much productivity are they getting out of current staff without adding or removing people from the organization? 

On the other hand, they may want an understanding of the efficiency of their labor investment. In other words, how much productivity is the company receiving in comparison to what they’re paying for? That difference may be non-existent if the entire staff is salaried. However, when you start factoring in subcontractors paid on an hourly basis or non-exempt employees eligible for overtime, it’s a whole different story. 

Impact of Improved Employee Billable Utilization Rate
As employee billable utilization rates improve, benefits include higher on-time project delivery rates, lower project overruns, and more executive real-time visibility. (Source: 2022 SPI Research)

Professional Services Utilization Benchmarks

Explanation:

Once a firm has settled on an approach to calculate a utilization percentage, the next step is to determine what a reasonable utilization target is. Or, perhaps I should say what its approaches are and what reasonable utilization targets are—both of which may vary depending on the firm’s needs and goals.

A Simple View:

Many organizations will measure billable utilization against a 2,000 hour per year target when benchmarking themselves against the market. It’s simple, it’s consistent, it doesn’t require a ton of thought, and it’s easily comparable to industry benchmarks like the SPI Benchmark Survey.

A Nuanced View:

Also, companies may take a slightly more nuanced, but still straightforward measure for individual team members in the form of bonus calculations or metrics on individual dashboards. This measure is often utilization-based on productive hours divided by working hours minus holidays and time off. This can then be compared to a minimum productive utilization target.

Billable Utilization Benchmarks

Minimum and Maximum Utilization Targets

In addition, more sophisticated firms may use both a minimum and a maximum utilization target to improve the discipline of professional services resource management. Maximum targets may be used to help control overutilization, which may lead to unwanted employee attrition as described in this Forbes article on consulting burnout. Maximum billable or chargeable targets can also help ensure partially-billable managers set aside sufficient time for other activities such as staff development or account management.

In Summary

To sum it all up, a fairly simple notion of determining how busy people are is more nuanced than meets the eye, depending on what the organization is looking to accomplish. 

Firms should consciously and deliberately decide which assumptions and approaches to use and understand what behaviors those decisions are likely to drive. Everyone who is responsible for measuring and optimizing resource utilization rates needs to understand the assumptions and ensure that the approaches are used consistently with their intent. 

One of the most important aspects of measuring and managing utilization is being able to do it easily and consistently. Professional Services Automation (PSA) Software can help consulting firms do this, resulting in a higher utilization rate of 7 percentage points. This translates into improved billable utilization of nearly a whole month per billable employee per year.

Impact of Professional Services Automation (PSA) on Billable Utilization
PSA solutions yield several core benefits to professional services organizations, but most executives only need to look to the relative 11% (from 68.1% to 75.3%) increase in billable utilization as a primary reason to select PSA. (Source: 2022 SPI Research)

Finally, it’s important to understand that the different methods of calculating professional services billable utilization are not all mutually exclusive. Instead, they can be used in concert with one another. It’s also critical to know that optimizing utilization in isolation can actually be detrimental to the health of a services organization, and needs to be done in concert with all the other KPIs in the business.

To learn more about these other metrics, download our white paper Billable Utilization and Other Metrics that Matter for Professional Services Organizations: The Basics and Beyond. Or read more about billable utilization in our post about how optimal resource utilization can fuel growth. And don’t forget to download the SPI Research for benchmarking targets.

Optimal Resource Utilization for a Growth-Focused Strategy

Learn how professional services teams can achieve scalable growth through optimal resource utilization in project management.

White Paper | Fighting The Great Resignation & Maximizing Retention

Why are consultants quitting and what can you do about it? Learn reasons people leave and how to control turnover.

White Paper | Billable Utilization & Other Key Metrics That Matter For Professional Services Organizations

Frequently Asked Questions About Billable Utilization

What is billable utilization?

Billable utilization measures the percentage of available hours that employees spend generating revenue for project-based services. The utilization rate formula is defined as: Billable Utilization % = (Number of Billable Hours / Number of Available Hours) X 100%. It’s one of the most important Key Performance Indicators (KPIs) measured by almost all professional services firms.

What is the billable utilization rate formula?

The billable utilization rate is calculated by this formula: Billable Utilization % = (Number of Hours People are Billable / Number of Hours People are Available) X 100%

What is chargeable utilization?

Chargeable utilization is slightly different than billable utilization in that it does exactly what it says. It takes the work and hours that are actually chargeable to a customer, telling you what percentage of total hours billed contributes to your service organization’s revenue.

What is productive utilization?

Productive utilization measures the number of hours spent on non-billable work deemed vital to the ongoing business of the firm. It is a much more holistic measure that thinks about all of the work in a professional services organization, not just billable or chargeable. Not all good work is work that’s delivered to customers. It’s work that can be delivered internally that helps advance our business overall.

What is the meaning of utilization rate?

Billable utilization rate is essentially a measurement of the percentage of available time spent working on billable projects. It’s one of the most important Key Performance Indicators (KPIs) measured by almost all professional services firms.

How do you calculate utilization?

Utilization in professional services measures how much time people spend generating revenue. The utilization formula is: hours people are billable divided by the hours people are available, then multiplied by 100 to come up with a percentage.

What is utilization in professional services?

In the world of professional services, utilization is a measure of how efficiently you are using your resources. It can be thought of as a ratio that compares the amount of time you spend working on client projects with the amount of time you have available to do so.

How can billable utilization be improved?

