Cost Accounting in Local Government

Available versus Billable Hours

It is important to know the available hours of our employees, so that we can spread their total cost over these hours. Consequently, the example went on to divide the total dollar cost of our fictitious employee by the above available working hours for a resulting fully-burdened hourly rate. Putting this exercise in context, the authors (of which I was one) developed this example to show government finance professionals that the total hourly cost of an employee is NOT the annual salary divided by 2,080.

On page 31 of the League of California Cities publication “Cost Accounting for California Cities (1981),” we proposed the following table to calculate the available working hours of our fictitious employees:

WORK DAYS

WORK HOURS

Total 260 2,080
Less
Holidays (20) (160)
Vacation (10) (80)
Sick Leave (8) (70)
At Work 222 1,770
Less, Coffe Breaks (111)
Available Work Hours 1,659

As the table illustrates, a typical employee can be expected to work, at most, only 1,659 hours over a year. In addition, we were being really radical by subtracting the time for coffee breaks!

Over the years RCS (formerly Management Services Institute) has refined the above approach by further subtracting the time for training and, my favorite, “startup and wind-down time” which recognizes that employees rarely start work or stop work without “transition” time.

The available work hours model is in use by many governmental agencies. However, it may not be the most accurate measure of the time that an employee spends on service related work. Critics of the above model have mentioned staff meetings, phone calls, email replies and, their favorite, replying to consultant questions about how they spend their time, as refinements that are necessary to improve the accuracy of the above model.

My usual response is to describe the above model as a “conservative” method for determining the fully-burdened hourly cost of an employee. My feeling is that a more accurate method would only increase the hourly rate so that using this method insured that a customer was not overcharged. I continue to follow that philosophy today because…

Several years ago I got a call from a planning director who had gotten approval to operate his department as an enterprise fund. He wanted me to create the procedures that would make the move successful. I made my list of journal entries and explicit subsidies that had to be addressed and also discovered that the department had been keeping records for years of time spent on the various applications by the professional planning staff.

Being the numbers guy that I am, the records had to be downloaded into a format that would allow me to sum the billable hours by staff position over a period of time. Pandora’s Box – I discovered that each staff person had different amounts of billable time for the period and that annualized, none of them had more than 50% of their hours billable.

Billable hours is a useful management tool in the private sector where many professionals are given a salary based on achieving a certain number of billable hours for the year. The consequence of not meeting their goal is either “no salary increase” or a salary cut. Likewise, exceeding one’s goal is a necessary precondition to a salary increase. In the public sector, we have traditionally shielded our staff from any performance measure. Even the recent movement for performance measurement in government does not go to the extreme of collecting billable hour data for salary purposes.

The result of opening this “box” was that staff became more aware of how they spent their time, modified the time coding to make it more useful and recognized that billable hour goals served as a psychological incentive to increase billable hours. However, the fully-burdened hourly rates using billable hours could not pass the “gulp” test and the city manager, who had initially encouraged the enterprise fund approach, lost his nerve.

Would I recommend capturing the billable hours of your professional planning and engineering staff? Billable hour records are not necessarily accurate, as the employee often fudges the numbers to show what he/she thinks the supervisor is hoping to see. Supervisors, on the other hand, rarely want to spend the time to insure that the time records are meaningful and to review them for anomalies, especially if the approach is recommended by another department. Therefore, unless the approach is understood by the applicable department head and mandated by your governing board and manager, I would avoid it like the plague.

Nevertheless, I thought you should know about it in case someone asks you whether it’s a good idea.

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