1. Billability – Billable Hours, Hourly Billability and Financial Billability
Welcome to this podcast where we will be covering Billable Hours, Hourly Billability and Financial Billability. This session is intended to help operations and resource managers understand:
how to calculate each of these metrics
what reports are available and how to read them
How measures impact performance
This is one in a series of podcasts developed to help ARCADIS employees enhance their understanding of how the Company does business and why our financial metrics and reports are so critical to the success of our business.
My name is Stephen Siano, Controller for the Environment Division and I will be presenting today along with Rhonda Rupert, a Finance Manager supporting the Water Division.
Thank you for taking the time to listen to this material. Before we begin, let’s have a health and safety moment.
Lifting injuries are a common cause of back pain. You can protect yourself against damage with good lifting habits, both at home and in the workplace. When making a two handed lift, place your feet shoulder width apart, bending at the hips and knees. Grip the load firmly and keep it close to your body. Use the strong muscles in your legs to lift. Keep your back as straight as possible for the whole lift. If making a one handed lift, be sure to keep your other hand on your knee for support.
Imagine the result

2. Key Financial Metrics Gross Revenue Net Revenue Net Revenue Multiplier
Financial Billability
Operating Income (Income after Corporate Overhead)
Return on Net Revenue (Income percent of net revenue)
Bookings
Backlog
DRO (Days Revenue Outstanding)
As we said, this session will focus on Billable Hours, Hourly Billability and Financial Billability
Billability Performance has a direct impact several other Financial Metrics such as:
Net Revenue
Operating Income
Return on Net Revenue

3. Why Does Financial Billability Matter?
Financial billability is a critical driver to our overall financial performance
FB provides greatest ROI as the average billable hour generates 3 times its cost.
Match staff levels to workload
Workload forecasting or Billable Hours forecasting helps with management and delivery on projects
Why does Financial Billability matter so much?
Financial Billability is the primary indicator for our industry that measures the ratio of direct labor to total labor or productivity. This metric drives our revenue stream and financial performance. Strong financial billability typically represents strong backlog and high utilization among all staff. Conversely, low Financial Billability may indicate a reduction in workload and the need to adjust staff levels. Financial Billability also helps to identify areas where underutilized staff may be able to support another business unit that is maxed out.
In a professional services firm, staff are the most important assets we have. Therefore, staff utilization determines how much revenue and profit a firm can generate. Monitoring and measuring staff utilization at optimal levels provides for not only healthy returns, but allows for staff opportunities such as promotion and raises.

4. Billable Hours
First, we will review the Billable Hours Program and calculations

5. Principles of How Billable Hours are Set
Annual goal for each employee based on hours per week, target billability percentage, plan overtime percentage and allowable benefit hours
Establishes direct hour targets for each employee
Provides a set number of hours for indirect activities (i.e. training, staff development, podcasts and business development)
Management over a longer time period
More flexibility to tailor use of indirect time
Employees must always meet project needs first
In order to have the company meet its overall Financial Goals, All individual Billable Hours goals need to be met and aligned with company metrics for billability.
As part of the business plan process, resource managers set a billable hour goal for each employee. These goals are set based on a number of factors, including hours per week, PTO, an overtime factor and target utilization. The target utilization factor should account for necessary indirect activities such as training, staff development and business development.
This process empowers the employee to manage their utilization goal over the year allowing flexibility to participate in indirect activities once client and project needs are met.

6. Billable Hours Calculation
Calculation: Total Available Hours (Total Regular Hours + Overtime Hours – PTO - Holidays) times Target Billability Percentage
Total Regular Hours: Hours per week times 52 (2080 for most)
Overtime Hours: Total Regular Hours times Plan Overtime Percentage
Example:
40 hour per week employee, 10% overtime goal, (20 PTO + 9 holiday), 95% target billability goal
40 hrs X 52 weeks = 2080 Regular Hours
2080 X 10% = 208 Overtime Hours
8 hrs X (20 PTO+ 9 holiday) = 232 Benefit Hours
Calculation: ( – 232) X 95% = 1953 Billable Hour Goal
The calculation for the individual billable hour goal is as follows:
Total Available Hours times Target Billability Percentage.
The Total Available Hours is comprised of Total Regular Hours plus Overtime Hours less PTO and Holidays
Total Regular Hours equals the number of Hours per week times 52 weeks (which is 2080 for most)
Overtime Hours equal the Total Regular Hours times the Plan Overtime Percentage
In the example shown we will review a 40 hr per week employee with a 10% overtime goal. He receives 20 PTO days and 9 holidays and has a 95% target billability goal.
We calculate regular hours to be 2080 which is 40 hrs per week X 52 weeks
Next we calculate the overtime hours which are the regular hours of 2080 times the 10% overtime goal to equal 208 Overtime Hours
Benefit hours are calculated based on the hours per day, which is 8 hrs in this example, times 20 PTO days and 9 holidays. This equates to 232 Benefit Hours
The final Calculation is Total Available Hours of 2080 regular hours plus 208 overtime hours less 232 benefit hours times 95% Target billability to equal a Billable Hour Goal of 1953
This billable hour goal that is established during the plan process is uploaded in Vision and carries through to all reports including the My Metrics application.