According to the most recent Professional Services Maturity Benchmark report by SPI Research, the following factors have a direct correlation with improved billable utilization:

• Providing good leadership direction
• Utilizing effective communication
• Implementing a PSA tool
• Executing very effective service marketing
• Increasing the deal pipeline
• Limiting service discounts given
• Decreasing the amount of time it takes to recruit and hire
• Improving on-time delivery
• Developing effective estimating and process review processes

Why is billable utilization important?

Billable utilization is important to a professional services organization because it measures how well the business is using its resources and helps ensure revenue targets can be met.

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6 thoughts on “How Do You Calculate Billable Utilization Rate?”

  1. All nice and good on paper. How do measure the “effeciency” of a professional who, through in depth knowledge, experience and networks, spends 8 hours to prevent the company from losing its key account and potential multi million dollar fee? How do you reward him/her?How do the Bean Counters measure that 8 hours which is not even billable? The only methodology that’s now relevant to Professional Practices is Theory of Constraints and LEAN and a bit of Agile. The rest is still archaic 1920 Frédéric Taylor derived nonsense “Science” when applied to Professional Practices.

    • Hi Santosh,

      Thanks very much for your comments.

      You’re absolutely right in that using billable utilization as the sole, one-dimensional metric to run the business can be counterproductive. In fact, under the “What’s on the Top” section, we argue for a more nuanced view of utilization instead of or in addition to simple billable utilization. The sort of valuable work that you’re talking about…account management, product development, investment in client relationships, business development, and the like…should be encouraged and, as we argue, should be measured as part of productive utilization.

      I do like where you’re going with thinking about how Theory of Constraints and Lean apply to the world of professional services. I started my career in manufacturing environments, deploying these sorts of strategies to help make our production operations more competitive. Subsequently, I have moved over to utilizing these same concepts to manage professional services operations. The whole key to ToC is identifying and alleviating bottlenecks in a process. In the professional services world, utilization is a key metric that can help you understand where that bottleneck lies. For instance, suppose you build custom software that generally goes through technical architecture, development, and testing phases. If the utilization of your technical architects, developers, and testers is 20%, 25%, and 110%, respectively, that can give you a good sense of where you may need to hire or to increase efficiency to improve throughput of your entire system.

      Finally, I won’t defend the entirety of the scientific management movement as envisioned by Taylor. At the same time, I’m not sure I agree that all of Taylorism is archaic nonsense that lacks relevance in a modern services economy. His emphasis on standardization has led to adoption of templates and best practices today, which is key to scaling a professional services firm. His focus on empiricism manifests itself in the deployment of the metrics, scorecards, and dashboards that are used across industries. His drive towards waste elimination has evolved into the very useful philosophies of continuous improvement and lean manufacturing itself. I think the key to sound business management is to understand the underlying principles behind a movement and, as thinking evolves, to discard those aspects that are no longer relevant while retaining and improving upon those that are.

      At any rate, thanks for the thoughts, and we very much welcome further discussion on this intriguing topic.

      Best,
      Steve Chong

  2. Hey Steve,

    Are there any scientific approaches for setting a Minimum and Maximum Utilization Target?

    Regards,
    Shanaya

      • Hi Victoria and Shanaya,

        You’ve posed great questions here, and I’ll try to provide some thoughts from both an academic and a practical perspective.

        The cop-out answer (but the realistic one) is “it depends.” Most of the time, we see targets based on 3 main things:

        1. The nature of the organization’s business model
        2. The types of projects resources work on
        3. The responsibilities of the resource

        In terms of the business model, you’ll see widely differing utilization expectations depending on the type of firm, culture, and competitive landscape. If I were to paint with a broad brush, consider the difference in billable utilization expectations between, say, lawyers (where billable hours might exceed a “normal” workweek by a lot) and digital marketing firms (where the culture might be tuned to appeal to an employee demographic that values work/life balance).

        Organizations where resources are dedicated to a single project for a long time might tend to see higher utilization than firms where the norm is for a person to work on multiple quick-hit projects at once. The realities of constant context switching might mean that achieving 60% utilization is hard for the latter while maintaining 100% utilization is no big deal for the former.

        Finally, when talking specifically about billable or chargeable utilization, the responsibilities of more junior resources might be entirely focused on delivering billable work. On the other hand, more senior resources might be tasked with winning new business, investing in internal methodology, or nurturing existing client relationships. All of this means the more senior resources might only be expected to spend a small fraction of their time directly generating revenue.

        So, it depends.

        From the perspective of an analytical way to set targets, one mechanism to consider is to build a historical dataset of utilization from your business, your projects, and your people and control for anomalies (perhaps eliminating the outliers like the raging workaholic or the chronic underperformer). You could calculate the average (x̄) and standard deviation (σ) of that sample set and set minimum targets to (x̄ – σ) and maximum targets to (x̄ + σ). This would mean that for a typical normalized distribution, you’d see people falling within that range about 68% of the time. If you wanted to have a wider range with fewer flags, if you used (x̄ ± 2σ), that would account for about 95% of the expected population.

        In reality, we don’t see people using these more rigorous statistical methods to set min and max targets that often. Rather, people tend to employ generalized bands derived from goals built during the annual planning and budgeting process. But, the statistical analyses above may be a useful method to inform that planning and budgeting exercise.

        Hope this helps, and do let us know if you have further questions. In fact, we do have a white paper that we’re in the process of publishing that will dive a little deeper into the main metrics services organizations use (or should use) to manage the business. Happy to keep you in the loop if that’s something that might be of interest to you!

        Best,
        Steve

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