5. Utilization Rate: Tab-12
The utilization rate also known as chargeability ratio is the percentage of total labor dollars or hours spent or ‘charged’ to project production. The utilization rate may be calculated several ways and may be based on dollars or hours. This labor-related key indicator is calculated by dividing total direct labor dollars or hours by total labor dollars or hours. The best measure of firm-wide utilization is based on dollars since the billing net multiplier is applied to direct labor dollars, not hours.
The utilization rate can also be calculated based on standard hours. The concept of standard hours is based on full-time-equivalents (40 hours per week times 52 weeks per year). Calculate the utilization rate based on standard hours by dividing direct labor hours for the period by total standard hours for the period. The utilization rate ‘rule of thumb’ for technical personnel in design firms is usually around 85%. The utilization rate ‘rule of thumb’ for total staff is 65% to make a profit. Compare the actual firm-wide standard utilization rate to the labor budget utilization rate to see if the firm is on target.
In the Profit Plan Labor Budget, the individual staff utilization rate is applied to available hours to determine the direct labor hours available to produce billing revenue for each employee. Available hours are defined as standard hours less paid-time-off for sick, vacation and holidays. Standard hours are defined as 40 hours per week time 52 weeks or 2080 hours per year to make one full-time-equivalent. Changes to the Labor Budget staff Utilization Rate change the firm’s total revenue capacity. The other variable in determining the firm’s revenue capacity is the individual billing rate. The firm’s planned revenue capacity is determined in Tab-21 Labor Budget based on the Utilization Rates and the Billing Rates. The firm’s required revenue to meet the planned profit target at the planed staffing level is determined in Tab-22 Profit Plan. The variance between revenue capacity and required revenue is shown in Tab-21 Labor Budget. Make changes to Tab-21 Labor Budget Utilization Rates to decrease the variance between required revenue and revenue capacity to see what the required Profit Plan utilization rate needs to be to meet the Profit Plan Profit Target.