7. Billable Hours Goal Change Form
A common question we often hear regarding billable hours is: What happens when an employees standard hours change? The Operations Manager should initiate a billable hour goal change. For instance, if a 20 hour a week employee moves to 40 hours per week, the billable hour goal that was established when the employee was at 20 hours would be much too low. The change basically prorates the hours over the year to set a new billable hour goal for the year.
In the event you need to adjust the billable hour goal for an employee mid year, you will need to complete this form and send to the Timesheet Administration box. The yellow boxes represent the key input areas.
This change form should also be used for new employees that are not specified in the plan. Adjusting the start date will automatically prorate the billable hour goal for the year.
Note, the financial billability goal for the business unit will remain unchanged for the year and will not be updated to account for adjustments made to individual goals.

8. Billable Hours - MyMetrics
From the Track Metrics link on APEX the supervisor can monitor an employee’s performance through the supervisor view. The drilldown allows review of YTD, quarterly, monthly and weekly performance. Project level detail is also available in this drilldown.
Please note that when individual billable hour goals are entered, there is some seasonality built in to the quarterly goals based on historical holiday and PTO trends.

9. Billable Hours Report
A Billable Hours Report is distributed each week on Tuesday which also tracks hours variance by employee. The report shows variances on a year to date goal as well as for the quarter.

10. Hourly Billability
Now let’s review the Hourly Billability calculations.

11. Employee Ovt %
000 – Exempt employees that never get paid overtime, hours worked over 40 are considered EXTRA hours and are deducted from Indirect Labor
100 –Exempt employee that will get straight time overtime if 100% billable
150 – Non exempt employees will get paid time and a half for all overtime hours in a week
Before we discuss both Hourly Billability and Financial Billability, it is important to understand the different employee overtime methods and how these impact the calculations.
There are three different overtime percent methods.
The first are exempt employees, these type of employee never gets paid overtime. Their cost rate is simply their annual salary divided by 2080 hours. This hourly rate is then used to allocate their hours to projects. All hours are charged to projects, however hours worked in excess of 40 hours per week are considered EXTRA hours and are deducted from indirect labor.
The second type of employee is Exempt employee who gets paid straight time overtime for all billable hours only greater than 40 hours in a week.
The third type of employee is a 150 percent employee. These employee gets paid by the hour and will get paid time and a half for all hours worked in excess of 40 hours per week.

12. April 24, 2017
Billability (Hours)
Definition – A measure of an employee’s productivity based on hours
Calculation: Direct Hours / Available Hours
Direct Hours – hours charged to direct projects
Available Hours – Total hours paid minus Benefit hours.
Benefit Hours– PTO, Holiday, Other
Percentage assigned to each employee to establish individual billable hours goal
By definition, Billability is a measure of an employees productivity based on hours. The calculation is direct hours divided by available hours. Direct hours are hours charged to billable projects. Available Hours are total hours paid, less benefit hours, which include PTO, Holiday and other benefit hours such as Bereavement, Military Leave, Jury Duty and Paternity Leave.
This calculation results in the Target Billability percent that is assigned to each employee to establish the individual billable hours goal as we discussed previously.

13. Billability (Hours) Overview
000 – Salary Employee
Direct Hours Divided by Available Hours
30 Hours Billable,13 Admin / Marketing Hours, and 8 Hours Holiday
OT Percent = 27.5% (51-40=11 OT hours / 40 standard)
Billability = 93.8% (30 Billable divided by 32 ) (40 hours paid less 8 TOBE)
Let’s review some specific examples:
For Exempt salaried employees the formula is simply direct hours divided by total available hours.
The first example is a exempt salaried employee working 40 hours per week who is not eligible for overtime pay.
In this particular week, the employee worked 30 billable hours, 13 Admin/Marketing hours and recorded 8 holiday.
The calculated overtime percent is 27.5 percent, which is the 51 hours recorded less their 40 hour workweek divided by the 40 standard hours
This is the total billable hours of 30 divided by 32 available hours, which is 40 paid hours less 8 benefit hours.
The billability percent calculated is 93.8%.

