Utilization rate: the number consultants should check every Friday
· 7 min read
Independent consultants tend to track revenue and hours billed. Far fewer track hours worked, which means the most useful number in the business goes uncalculated.
Utilization is billable hours divided by hours worked. It tells you what proportion of your working life someone is paying for, and it explains almost everything about why a business that looks busy does not feel profitable.
The calculation
utilization = billable hours / total hours worked
Both figures need to be real. Billable hours you probably have, since they went on invoices. Total hours worked is the one people estimate, and estimates of one’s own working time are consistently wrong, usually low on the days that were long.
For a week where you invoiced twenty-two hours and actually worked forty-one, utilization is fifty-four percent. Just over half your working time was paid for.
That figure is not a failure. It is normal, and knowing it is what lets you price properly.
Why it is never one hundred percent
The unbillable half is not waste. It is the business:
- Proposals and scoping calls, including for work you do not win
- Invoicing, chasing payment, bookkeeping
- Contracts and negotiation
- Marketing, writing, speaking, maintaining a network
- Learning things a client will benefit from and will not pay for directly
- Administration: insurance, tax, software, the laptop that stopped working
An employee has colleagues doing most of that. Independently, it is yours, and it happens in hours nobody bills.
The mistake is not that utilization is below one hundred percent. It is failing to price for that fact, and then wondering why an apparently good day rate does not produce the income it implies.
The effective rate, which is the number that matters
Your nominal rate is what you charge per hour. Your effective rate is what you actually earn per hour worked:
effective rate = nominal rate x utilization
At £150 an hour with fifty-four percent utilization, your effective rate is £81. That is what each hour of your working life is worth, and it is the figure to compare against a salary or against what you would need to earn.
Most people find this number startling the first time. It is also immediately actionable, because it shows there are two levers rather than one: charge more, or reduce the unbillable share. The second is usually easier and is almost always ignored.
Getting an honest figure for hours worked
The calculation is trivial. Getting a truthful denominator is the hard part.
Reconstructing a week from memory produces a figure that is wrong in a predictable direction: you remember the blocks of focused work and forget the twenty minutes before a call, the half hour of admin after lunch, the evening spent on a proposal. Those add up to a substantial part of the week, and leaving them out inflates your apparent utilization and flatters your effective rate.
Automatic tracking on the Mac fixes the denominator specifically. It records what was in front of you and for how long, without you remembering to start anything, which means the small pieces get counted along with the large ones.
Punchcard does this from the menu bar: it notices which application is in front, by name only, and prints a receipt of the day at your closing time, one line per application with a total. No permissions, no account, no cloud. What it gives you is a trustworthy figure for hours actually at the desk, which is the number nobody has.
What it does not give you is the split between billable and not. It has no projects or tags and does not know which client anything was for. That allocation is a daily step you do yourself, taking a few minutes with the receipt in front of you, and it is far more accurate than doing it weekly from memory. Hours open versus hours billed covers the distinction.
What to do with the number
Check it weekly, on a Friday, and watch the trend rather than the individual figure.
Utilization falling while revenue holds. You are working more hours for the same money. Something unbillable is expanding: a client needing more management than they pay for, or administration creeping. Find it before it becomes normal.
Utilization rising towards eighty percent and staying there. Less comfortable than it sounds. Very high utilization means nothing is going into business development, and a pipeline that is not being fed empties a few months later. Consistently high utilization is often a leading indicator of a quiet quarter.
Utilization stable and effective rate too low. The lever is the nominal rate, and you now have the arithmetic to justify it. The time audit to do before raising your rates covers making that case, including to yourself.
A sensible weekly ritual
Five minutes on a Friday:
- Total the week’s hours worked from the receipts.
- Total the hours billed.
- Divide. Note the figure somewhere you keep them.
- Multiply your nominal rate by it. That is what the week was worth per hour.
- Look at the largest unbillable block and ask whether it was investment or leakage.
Point five is where the value is. Proposal writing is investment. Chasing an invoice for the third time is leakage, and leakage has fixes.
The Sunday roll covers building a weekly review you actually keep up.
Questions
What is a good utilization rate? There is no universal figure, and chasing someone else’s benchmark is a poor use of the number. What matters is your own trend and whether your effective rate clears what you need. Very high utilization is a warning as often as an achievement.
Should holidays count in hours worked? No. Utilization measures working time. Time off is accounted for separately, in your annual income planning, where the relevant figure is how many weeks you actually work.
I bill fixed fees, not hourly. Then convert: divide the fee by the hours the project actually took to get an effective rate for that project. That is precisely how you find out which of your fixed-price work is profitable, and the answer is often not the one you expected.
Is it depressing to track this? Initially, sometimes. It is more depressing to discover after two years that the rate was never going to work. The number is uncomfortable once and useful thereafter.