What Does It Mean?
Utilization usually refers to the percentage of a person’s time that is applied directly to project work. Sometimes referred to as “chargeability,” utilization is generally considered in dollar terms, rather than hours, though the latter can also be considered.
Utilization can also refer to the portion of the overall firm’s time that gets applied to direct project time. In dollar terms, this just means the cost of Direct Labor as a percentage of the firm’s Total Labor costs.
The Simple Math
Simply put, Utilization is merely the percentage of our Total Labor that is devoted to Direct (Project) Labor:
Direct Labor ($) / Total Labor ($) = Utilization Rate
The Big Idea
A typical firm-wide Utilization Rate would likely fall somewhere between 60% and 80%, though it can vary widely depending on the amount of non-billable work the firm is doing. The higher the rate, the less non-billable work being done.
Practically speaking, if the firm offers paid time off and paid holidays, a Utilization Rate above 90% for an individual is not likely possible. Take a look at the percentage of paid time off in relation to work time for a typical staff member. Vacation, sick, and holiday time are most likely consuming 6% to 8% of available time. Other essential non-billable activities may consume several more percentage points.
Higher Utilization Rates by individual project staff are usually offset by much lower Utilization Rates for principals and other senior members of the firm, due to time spent on non-project duties.
Dollars vs. Hours
The primary reason we look at Utilization in dollar terms is that all dollars are created equal, but hours are not. The cost of an hour of labor for the most junior staff is considerably different than an hour of a principal’s time. Therefore, a time-based calculation is not as clear an indication of how the firm uses its labor investment as is a cost-based calculation.
A low Utilization Rate might indicate a shortage of billable work for the staff size, though it may also reflect more time invested in important non-billable activities. A high Utilization Rate may indicate more work than staff available to do it, and/or staff not taking time off.
The most effective control of utilization is making sure the firm’s projects are staffed properly, while proactively managing non-billable activities as though they were revenue projects.