How to track utilization rate and drive team profitability

Summary

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Utilization rate is the measure of available time used for billable work, expressed as a percentage. You can determine utilization rate by dividing a team member’s total number of billed hours by the total hours they have available. In this piece, we’ll explain how to calculate utilization rates and discuss ways to reduce work about work and improve these rates across your team.

You likely track various success metrics to ensure projects stay within scope and customer satisfaction stays high. If you work with clients, one of these success metrics is probably focused on billable hours. Billing hours to clients is how companies make a profit. When you track your team members’ utilization rate, you’re able to see how billable hours and company time match up.

Team members can’t bill hours for every task because some tasks focus on internal operations. Utilization rate can determine a team member’s available time for profitable work. In this piece, we’ll explain how to calculate utilization rates and discuss ways to reduce work about work in order to improve these rates for your team members.

What is utilization rate?

If a team member bills 34 hours in one week to clients and they have 40 hours available in the week, then their utilization rate is .85, or 85%.

Keep in mind that a team member’s utilization rate will never reach 100% because they should dedicate some of their time to internal work. There should be a healthy balance in a team member's work week between team meetings, phone calls, training, and billable work.

So the goal of calculating and tracking utilization rate isn’t to get to 100%—it’s to reduce the unnecessary manual and duplicative work that takes up so much of our workday. According to the Anatomy of Work Index , the average knowledge worker spends 60% of their time on work about work—things like searching for information, chasing approvals, and switching between apps. By reducing this unnecessary work about work , you can increase utilization rates across your team and make more time for your team members to execute their high-impact tasks.

The best way to track utilization rates is with workload software. Workload management software, like UDN Task Manager , makes it easy for you to see exactly who’s doing what by when so you can promote balance and prevent burnout . By making it easy to see exactly what each team member has on their plate, you can effectively manage team workloads to ensure team members don’t go over their maximum allotted work hours.

How to improve utilization rates

It can be frustrating to discover your team’s utilization rates are low. But oftentimes, low utilization happens because of bad processes, inconsistent communication, and cumbersome tooling. Ultimately, low utilization rates occur because there’s an imbalance between internal and external workload . Here are four ways to improve that.

To improve utilization rates, try putting the following project management processes in place.

Set utilization rate benchmarks: Your team members won’t know what utilization rate to reach unless you set benchmarks. You can also set unique benchmarks for team members depending on their role. For example, a designer may have a higher utilization rate benchmark than a human resource manager because designers often work directly with clients and bill more hours. You should set your benchmarks based on your optimal billing rate.

Monitor rates across company: Tracking utilization rates across the entire company can help you determine your capacity utilization rate so you can look for team member availability or lack thereof. Universal tracking will help you see when other teams have time to bill more hours so your company can accomplish billable work without hiring freelancers.

Reduce work about work: Reducing work about work is crucial to improve utilization rates. While there will always be a number of hours dedicated to internal operations, you can employ project management best practices and offer time management tips to reduce time spent on non meaningful work. Work about work includes things like communicating about work, searching for information, switching between apps, and managing shifting priorities.

Use time tracking software: Time tracking software is crucial for improving utilization rates because it allows team members to bill tasks to specific clients or place them under company time. Tracking time can also encourage team members to be more mindful of how they’re using their time and help them reach their benchmarks. Once they input their time, you can analyze this information as one large data set.

How to calculate utilization rate

Tracking team member utilization rate informs your company’s overall profitability. The formula for one team member’s utilization rate is simple enough, but there are a handful of formulas you’ll need in order to calculate your company’s ideal numbers.

1. Utilization rate formula

To calculate team member utilization rate, use the basic utilization rate formula:

Utilization rate formula: (Total billable hours / total hours available)

For example, if a team member billed for 32 hours from a 40-hour week, their utilization rate would be 0.80, or 80%.

Team member utilization rates differ based on job role and productivity , so calculating an individual team member’s utilization rate isn’t enough. Instead, make sure you’re tracking utilization rates for all team members in order to get a more accurate picture of company performance.

If your utilization rate is low across teams and departments, take a look at the tooling, processes, and expectations you have at your company. A low utilization rate means team members are spending most of their time on non-billable work. What are they spending time on? A lot of work about work, like app switching or manual work, can be reduced with the right tooling and processes.

For example, we know that the average knowledge worker switches between 10 apps up to 25 times per day . If your team members report that app switching is reducing their productivity and contributing to low utilization rates, look for business tools that integrate with one another. That way, instead of having team members switch between tools and lose valuable time, they have all of the information they need to complete their work at their fingertips.

Tip: Time tracking software can keep team member metrics organized and make it easier to perform calculations. It can also ensure your calculations are accurate and make any mistakes in calculations easier to spot and correct.

2. Capacity utilization rate

Capacity utilization rate is the average utilization rate for every team member. This is the formula that will tell you whether you’re able to cover your resource costs and make a profit.

Capacity utilization rate = Total team member utilization rates / Total number of team members

To calculate your company’s capacity utilization rate, add the utilization rates of every team member and divide this number by the total number of team members.

3. Optimal billing rate

Once you calculate your team’s capacity utilization rate, use this number to determine how much you should charge clients to make a profit—otherwise known as your optimal billing rate.

Sum up your resource costs, your overhead, and profit margin. Your resource costs are the amount you spend on labor, direct materials, or production. You should list your overhead costs on a per team member basis. Your profit margin is the percentage of profit that exceeds business costs, but you should list this number as the profit margin you hope to achieve.

While profit margin is typically expressed as a percentage, you’ll need to use your resources and overhead costs to turn your profit margin into a dollar amount for this formula.

Profit margin as dollar amount = (Resource costs + overhead) x Profit margin as a percentage

Optimal billing rate = (Resource costs + overhead + profit margin) / Total average labor hours / Capacity utilization rate

So, for example, if your labor costs are $50,000, you spend $10,000 in overhead per employee, your optimal profit margin is 25% (($50,000 + $10,000) x .25 = $15,000), and your total average labor hours is 1,000, then the top number in this formula would be 75. If your capacity utilization rate is .80, then your optimal billing rate would be $94 per hour.

Optimal billing rate = ($50,000 + $10,000 + $15,000) / (1,000)

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.80

4. Ideal utilization rate

Your capacity utilization rate will tell you the average amount of hours your team members bill in relation to the total hours they work, but this metric won’t tell you whether that rate is the ideal amount compared to company costs. The best way to understand ideal utilization rate for profitability is to use the following formula:

Ideal utilization rate = (Resource costs + overhead + profit margin) / (Total hours available x optimal billing rate)

To calculate your ideal utilization rate, find the sum of your resource costs, overhead, and profit margin and divide the total by the product of total hours available and your optimal billing rate.

Using the numbers from the example above, the top number in this formula would be $75,000. You would then calculate 1,000 x 94 to equal 94,000 on the bottom of the formula and then perform the final division of $75,000 over 94,000 to get your ideal utilization rate of roughly 0.80, or 80%. This shows that your capacity utilization rate and your ideal utilization rate do, in fact, match!

Ideal utilization rate = ($50,000 + $10,000 + $15,000)

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(1,000 x 94)

Reduce work about work to drive utilization rates

Utilization rate is a key metric you should track to assess team member and company performance. High utilization rates make it easier to cover operating costs and continuously increase profits, while low utilization rates may indicate problems in your processes that need fixing.

The best way to keep track of overall utilization is to have team members report tasks and keep structured processes in place. When team members report non-billable and billable tasks in real time, you get more control of your resources and a clearer perspective on time management.