14. Billability (Hours) Overview
100 – Paid straight time for billable hours over base
35 Hours Billable, 8 Training Hours, and 8 Hours Holiday
OT Percent = 27.5% (51-40=11 OT hours / 40 standard)
Billability = 100% (35 Billable divided by 35 ) (43 hours paid less 8 TOBE)
This next example is for an exempt employee who is Exempt but gets paid straight time for billable hours over base:
These employee have a base of 40 hours per week. However, can get paid for OT above the base hours less any benefit hours that are Billable.
the In this particular week, the employee worked 35 billable hours, 8 Training hours and recorded a holiday.
The calculated overtime percent is 27.5 percent, which is the 51 hours recorded less their 40 hour workweek divided by the 40 standard hours
This is the total billable hours of 35 divided by 35 available hours, which is 43 paid hours less 8 benefit hours.
The billability percent calculated is 100%.

15. Billability (Hours) Overview
150 – Overtime Employee
30 Hours Billable and 13 Admin / Marketing Hours
OT Percent = 7.5% (43-40=3 OT hours / 40 standard)
Billability = 69.8% (30 Billable divided by 43 )(43 hours all paid)
This final example is for a non exempt employee who gets paid time and a half for all hours worked over base:
This employee works 40 hours per week. In this particular week, the employee worked 30 billable hours and 13 Admin/Marketing hours.
The calculated overtime percent is 7.5 percent, which is the 43 hours recorded less their 40 hour work week divided by the 40 standard hours
This is the total billable hours of 30 divided by 43 paid hours.
The billability percent calculated is 69.8%.

16. Weekly Labor Analysis by Department
Each Tuesday Resource and Business Unit managers will receive a Weekly Labor Analysis by Department. This report can be used to measure each employees current, monthly and YTD billability performance as compared to target. The report also shows the overtime percentage for each employee as well as a breakdown of that persons indirect time (Marketing, Admin, PTO, etc…).

17. Labor Analysis
The Labor Analysis report is also distributed on Tuesday and gives a high level look at the same metrics displayed on the Weekly Labor Analysis. This report only summarizes the hours at a BU level.

18. Financial Billability
Let’s move on to Financial Billability and the associated calculations.

19. Financial Billability
Definition – A measure of an employee’s productivity based on dollars
Calculation: Direct Labor $ / Total Accrued Payroll $
Direct Labor $ – Billable hours times the employee’s direct rate (hourly pay rate)
Total Accrued Payroll – Total Payroll(Direct and Indirect) %(Benefit Accrual) – Benefits Taken
Financial Billability will also vary based on employees status with regards to OT pay
By definition, Financial Billability is a measure of an employees productivity based on dollars.
The calculation is direct labor dollars divided by total accrued payroll dollars.
Direct labor dollars are the billable hours charged in a given period times the employee’s direct rate – their hourly pay rates.
Total accrued payroll is calculated as follows: Total payroll (direct and indirect payroll dollars) plus an 11.9 percent accrual of the total payroll for benefits, less any benefit payroll dollars taken in that period.
The benefit accrual is intended to even out swings in financial billability that would occur in periods of heavy PTO.
Financial billability will also vary based on the employee’s status with regards to overtime pay.

20. Financial Billability
In this example, we will look at a 40 hour a week employee who is exempt and makes 40 dollars per hour. You can see in the first column on the timesheet there were 51 total hours posted, 30 direct hours, 13 training hours and 8 holiday hours. The slide shows the calculation we previously discussed for hourly billability and the result of 93.8%. Now lets go through the calculation for financial billability for the same person.
In the cost column, The direct labor dollars are calculated by taking the 30 direct hours times the 40 dollars per hour to equal The indirect dollars are calculated by taking 13 training hours times 40 dollars to equal The benefit dollars are calculated by taking 8 holiday hours times 40 dollars to equal The next line item shows the indirect labor deduction for the extra hours that were not paid, so 11 hours times 40 dollars per hour to equal a negative Total payroll is 1600 dollars. This is the sum of the direct, indirect and benefit dollars charged less the dollar value of any unpaid or extra hours.
When calculating financial billability we always deduct the actual benefit dollars taken and add back in an accrual of 11.9% of total payroll. The next two line items show this. The negative 320 is the deduction of the $ value of benefit hours taken and the positive 190 is the dollar value of the benefit accrual. The total of 1470 dollars represents the total payroll dollars adjusted for the accrual. This becomes the denominator in the equation for financial billability. Now let’s look at the final equation…
As you can see we take the direct labor dollars of 1200 divided by the Total payroll dollars (adjusted for accrual) of 1470, the result is 81.6%.
You can see that the difference between hourly billability and financial billability is the impact of the accrual. Remember this is meant to even out swings in financial billability that would occur in periods of heavy PTO.

