what is utilization rate and how to calculate it

Utilization Rate: What Is It and How To Calculate It

Wondering where the hours in each day are going? You can calculate your team’s utilization rate to determine the percentage of an employee's time spent on billable tasks.

A utilization rate serves as a key metric for any business that is looking to:

  • Improve productivity and streamline project management

  • Bill clients for the correct amount of time

  • Gain insight into your billing efficiency

  • Increase profitability

This rate is a great way to measure productivity and can be very helpful in resource management. Let's take a closer look at the utilization rate and how to calculate it.

What is a utilization rate?

Utilization rate is the percentage of an employee's total hours spent doing billable work instead of internal or non-billable work. The metric shows your team's bandwidth and provides insights into how productive employees are.

There are two types of metrics when you choose to measure utilization rate:

  1. Billable utilization

  2. Resource utilization

Billable utilization

Billable utilization is a way to measure how much of an employee's total work hours are billable.

The billable utilization rate formula is:

(Billable time / time available) x 100

Billable utilization rate formula

Resource utilization

Resource utilization is a way to measure and track how productive each employee is. Resource utilization includes billable time (client work) and internal time (non-billable time).

The resource utilization rate formula is:

(Total tracked time / total time available) x 100

Resource utilization rate formula

How do you calculate utilization rate?

Here is an example of how to use the utilization rate formula.

Let's use Bob as an example.

  • Bob is a copywriter at an advertising agency.

  • He works 40 hours a week (2,080 hours a year).

  • Bob has five weeks of paid leave time per year (or 200 hours).

  • Bob has a total of 1,880 available hours a year.

  • Bob spent 1600 hours on billable tasks last year.

We can use the following formula to figure out Bob's billable utilization:

(Total billable hours / total available hours) x 100

Using this formula, we find that Bob's billable utilization is (1600/1880) x 100

= 85.1%

What is a good utilization rate?

Between 75% and 90% is a reasonable benchmark utilization rate for people in production roles at many creative agencies. That said, the ideal utilization rate will be different for each business.

A relatively high utilization rate signifies that a company is making money. However, a rate that is too high could cause problems.

For example, if your utilization rate is at or near 100%, it's likely that your team is overworked and could be at risk of burnout.

A utilization rate near 100% could also mean that the business isn't spending enough time on workforce planning. If things keep going well, consider hiring more people to handle the workload. If this sounds like you, check out some ideas for hiring people.

"Once the utilization rate hits 75%, that signals that we need another staff member to cope with the workload."

Says Brett Downes, Founder of Link Building Geek

"75% is the cut-off because there needs to be a buffer for personal projects, coffee breaks, and unexpected work."

Try to avoid having a high utilization rate for a long time. Most businesses can feel good and safe with an average utilization rate of about 80%.

Managers or team leaders typically spend less time on billable tasks and may have a lower utilization rate.

Dig deeper and improve profitability

Businesses must look beyond simple percentages to get the most out of a utilization rate.

Ensure you are billing for the right tasks. Use utilization rates to make billing efficient and increase profit margin. Determining the best billing rate is a three-step process.

Step 1: Use the capacity utilization rate formula

Start by finding the team's capacity utilization rate (or average utilization rate). The capacity utilization rate formula is simply:

The sum of all employee utilization rates / the number of employees

Capacity utilization rate formula

For example:

Your business wants to bill clients at a 20% profit margin. To do this, you must first identify each employee's utilization rate, then determine the organization's capacity utilization rate.

Let's say your business has four billable employees. Their utilization rates are 70%, 80%, 75%, and 85%.

Sum of all employee utilization rates/number of employees

(70+80+75+85) / 4

Capacity rate = 77.5 %

Now you can identify the optimal billing rate.

Step 2: Identify the ideal profit margin

Let’s say your business still wants to make a 20% profit margin and the average cost of a team member's time is $80,000.

Don't forget to add the overhead costs! For this formula, we'll say that the overhead costs are $15,000 per team member.

The ideal profit margin formula is:

(resource costs + overhead costs) x ideal profit margin percentage

Ideal profit number formula

With these variables in mind, the ideal profit margin comes out to:

(80,000 + 15,000) x .20 = $19,000

Step 3: Use the optimal billing rate formula

Next, add up the costs of the resources, the overhead costs, and the profit margin. Then, divide that number by the average hours each team member works to find the best billing rate.

Each of the four employees has 2,000 available hours per year.

The optimal billing rate formula is:

(resource costs + overhead + profit margin) / average employee hours

Optimal billing rate formula (dollars)

(80,000 + 15,000 + 19,000) / 2000 = 57

The optimal billing rate formula shows that the best pricing is $57.

Step 4: Use the average utilization rate to figure out the optimal billing rate

We calculated this optimal billing rate in the previous step at a 100% utilization rate. The average utilization (found in step 1) is 77.5%.

So, one more step to determine the best billing rate based on 77.5% usage.

We need to divide the 57 by 77.5 percent.

Optimal billing rate / utilization rate

Optimal billing rate formula (percentage)

57 / .775

= $73.55

For your business to make a profit of 20%, the best rate to bill at is $73.55.

Why should you monitor utilization rate?

Yes. Keeping an eye on utilization rate is important for several reasons. It can help you:

  • Ensure your business is communicating the correct number of billable hours to clients.

  • Charge clients the optimal billing rate so that you can make money and increase profits.

  • Find the proper amount of team members available to handle the workload.

  • Take on new work with confidence that your team can deliver.

Employee time tracking software is a must-have if you want to monitor and optimize overall utilization in real-time.

Hubstaff dashboard tracking utilization rate in reat-time

Monitor and optimize utilization rate with time tracking software

Utilization rate is an important metric that provides valuable insights into an organization's workflow and can indicate when team members need more help or training.

Here is a rundown of the key takeaways from this post.

  • If your team's utilization rate is 95% or above, it's essential to ensure no one is getting burned out. You may need to grow your team.

  • Suppose your business has a low utilization rate. You may have more employees than you need at the current business level.

  • The ideal utilization rate varies, but most aim for 75%.

  • Utilization rates are essential to your business' bottom line.

  • Calculating average and optimal utilization rates can influence the billing rates required to meet profit margin goals.

  • It is best to calculate the utilization rate using accurate data. You can achieve this by carefully tracking employee time.

Hubstaff helps keep track of time and manage projects for over 95,000 companies in fields like professional services, manufacturing, construction, nonprofit, health care, and many more.

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