How to Calculate Employee Utilization Rate: Formula & Tips

Monitoring the percentage of an employee's billable labor is vital in streamlining the business process. It helps companies determine the time needed to do administrative tasks, staffing needs, and come up with a robust organizational strategy.

To track these, businesses use the employee utilization rate.

To gain more insights about this metric, read on as we discuss its meaning and importance, what is considered a good rate, how to calculate employee utilization, examples, and tips to use it efficiently in your team.

What is employee utilization rate?

Employee utilization rate is a measurement of a worker’s total hours of billable work, instead of non-billable time or internal work. This shows employee productivity and project management, helping companies manage resources and billing efficiency.

There are 2 key metrics in a team's utilization rate: billable and resource. The billable utilization rate measures the total billable work hours dedicated to client tasks, while resource utilization rate measures the overall productivity of the employee, both billable and non-billable.

The employee utilization formula is (Total billable hours ÷ Total available hours) x 100. For example, Employee A has a total of 1800 billable hours and a total of 2200 available hours per year. With the formula, the utilization rate of Employee A is 81.82%.

Employees’ billable hours are an important aspect of their productivity and motivation at work. To help HR leaders make competitive pay decisions with accuracy, use Compensation Software and maintain an effective employee utilization.

What is a good employee utilization rate?

A good employee utilization rate depends on the seniority and the industry of the company. Usually, it is around 70% to 90%. Here is the list of the optimal utilization rates based the different job positions and sectors:

Utilization rate based on seniority

Interns and junior-level employees: 90%

More experienced employees: 80%

Experts and senior employees: 60-70%

Managers: 30-50%

Utilization rate based on industry

Professional services: 70-75%

IT services: 75%

Production and manufacturing: 80-90%

Marketing: 70%

Importance of tracking utilization rate

Utilization tracking helps companies monitor the billable and non-billable working hours to achieve productivity, as well as manage the well-being of employees. Here are reasons to track employee utilization rates:

• Better communication with clients

  The company will be able to address accurate billable hours and billable tasks to customers. This means that the clients are getting transparent information from the business and the company can charge the target billable rate for profitability.

• Optimizes team for workload

  Employee utilization reports give insights on the size of the team needed for a project, giving way to a more enhanced and capable workforce to achieve the best result. This also prevents burnout for employees who are overloaded.

• Improves workforce planning

  Companies can better adjust resource allocation and project management as the utilization rate implies how many workers and work hours are needed for the job. Through this, the company can utilize time, finances, and people efficiently.

How do you calculate employee utilization?

Calculating utilization rates gives you insights on the productivity of your team, but if you want to make the most out of the data, you also need to measure other metrics to achieve success in your organization. Here are steps to do that:

1. Step 1: Start with the utilization rate

   Calculate a team member’s utilization rate by using this formula: (Total billable hours ÷ Total available hours) × 100

   For Example: Team Member A has 36 billable hours out of 40 available hours of work week:

   • (36 hours ÷ 40 hours) × 100 = 90%

   The utilization rate of Team Member A is 90%.

2. Step 2: Calculate capacity utilization rate

   Capacity utilization rate is the average utilization rate encompassing all employees. The organization's capacity utilization rate formula is: (Total utilization rates of employees) ÷ (Total no. of employees)

   For Example: There are 3 team members in Department B and their individual utilization rates are 82%, 71% and 86%.

   • (82% + 71% + 86%) ÷ 3 = 79.67%

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   The team's capacity utilization rate of Department B is 79.67%.

3. Step 3: Determine optimal billing rate

   Determine the amount to charge clients so that the company reaches its profit goals. The optimal billing rate formula is:

   [ (Resource costs + Overhead costs + Profit Margin) ÷ (Total average labor hours) ] ÷ Capacity utilization rate

   For Example: Company A has a labor cost of $150,000, a $30,000 overhead cost, and a 30% profit margin. The total labor hours are 1200 and the capacity utilization rate is 80%.

   • [($150,000 + $30,000 + (30% × $180,000))] ÷ 1200 = 195

   • 195 ÷ 80% = $243.75

   The optimal billing rate is $243.75 per hour for Company A.

4. Step 4: Compute for the ideal utilization rate

   To ensure that the utilization rate achieves profitability, use this formula for ideal utilization rate:

   (Resource costs + Overhead costs + Profit margin) ÷ (Total available hours × Optimal billing rate) × 100

   For Example: Company A has a total of 1200 available hours. Using the numbers in Step 3, calculate the ideal utilization rate.

   • [($150,000 + $30,000 + (30% × $180,000))] ÷ (1200 × $243.75) × 100 = 80%

   If Company A charges $243.75 per hour, it must have an 80% ideal utilization rate to pay all the costs and achieve its 30% profit.

   One key motivator in achieving the target utilization rate is through having robust Market Pricing. Ensure that your employees are maximizing their effort in achieving profitability by providing them compensation that aligns with the current market trends.

Employee utilization rate examples

The impact of the employee utilization rate is evident in different aspects of the company. To give you an overview, here are examples of how monitoring employee utilization helps in workforce planning.

• Scenario 1: High employee utilization rate

  Law Firm A has been calculating their utilization rate for the past 3 years. They found out that their senior lawyers consistently have the highest utilization rate. This indicated that the employees were overworked due to the excessive workload for senior team members.

  The company decided to implement learning and development sessions to upskill the junior team members and to hire skilled and expert candidates to ease the workload of the senior lawyers.

• Scenario 2: Low employee utilization rate

  Tech Company A has set an 85% utilization rate across all departments. For the past 6 months, they noticed that the utilization rate was lacking at 75%. The manager conducted a meeting and realized that the lack of time tracking tool caused the drawback.

  To streamline the process and efficiently track utilization, the company invested in project management software that accurately shows billable and non-billable hours and assesses areas of improvement to achieve the 85% utilization rate.

Tips in optimizing utilization rate

Optimizing the employee utilization rate helps companies maintain profitability and productivity. Here are tips for you to attain this:

• Track time: For accuracy and efficiency, use a time-tracking software to monitor time employees spend doing their tasks. It also encourages workers to spend their work hours with the intention of helping achieve company goals.

• Set goals: Communicate utilization rate objectives to guide team members and to align optimization initiatives. Goals can be for boosting productivity, employee satisfaction, client satisfaction, or resource management.

• Identify barriers: A good utilization rate is hard to achieve if there are processes and resources that cause inefficiency, such as understaffed teams or damaged equipment. Assess these hindrances to make way for a better workflow.

To better allocate resource, achieve business profitability, and optimize utilization of employees, Compensation Software gives accurate insights on the global market data to guide you in labor cost forecasting and strong compensation strategy, aiding for a competitive employee utilization rate.