What is Resource Utilization and How Can You Calculate It?
Agency leaders know that projects don't go from one end of the pipeline to the other without careful organization.
Projects have a lot of moving parts, and careful planning is especially important when agencies are working on multiple tasks simultaneously. This juggling act requires project managers to be on their A game, as they need to know how productive their team is, what jobs they're working on and whether or not they're using their time effectively.
And while careful planning and resource scheduling are crucial to making sure a project is successful, so is one other often forgotten part of the process—resource utilization.
Resource utilization measures how productively your team is working, and monitors whether they're being over (or under) worked.
In this article, we're going to explore:
- What is resource utilization, and why is it important?
- Resource utilization vs. resource allocation: what's the difference?
- How to create a resource utilization formula that calculates productivity + billing rate
- The use of time tracking software to keep track of your resource utilization
Let's get productive!
What is resource utilization, and why is it important?
Resource utilization is a term used to describe the percentage of an employee's available time that is used for billable tasks.
Utilization rates show how much of your team's time is being spent on billable tasks, as well as how productive each team member is. Ultimately, these figures enable team leaders to measure billing efficiency and determine if you are pricing your projects correctly to cover your costs and make a profit.
That sweet spot, according to Gartner analyst Robert Handler, is between 70-80% utilization of a team member's scheduled time. If team members are spending more than 80% of their time on billable tasks, they are less productive than they need be, and ultimately costing your agency time and money.
The problem is that not enough agencies know where they stand when it comes to their resource utilization percentage. HubSpot's 2018 Marketing Agency Growth Report found that only 58% of agencies are tracking their team's utilization rates!
Credo founder John Doherty helped contribute to the report, and says that with 42% of agencies not knowing if their clients were profitable or not, it’s impossible for them to optimize projects and keep their staff happy.
"These agencies would be well served to spend a month understanding where their employee time is going. They can then make necessary changes to make projects profitable and understand their true utilization, as well as the areas where they need to hire or trim back in order to run a profitable company."
Profitability isn't the only reason agencies need to start tracking their resource utilization.
Managing multiple projects at once requires cross collaboration and juggling resources within teams. Although project managers work hard to make sure their team members aren't overworked in the process, keeping track of resource utilization can make the process a whole lot easier.
With the right system in place to track resource utilization, agencies can:
📊 Manage projects better because they have access to productivity data
📈 Maximize their use of resources which leads to a higher ROI
🤝 Be more agile with how they schedule their team to boost cross collaboration opportunities
Resource utilization vs. resource allocation: what's the difference?
Despite sounding similar, resource allocation and resource utilization are two different areas of project management.
The process of resource allocation involves assigning team members to specific tasks and activities to get a project completed. As the project progresses, project managers keep an eye on how these tasks are going, and shuffle the workload around to other team members as needed.
Resource utilization, on the other hand, refers to the measurement of these efforts. By tracking a team member's billable/non-billable hours, a project manager can get a feel for their team’s overall productivity and workload.
For creative agency Kobe, juggling multiple projects at once is all in a day’s work for their team.
Kobe has been using Float for their resource management since April 2019. The company'c co-founder Bruno Bulso says that it's made it much easier to forecast the team's resource capacity and predict the success of their projects. With Float, the Kobe team are able to keep track of the multiple projects in their pipeline and make sure their team is being utilized effectively.
Measuring your agency's resource utilization may seem daunting at first, but it’s easy with the right tools. Once you've calculated your ideal utilization and billing rates, you can use a resource management tool to track your team's productivity automatically.
How to create a resource utilization formula that calculates productivity + billing rate
At this point, it should be pretty obvious how your agency can benefit from calculating resource utilization rates. Thankfully, the typical formula used to calculate resource utilization isn’t overly complicated:
A typical resource utilization formula:
Total billable hours ÷ Total available working hours x 100
If a designer on your team works 8 hours a day, 5 days a week, then their availability is set to 40 hours per week. If 34 of those hours are considered billable, while 6 are left for other tasks (like administrative work), the calculation you make is 34 / 40 x 100 = 85. The designer's utilization rate is 85%.