21. Financial Billability
In this example, we will look at a 40 hour a week employee who is exempt and makes 30 dollars per hour. This exempt employee gets paid straight time for billable hours over base. You can see in the first column on the timesheet there were 51 total hours posted, 35 direct hours, 8 training hours and 8 holiday hours. The slide shows the calculation we previously discussed for hourly billability and the result of 100%. Now lets go through the calculation for financial billability for the same person.
In the cost column, The direct labor dollars are calculated by taking the 35 direct hours times the 30 dollars per hour to equal The indirect dollars are calculated by taking 8 training hours times 30 dollars to equal The benefit dollars are calculated by taking 8 holiday hours times 30 dollars to equal The next line item shows the indirect labor deduction for the extra hours that were not paid, so 8 hours times 30 dollars per hour to equal negative Total payroll is 1290 dollars. This is the sum of the direct, indirect and benefit dollars charged less the dollar value of any unpaid or extra hours.
The next two line items show the deduction for the actual benefit dollars taken and the addition of the 11.9% accrual. The negative 240 dollars is the deduction of the $ value of benefit hours taken and the positive 154 dollars is the dollar value of the benefit accrual. The total of 1204 dollars represents the total payroll dollars adjusted for the accrual. This becomes the denominator in the equation for financial billability.
As you can see we take the direct labor dollars of 1050 divided by the Total payroll dollars (adjusted for accrual) of 1204 and the result is 87.2%.
You can see that the difference between hourly billability and financial billability is the impact of the accrual. Remember this is meant to even out swings in financial billability that would occur in periods of heavy PTO.
Please note that a 100% or straight time OT employee can never have a financial billability higher than 89.4%

22. Financial Billability
In this example, we will look at a 40 hour a week employee who is non-exempt and makes 20 dollars per hour. Remember, non-exempt employees get paid for every hour worked and get paid time and a half for every hour worked over base. You can see in the first column on the timesheet there were 43 total hours posted, 30 direct hours and 13 training hours. The slide shows the calculation we previously discussed for hourly billability and the result of 69.8%. Now lets go through the calculation for financial billability for the same person.
In the cost column, The direct labor dollars are calculated by taking the 30 direct hours times the 20 dollars per hour to equal The indirect dollars are calculated by taking 13 training hours times 20 dollars to equal The next line item shows the impact of overtime which was charged to an indirect labor project. This calculation is the 3 additional hours times the overtime premium of 10 dollars to equal 30 dollars of additional payroll. Total payroll is 890 dollars. This is the sum of the direct, indirect and overtime dollars charged.
When calculating financial billability we always deduct the actual benefit dollars taken and add back in an accrual of 11.9% of total payroll. In this example there were no benefit hours taken, therefore there is no deduction. the positive 106 dollars is the dollar value of the benefit accrual. The total of 996 dollars represents the total payroll dollars adjusted for the accrual. This becomes the denominator in the equation for financial billability. we then take the direct labor dollars of 600 divided by the Total payroll dollars (adjusted for accrual) of 996, the result is 60.2%.

23. Financial Billability by Department
Imagine the result
There are two reports distributed from corporate related to Financial billability. The first is the financial billability by department report that is distributed each Tuesday to Business Unit and Resource Managers. This report shows weekly, MTD and YTD performance. Results in red indicate performance that is below plan.
One question that often comes up when reviewing this report is: what happens when an employee transfers to another department in the middle of the year? The answer is this, the labor for the entire year is moved from the old department to the new department. At the business unit level there is an adjustment made to include only the labor from the effective date in the new business unit, these are often included in hidden rows within the report. In the end this report will tie to the financial statement for the business unit.

24. Financial Billability by Dept/by Grade
Imagine the result
The financial billability by department/by grade report is also distributed each Tuesday to Business Unit and Resource Managers. This report shows the detailed results by employee. The report should balance to and serve as back up for the numbers we see on the financial billability by department report. Occasionally the total on the financial billability by Dept/by Grade does not tie to the Financial Billability by Dept report. The reason for this is that the detail by person report is only looking at the current timesheets in the most recent labor post. The summary report is a running total for the month and any change in the MTD totals is reported in the weekly totals, this may include timesheet revisions or the posting of missing timesheets.
We recognize that the metrics related to productivity may be the source of confusion from time to time. Please do not hesitate to contact your division controller or your finance manager if you ever have a question related to billability. Thank you for your time today.

25. April 24, 2017
Imagine the result