Utilisation rate (utilization rate, in US spelling) is the percentage of a person’s available time that was billed to a client in a period. Divide billable hours by available hours, multiply by a hundred, and you have it. It is the number most consultancies and agencies run their delivery on, because it is easy to collect from timesheets and easy to put on a wall. It is also the number most likely to look healthy while the business loses money, because it counts hours and knows nothing about price.
The formula, and the three choices hidden in it
Utilisation rate = billable hours / available hours x 100
Three decisions sit inside that line, and each one moves the answer.
What counts as billable. Hours charged to a client at a rate, hours logged to a fixed-price job whether or not the job can absorb them, and hours written off after the fact are three different things. The strict version counts only hours that turned into an invoice; most timesheet systems count the loose version.
What counts as available. Total contracted hours (capacity utilisation) gives a lower, more honest number. Contracted hours less leave, public holidays and training (available utilisation) gives a higher one. Comparing your number to a benchmark without knowing which it used is meaningless.
Who is in the denominator. A firm that measures only its delivery staff will report a higher figure than one that includes the founder who sells half the week. Decide once, write it down, and do not change it between years.
What a utilisation report shows
A utilisation report is that calculation laid out weekly or monthly, with one row per person and a subtotal per team. A useful one shows, for each row: available hours, billable hours, non-billable hours split by reason (selling, internal projects, training, bench), leave, the resulting percentage against the target for that role, and the trend over recent periods. The best ones add a column the timesheet cannot supply: the revenue those billable hours actually produced. Without it the report tells you how busy people were. With it, the report starts to tell you whether the busyness paid.
What counts as good
Targets vary by role, and a firm that sets one figure for everybody will either burn out its juniors or waste its principals. Delivery staff carry the highest targets; leads and principals lower ones, because part of their week is selling, scoping and reviewing; founders and directors lower still. Industry surveys publish ranges for each, but set your own from your cost base: the target is the utilisation at which a fully loaded person, at the rate you actually realise, covers their cost and their share of overhead and leaves the profit the firm needs. That number is yours; a benchmark is somebody else’s.
Utilisation up and margin down
The failure that utilisation cannot see is one that cost us. At DevOpsGroup, a services company helping other businesses build and run software, we ran the delivery business on utilisation for years, and utilisation and gross margin did not always move together. That is not a paradox. It is what utilisation is built to miss, and more than one of these was true of us at some point:
- Discounting. Hours sold at a negotiated rate below the card count as fully billable. Utilisation rises, revenue per hour falls.
- Overruns on fixed-price work. Hours logged to a fixed-price project are billable to the project and worthless to the invoice once the budget is spent. The utilisation report shows a team flat out; the phase profit and loss shows the margin draining week by week.
- Grade mismatch. A senior engineer doing work sold at a junior rate is fully utilised and losing the firm the difference between the two rates every day.
- Write-offs after the fact. Hours billable when logged and credited back a month later still sit in last month’s utilisation.
- Subcontractors. A contractor’s hours often sit outside the utilisation report entirely, so a team that looks efficient is quietly bought in at thin margin.
A worked example, with invented figures to make the arithmetic visible: a ten-person team is 70 per cent utilised at a realised rate of £800 a day in one quarter, and 80 per cent utilised at £650 a day in the next, after a discounted renewal and an overrun. Utilisation is up ten points. Revenue per person per day of capacity has fallen from £560 to £520, and the team costs the same as before. The report celebrating the quarter is the same report that should have raised the alarm.
Why revenue per billable person reconciles
The number that catches every one of those leaks is revenue per billable person: revenue in the period divided by the billable people in the unit. It is utilisation multiplied by realised rate multiplied by available days, so it carries the price and the write-offs that utilisation drops on the floor. It also adds up: a team’s revenue per billable person, weighted by headcount, sums to the division’s, and the division’s to the company’s, all the way to the board pack. Utilisation percentages do not add up across teams with different rates; you can average them and learn nothing. Run utilisation to manage the week and revenue per billable person to manage the business, and when the two disagree, believe the second.
Going further
The playbook Revenue per billable person: where a consultancy’s money leaks works through the leaks in full, and the revenue per billable person model puts a revenue column beside the utilisation one. Both are in development.