How to Calculate Your Agency's Utilization Rate

Utilization rate is the single most important operational metric at a services firm. It measures how much of your team's available time is spent on billable client work versus internal, administrative, or idle time. A firm that does not track utilization is guessing at capacity, pricing, and profitability.

This guide covers the exact formula, how to calculate available hours correctly, what good utilization looks like by role, and how utilization connects to your cost rates and margins.

What Is Utilization Rate?

Utilization rate is the percentage of a team member's available working hours that are spent on billable client work. It is calculated by dividing billable hours by available hours and multiplying by 100.

A utilization rate of 75% means that for every 100 available hours, 75 are spent on client work and 25 are spent on internal tasks, administration, professional development, or unallocated time.

Utilization is not about working more hours. It is about understanding how the hours your team already works are distributed between revenue-generating and non-revenue-generating activities.

How Do You Calculate Utilization Rate?

The core formula is straightforward:

Utilization Rate = (Billable Client Hours / Available Hours) x 100

The complexity is in defining "available hours" correctly. Most agencies get this wrong by using a flat number like 2,080 hours per year (40 hours x 52 weeks) without adjusting for the time that is genuinely unavailable.

Step 1: Calculate Annual Work Hours

Start with the total work hours in a year. The US standard is 2,080 hours (40 hours per week x 52 weeks). Some firms use different baselines depending on their work culture or region. This number should be consistent across your organization and is typically set as an organization-wide default.

Step 2: Calculate Monthly Base Hours

Divide annual work hours by 12 to get your monthly baseline.

Monthly Base Hours = 2,080 / 12 = 173.33 hours per month

This is your starting point before any adjustments. Every salaried employee starts with 173.33 available hours per month.

Step 3: Subtract Statutory Holidays

Deduct 8 hours for each statutory holiday that falls in the month. If your organization observes 3 holidays in December, that removes 24 hours from the available pool for that month.

Adjusted Hours = 173.33 - (3 holidays x 8 hours) = 149.33 hours

Step 4: Subtract PTO and Vacation

Deduct any paid time off, vacation days, or sick leave taken during the month. If an employee takes 3 days off, that is another 24 hours removed.

Available Hours = 149.33 - 24 PTO hours = 125.33 hours

Step 5: Calculate Utilization

Divide the employee's billable client hours by their available hours for the month.

Example: An employee logs 95 billable client hours in a month with 125.33 available hours. Their utilization rate is (95 / 125.33) x 100 = 75.8%.

How to Handle Partial Months

When an employee starts or leaves mid-month, you need to pro-rate their available hours. Use the number of working days they were employed during the month divided by the total working days in that month, then multiply by the base monthly hours.

Example: An employee starts on the 15th of a 30-day month. They are employed for 16 of 30 days, so their pro-rated base is 173.33 x (16/30) = 92.4 hours. Subtract any holidays and PTO that fall within their employment period to get available hours.

This matters more than most firms realize. Without pro-rating, new hires and departures will distort your utilization numbers for the entire team.

How to Calculate Utilization for Hourly Contractors

Hourly contractors do not have a fixed number of available hours because they only work when there is billable work to do. The standard utilization formula does not apply because there is no meaningful "available hours" denominator.

For hourly contractors, use a different formula:

Contractor Utilization = (Client Hours / Total Hours Worked) x 100

Total hours worked includes both client hours and internal hours (meetings, admin, coordination). This tells you what percentage of the contractor's working time is revenue-generating versus overhead.

What Is a Good Utilization Rate?

A healthy utilization rate for salaried employees at an agency is 65-80%. This is not a single number because the right target depends on the role, seniority, and responsibilities of each team member.

• Delivery staff (designers, developers, analysts): 75-85%. These roles should spend the majority of their time on client work. Below 70% signals underutilization or too much internal overhead.
• Project managers and account managers: 60-75%. These roles split time between client-facing work and internal coordination, so a lower target is expected.
• Senior leadership and principals: 40-55%. Partners and directors spend significant time on business development, strategy, and firm management. High utilization at the leadership level often means the firm is understaffed.
• Firm-wide average: 65-75%. If your overall average drops below 60%, you are likely overstaffed or undercharging. Above 85% firm-wide signals burnout risk and no room for growth.

According to Promethean Research's professional services benchmarks, the median utilization rate across agencies is approximately 60-65%, with top-performing firms reaching 70-75%. Firms consistently above 80% tend to experience higher employee turnover.

How to Set Utilization Targets

Set utilization targets per role, not per person. Each staff member should have a target that reflects their expected split between billable and non-billable work. This target becomes the benchmark you measure actual performance against.

• Set targets based on role responsibilities, not aspirational goals. A project manager who spends 30% of their time on internal coordination should have a 70% target, not an 85% target.
• Review targets quarterly. If someone consistently exceeds their target by 15% or more, they may be neglecting non-billable responsibilities or heading toward burnout.
• If someone is consistently 20% or more below their target, investigate whether they lack enough client work, need training, or have too many internal obligations.

