I'm curious how people managing professional services allocate costs when people work overtime. Here's my example:
The fully-loaded compensation (salary, bonus, benefits, taxes, etc.) for an employee is $100K per year. You allocate that cost over 52 weeks assuming 40 hours/week so you use a cost rate of $48.08 per hour. Any time related to client-billable projects is assigned to that project; any time related to non-billable work essentially goes into an overhead pool.
My question relates to a week where this employee works something like 60 hours. If you assign 60 hours at a rate of $48.08, you've allocated cost of $2,885 but their weekly cost is only $1,923. Of course, you essentially get 20 hours of work "free" because they are salaried but how do you reflect that for cost
How to best measure employee cost against projects in a professional services firm?
Answers
In my company, we budgeted and billed based on hours worked on the project, not how many were worked in a week. Bill all hours to the project and reduce the hours from overhead.
Since we could rarely bill all hours in a pay period, I also monitored the billable hours to non-billable hours and used the ratio to make sure that we weren't over-staffed or had too much capacity.
The concept is that billable people are to have the highest billable percentage practicable, and the lowest overhead possible (we may use them in other areas like maintenance or company projects).
An option is to have a "labor variance" account to record the difference.
I would not spread the hours over 52 weeks, since they get holidays and vacations. I would take them out and use something like 48 weeks or whatever is their working time.
Calculation of the hourly cost figure should be built around the closest measure of accurate hours that you can develop. When deriving that figure, you might want to look at your historical hours worked/billed over the course of a year. These figures should be available through your
If you have the data, my suggestion is to take a look at the historical man hours in each category (worked and billed) and calculate an average hourly rate using total payroll and dollars billed for a matching time period. Your analysis should be conducted periodically (ie quarterly or annually), to adjust for changing economic conditions (i.e. raises, bonuses, new hires at different pay rates). This should yield a historical hourly cost figure that you can use in your allocation scheme and will negate the need for recalculation of hourly cost rates if an employee spends "unpaid over time" working on a project.
Good luck
The applicable cost rate is fully loaded cost per hour of billable work, the rate varies based on utilization for each project/month. In a service firm the usual problem is miscalculating total cost based on using anything other than billable hours, and the total cost of the resource.
@James, are you saying that if someone is consistently billable at 85% then you would make sure their total cost is spread over 136 hours instead of the full 160 hours (assuming 20 billable days)?
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Yes, their total cost is only relevant vs. the billable hours.
I have recently taken on leading a professional services team at a small software co, does anyone have a simple template they use, employee facing that tracks billable vs non billable measurements quarterly/annually? Also, would you recommend tying training/admin time into a part of the leverage component to ensure hours are being submitted on time and there is a proactive approach to knowledge sharing/