What Is Resource Utilization and How Do You Calculate It?
Resource Utilization is one of the most critical KPIs that project-based, service organizations should track. Measuring resource utilization helps these organizations make more informed resourcing decisions to improve workforce productivity and increase project profitability.
The success and growth of every organization depend on various factors, of which employees are the central driving force. Project managers need to work smartly and quickly to ensure on-time delivery of their projects. They need to know how productive their team members are, what projects/tasks they are working on, their skill sets, future availability, etc. As per a Gartner Research Report, teams with lower utilization can reduce the time it takes to deliver business value by 30% or more.
However, most companies – irrespective of their size and nature – are yet to understand the significance of measuring resource utilization rates. As a result, they do not track the stats and actuals around resource utilization. HubSpot’s 2018 Marketing Agency Growth Report reveals that only 58% of agencies track their team’s utilization rates.
In this blog, we’ll answer a few of the commonly asked questions such as:
- What is resource utilization?
- What is the significance of tracking resource utilization rate?
- What are the best strategies and approaches for efficient resource utilization?
- What should be the ideal resource utilization calculation methods?
What is Resource Utilization?
The term ‘resource utilization’ is used to describe the percentage of an employee’s available time that is being spent on billable and non-billable projects/tasks. It is a KPI that reflects how effectively each resource is being utilized against his/her capability and availability. Resource utilization is a strategic means of measuring workforce utilization and keeping track of the daily productivity of employees across the organization – in order to ensure efficient overall resource management.
Maximizing utilization involves planning a project, allocating resources according to their skills, ensuring the availability of resources, and effectively using resources to their best ability. Resource utilization will also help leaders monitor each employee and verify who is working on what project, if resources are over or under-utilized, and re-allocate them to new/ongoing projects if required. Ultimately, these figures and stats also help managers determine whether they are billing accurately for all the projects.
Why is Resource Utilization Important? Significance of Resource Utilization in Project Management
Resource utilization should always be a priority metric for service businesses since how and where the resources are allocated will directly impact the overall performance of projects. Resource utilization rate offers real-time visibility and transparency into your projects, which means you are less likely to miss any important details and be more active towards catching errors before they develop into significant issues.
Optimal resource utilization can bring in a multitude of benefits for a project-oriented business, including:
- Indepth visibility into your resource productivity data enabling superior project management capabilities
- Derive the best out of your resources while constantly checking burn-out and exhaustion
- Avoid project cost overruns, promote accurate project planning and forecasting and improve overall project profitability
A close eye on how your resources are aligned with all aspects of the project can help you manage the entire project successfully. Effective resource utilization is one of the most critical factors that contributes to the success or failure of any project. Effective utilization of resources ensures timely delivery of services/products and guarantees high-quality services/products without any budget overrun. It is important to know how your team is spending time on multiple billable and non-billable projects/tasks
Resource utilization rate also provides managers with a comprehensive understanding of proactive capacity planning. It means that if a project demands the involvement of any other resource, then managers get ample time to procure another resource via internal or external channels. This will help you enhance productivity, accomplish goals timely, and optimize the resource health index while maintaining a high quality of standards.
Considering all these aspects, it becomes quite critical to ascertain the resource utilization rate for every project. So the question now is, how to calculate resource utilization in a project?
How to Calculate Resource Utilization in a Project?
It may seem time-consuming and cumbersome to calculate resource utilization for each team member, especially when doing it manually or just using excel. An advanced professional service automation solution will make this task easier for you.
The formula to calculate the resource utilization rate is simple.
Utilization Rate = Billable Hours Worked/Total Available Hours* 100
For example, if a team member should work for 8 hours each day for 5 days a week, the total available hours will be 40 hours per week. However, if they just worked for 36 hours (billable hours) in a week, while for the other 4 hours they were working on non-billable activities like general administration, meetings etc, then the calculation will be:
36/ 40 x 100 = 90, which means the employee has utilized 90% of his potential towards billable projects.
Project Scope and Costing
Assume that this employee is being paid an annual salary of $90,000, 8 hours of available time in a day would mean that his services will cost the company approximately $45 per hour. So working backwards from here and accounting for the margins its fairly simple to arrive at the hourly billing rate. However, in reality, this data is not enough to accurately calculate the billing rate. To do such a calculation, you need to track accurate billable and non-billable hours before getting into the extrapolation.
And one of the simplest ways to track and monitor the effective utilization of resources is by accurately tracking employees’ time. With the help of a PSA tool, you can track the billable and non-billable hours for your resources across different projects and calculate the productivity of each resource over any period of time.
Factors To Consider While Calculating Resource Utilization Rates
Project leaders and managers should keep in mind that resource utilization rate is considered as the baseline that can be tweaked or modified as per the project-specific requirements. There are multiple factors that you must consider while calculating the utilization rates in any project. Some of those factors are:
- How many hours are billable hours in the total number of available hours?
- Is your calculation based on planned or scheduled working time?
- Is your calculation based on actual devoted or reported working time?
- How would you consider the total number of available hours for part-time employees?
- Have you considered team members’ time off while calculating the utilization rate?