It's important to note that utilization rates should be used as a baseline that can be tweaked according to your agency's unique needs. For example, you might want to consider other factors when calculating the formula, such as:
- Are there any non-billable hours in the total available hours?
- Are you basing the calculation on planned working time or on reported working time?
- What baseline should you use to calculate the total hours available to work (i.e., this will change from full-time to part-time employees)?
- Are you including the team member's time off?
What’s cool about calculating your team’s utilization rate is that you can then use it to calculate a billing rate across projects.
Let's assume that the designer above is paid an annual salary of $85,000 for their work at the agency. The agency's overhead to employ the designer is relatively small at $4,000/year as the team works remotely (woo!), and their ideal profit margin on the designer's time is 25%.
To put a dollar figure on that profit margin, we need to multiply the designer's hours by the ideal profit margin ($85k x .25%), so we're left with $21,250. Taking in their full-time hours (52 x 40) leaves us with the designer punching in 2080 hours a year on their time clock.
Next, the calculation:
How to calculate your billing rate?
Billing rate = (Salary / hourly costs + overhead costs + desired profit margin ) ÷ total working hours
So: 89,010 / 2,080 = $42.79.
The agency employing the designer will have to charge at least $42/hour to cover their costs and hit their ideal profit margin. Except there's one problem with this formula…can you see it?
It assumes the designer is working at a 100% utilization rate.
Let's be honest—no team leader wants their staff working at 100% capacity all the time. It's bad for productivity and will likely burn the team out. A quick tweak in the calculation allows us to use the utilization rate we figured out earlier to keep the agency profitable and stop the designer from frying their keyboard:
How to calculate your ideal billing rate?
Ideal billing rate = (Salary / hourly costs + overhead costs + desired profit margin ) ÷ total working hours ÷ utilization rate
For the designer, this is 89,010 ÷ 2,080 ÷ .85 = $50.34.
As long as the agency is billing clients a little over $50/hour for their designer's time, they can comfortably schedule them at an 85% utilization rate while keeping their 25% desired profit margin.
These calculations are essential because they allow team leaders to make sense of utilization rates and make smarter decisions with their team's schedule. After you figure out what each person's ideal utilization and billable rates are, you can use them to build schedules that make sense for both your team's time, and your agency's bottom line.
The use of time tracking software to keep track of your resource utilization
Once you've calculated your resource utilization rates, you must track your team's time in order to make sense of them.
The easiest way to do that is to invest in a time tracking tool that handles things automatically. Tracking your team's time without a proper tool means a lot of manual data entry and messy spreadsheets.
Using Float's time tracking feature, you can track how many hours your team is working on billable/non-billable tasks by having them fill out their digital time log. This information is then stored and used to generate reports that show so you can see how productive your team has been over a specific period.
You can use Float's filters to see where individual team members have been spending their time.
Team leaders can instantly see that the staff member is only working at a 67% utilization rate, and use this data to either assign the team member to other projects, or find out what non-billable tasks are chewing up so much of their time.
Calculating your resource utilization can empower your team and your profits
The power that comes from calculating your agency's resource utilization should not be underestimated.
While it may seem like a daunting process at first, the rewards far outweigh the work. By using cold, hard data and creating a resource utilization formula unique to your agency, you can determine your team’s ideal billable rates.
Using resource utilization figures, you can ensure your team is working more productively without risk of burnout while still reaching your ideal profit margin. In fact, calculating your resource utilization can make your scheduling decisions easier—forever.
And that's why it’s such a smart calculation to make 🤓
Looking for a tool that combines resource utilization with powerful project scheduling? Float is the top rated resource management software, and is trusted by 3,000+ teams around the world.
Try it free for 30 days.