The gap between actual utilization and target utilization is more actionable than the raw number. An employee at 72% against a 75% target is performing well. An employee at 72% against a 60% target is overloaded.

How to Calculate Available Capacity

Available capacity is the flip side of utilization. It tells you how many more billable hours a team member can take on before hitting their target.

Available Capacity = (Target Utilization % x Available Hours) - Actual Client Hours

Example: An employee has 160 available hours this month and a 75% utilization target. Their target capacity is 160 x 0.75 = 120 billable hours. If they currently have 95 hours of client work booked, they have 25 hours of available capacity.

This metric is critical for sales and resourcing. When a new project comes in, you need to know who has capacity to take it on without pushing anyone past their target. Negative available capacity means someone is overbooked.

How Does Utilization Affect Cost Rates?

Utilization has a direct impact on your cost rates, which in turn affect your pricing and margins. The cost rate is what an employee actually costs you per billable hour, and it increases as utilization decreases.

The cost rate formula for salaried employees:

Cost Rate = (Annual Salary / Work Hours Per Year x Overhead Multiplier) / Utilization Target

Example: An employee earns $95,000/year. With 2,080 work hours, their hourly wage is $45.67. Apply a 15% overhead multiplier for benefits and taxes: $52.52/hour. At 80% target utilization, their cost rate is $52.52 / 0.80 = $65.65/hour.

That utilization divisor is the critical piece. The same employee at 60% utilization has a cost rate of $52.52 / 0.60 = $87.53/hour. Lower utilization means each billable hour has to carry more of the employee's total cost, which compresses your margins on every project they touch.

This is why utilization tracking and cost rate calculations should be connected in your operational systems. A change in utilization immediately changes the profitability math on every project that employee is assigned to.

How to Handle the Current Month

The current month presents a unique reporting challenge. You have partial actuals (hours logged so far) and forecasted hours for the rest of the month. Using only actuals mid-month will show artificially low utilization.

The most accurate approach is to use the greater of actual hours or forecasted hours for each staff member on each project. If someone has logged 30 hours on a project but was forecasted for 45, use 45. If they have already logged 50 against a 45-hour forecast, use 50.

For past months, use only actual time entries. For future months, use only forecasted hours. This gives you the most realistic picture at any point in the reporting period.

Common Mistakes When Calculating Utilization

• Using gross hours instead of available hours. Dividing billable hours by 2,080/12 = 173.33 without adjusting for holidays and PTO will understate your real utilization. An employee with 120 billable hours against 173.33 gross hours shows 69%. Against 145 available hours (after holidays and PTO), the real utilization is 83%.
• Not separating client work from internal work. Utilization should only count hours spent on client-facing, revenue-generating work. Internal meetings, professional development, company events, and administrative tasks are important but they are not utilization.
• Ignoring the difference between salaried and hourly staff. Salaried employees have a fixed cost regardless of hours worked, so utilization measures efficiency of a fixed expense. Hourly contractors only cost you when they work, so the formula and implications are different.
• Setting one target for everyone. A senior partner and a junior designer have fundamentally different roles. A single firm-wide target will either set unrealistic expectations for leadership or leave delivery staff underutilized.
• Measuring utilization in isolation. High utilization with low margins means you are busy but not profitable. Always pair utilization with profitability metrics to get the full picture.

What to Track Alongside Utilization

Utilization is most valuable when paired with other operational metrics:

• Cost rate: What each team member costs per billable hour. Directly influenced by their utilization.
• Bill rate: What you charge clients per hour. The spread between bill rate and cost rate is your gross margin.
• Revenue per employee: Total revenue divided by headcount. Low utilization drags this number down.
• Project profitability: Revenue minus delivery costs per project. Utilization affects the cost side of this equation.
• Available capacity: Remaining billable hours before hitting target. Critical for resource planning and sales decisions.

A platform like ClarityDesk connects utilization tracking with cost rates, project profitability, and capacity planning automatically, so changes in one metric immediately flow through to the others.

Utilization Rate Quick Reference

Salaried employee formula: Client Hours / (Monthly Base Hours - Holiday Hours - PTO Hours) x 100

Hourly contractor formula: Client Hours / (Client Hours + Internal Hours) x 100

Monthly base hours: Annual Work Hours / 12 (default: 2,080 / 12 = 173.33)

Holiday deduction: 8 hours per statutory holiday in the month

Healthy range (delivery staff): 75-85%

Healthy range (firm-wide): 65-75%

Burnout warning: Consistently above 85-90%

Underutilization warning: Consistently below 60%

Ready to track your team's utilization? See how ClarityDesk calculates utilization, cost rates, and capacity in real time.