December 31, 2018 Lior Schnabel, Managing Partner

Billable Hours and Utilization in Architectural and Engineering firms can be the difference between profit and loss.

Most Architecture and Engineering Firms are posting hours and measure projects profitability accordingly. However, many firms do not track billable hours and utilization on the real-time basis. Therefore, all of their profitability metrics might be wrong, and most importantly, they might be missing very important information regarding the efficiency of the firm.

How many billable hours should we expect from professional employees?

Billable hours are the hours that are spent on payable projects. Utilization is the percent of billable hours compare to the total hours including admin, leave, and etc. (there are a few ways to measure utilization). Today we are working with 300 A/E firms in NYC, Israel and London and we found that the average number of billable hours for professional employee is between 1,800 – 1,900 hours annually. In NYC and Israel, there are more billable hours than London due to labor laws.

What happens when we have less billable hours?
For example: If we have an employee with an annual cost (including overhead) of $144,000, then his hourly cost (W/O profit) is $80 per hour, assuming 1,800 billable hours annually. Let’s say that this employee works 1,000 hours (cost of $80,000) on a project for which the firm received $90,000. According to these metrics, there is a profit in the project of $10,000. However, if this employee is not posting 1,800 billable hours but only 1,500 billable hours in a year, then his real hourly cost is actually $96 and not $80, which means the project should show a loss of $ 6,000 instead!!! We need to remember that at the end of the day, we need the revenue from all projects to cover the firm cost, plus profit, so the profitability metrics must use the billable hours only.

Low utilization and billable hours indicate efficiency issues
Low utilization and billable hours tend to indicate one of the following efficiency issues:

Inefficiency at distributing the work
Professional employees that spend a lot of time on administration and non-billable tasks. In this case, we need to have a better definition of the scope of the employees, and make sure that the administrative staff is taking care of most of the administrative tasks at the firm. One time we had a case that one of the professional employee spent 30 hour a month scanning, which obviously shouldn’t take place.

Structure issues
Principals and Senior Staff often spend more non-billable hours than other professional employees because they are spending time on proposals, business development, management, and etc. If we have less than 87% utilization in the firm, then we need to look on the firm structure – it can indicate a top-heavy structure – too much management and not enough production.

Decrease in the workload and disparity between teams
One of the initial indications of a drop in the workload will be less billable hours and low utilization. Usually, it will appear in one or two teams, and then we can learn that this team is not as busy as the other team and should get more projects (or have a smaller team). If it happens across the board, then obviously the problem is firm-wide and not just a specific team. Of course, it is not the only indication for a low workload, but since there are so many different things happening at the same time in an A/E firm, low utilization is a very good indicator to support your decision-making process.

Inaccurate posting of the hours
Sometimes, it is just a matter of not posting the timesheets properly. Some employees might post time spent on project-related e-mails and calls as admin, or not even post all of their hours (many employees do not post overtime hours). The result is not just a technicality. It will prevent the firm from recognizing all of the issues above. Usually, when hours are not being posted accurately, it can indicate the lack of attention to efficiency and profitability. If the monitoring of the projects profitability is inaccurate, you probably have some efficiency issues…

At the end of the day, Architectural and Engineering firms that measure profitability accurately and meet the utilization and billable hours’ objectives, will be more efficient and therefore make more money.
All of the firms we encountered that had low utilization and billable hours were able to improve their financial performance and profitability by increasing their billable and utilization figures.