Once you have paid due attention to each key aspect, the entire resource utilization calculation becomes much more precise. Resource utilization charts will help you understand all the resources you have and how they perform in terms of productivity and efficiency. As every project is slightly different, it is quite reasonable to state that no standard formula can guarantee success in every project. That’s why one must keep in mind all the key aspects of resource utilization data projections and scenario analysis to efficiently calculate overall resource utilization rates.
Once you have calculated the overall resource utilization rate, it becomes more convenient to calculate the team’s billing rate and productivity. This guarantees precise billing rate calculation across projects and helps you maintain a decent level of profit margin on resource’s time.
Tips for Calculating Resource Utilization Accurately
Resource utilization calculation often becomes quite complicated, and project managers often find it extremely challenging to master the art. Discussed below are a few crucial tips that can help you calculate resource utilization charts accurately.
Comprehensive visibility: It is no surprise that there can be multiple tasks associated with any given project. You might have allocated numerous resources to specific tasks, and they might be working in collaboration or silos. It is critical to gain comprehensive visibility into each resource’s time, which can then help you determine their efficiency, productivity, and performance. If you view their contribution towards any project in a silo, then it might not give you a clear understanding of their utilization rate.
Scope of flexibility: No matter how efficiently you have planned or contemplated initially, you will face unforeseen complications once the project is launched. Some projects demand much more time and resources than what was thought earlier. Similarly, many projects compel you to revisit your budgetary outlines, and project managers find it extremely challenging to justify the cost overrun. That’s why one should always add the scope of flexibility while tracking resource utilization rate.
Analyze thoroughly: It is very rare that everything will go as per the plan, and this highlights the significance of thorough analysis. Experts advise project managers to compare and analyze the difference between what was decided or planned earlier with respect to the actual resource utilization stats. This will help you identify whether your project management plan needs any sort of modification before anything goes wrong!
Best Practices for Optimal Resource Utilization
Project managers or leaders must embrace a systematic approach to optimize resource utilization in a project. Here’s the list of best practices for optimal resource utilization in any project.
Gain Complete Visibility in the Future Availability of Resources
Although everything is uncertain in business, you need to have complete visibility into the availability of resources in the future for successful project management. You must consider their loyalty towards your organization, future holidays, the end date of contractual employees, and things of similar nature while forecasting the availability of resources.
Clarity on Future Project Demand
Proactive resourcing decisions or resource planning helps you match the suitable candidate with the right tasks. Inefficient resourcing decisions often hampers the overall resource utilization in any project. Therefore, project managers should always have clarity on future project demand, which can help you maximize billable utilization of resources.
Revisit the Employees’ Schedules Timely
Managers need to revisit their employees’ schedules timely to identify any gap between what was decided at the start of the project and how the employees are performing during the project execution stage. Keeping a close eye on employees’ schedules will enable you to accomplish project goals timely, without encountering any major obstacles.
Multidimensional resource scheduling: It is always advisable to ensure competent resource allocation before the onset of any project. Herein, the real-time data of resources – with respect to their skills, interest, costs, and competence – can help project managers in multidimensional resource scheduling, which means mapping the most qualified resources with any project.
Improved Resource Utilization Ensures Reinforced Bottom Line
Resource utilization plays a pivotal role in deciding the project finances, which can be regulated timely. As an effective resource utilization plan always pays due attention to the employee’s health index, it directly influences the quality of the project deliverables. Consequently, it paves the way for excellent client experience – a strategic business objective.
If you have successfully been able to complete projects within time and budget, you simply win long-lasting relationships with your clients, which means a more promising future in the competitive business landscape. Thus, improved resource utilization in a project can ensure a reinforced bottom line.
How can PSA Software Increase your Resource Utilization?
Now let’s understand why your organization must automate its resource utilization and the value it brings to your business.
Imagine an organization with 500 employees who work for 2000 hours a year; however, these employees are currently utilized at only 72%. After digging deeper into the reasons for this under-utilization, they realize that the lack of real-time visibility during resource utilization and tracking has created a gap in allocating the right resources at the right time within professional services firms. In this case, the organization failed to utilize the time interval when resources moved out of their existing projects and joined a new one.
This means if you consider moving from manual tracking of resource utilization to an intelligent PSA platform, you will increase your employee billable utilization and drive a higher annual revenue per employee. A 0.5% change in resource utilization could increase your project revenue by $20-$30K per employee. Now, multiply that by the number of billable employees you have.
Whether you are an organization with 5,000 employees (equating to over 10 million project hours available each year) or 50,000 employees (equating to a massive 104 million project hours), this added annual project revenue undoubtedly will impact your profitability, resource utilization, and bill rates.
You need real-time visibility into allocating your resources across all your projects for optimal resource utilization. With an intelligent PSA platform, you can leverage artificial intelligence to find the right resources, identify their availability and allocate them to projects quickly. This will reduce the time to staff resources and bench time. Even at a billable rate of $150 per resource and an increase of resource utilization by 0.5%, you can gain an additional $750K that you can add to your project revenue.
Understanding the resource utilization in your organization is a critical metric to calculate the efficiency of your processes and the productivity of your workforce. A 75% resource utilization rate means that your resources spend 25% of their activities on non-billable activities, which is undesirable for any business.