Available versus Billable Hours – Redux

Nine years ago, I wrote the following article. Since the concepts are just as relevant today, I’m reprinting it with some editorial changes to make it more current. Enjoy…

On page 31 of the League of California Cities publication “Cost Accounting for California Cities (1981),” we (I was one of the authors) proposed an early version of the following method for calculating the available working-hours of staff:

WORK DAYS WORK HOURS

Starting Point 260 2,080

Less: 

Holidays (20) (160) 

Vacation (10) (80) 

Sick Leave Used (8) (70)  

Training (2) (16)

Subtotal At Work 220 1,754   

Less,

Morning/Afternoon Breaks (110) 

Start-up & wind-down time (55)

Available Work-Hours 1,589

For this “given” mix of benefits, a typical employee could be expected to work, at most, only 1,589 hours over a year.

The available work-hours model is now 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.

Since RCS divides the total cost of a staff position by the “available work-hours” to calculate the fully-burdened hourly rate (FBHR) of an employee, my usual response is to describe the above model as a “conservative” method for determining the FBHR. My feeling is that a more accurate method would increase the hourly rates so that service charges would also increase.

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 the “billable hours” approach in case someone asks you whether it’s a good idea.

It is important to know the available work-hours of our staff, so that we can spread their total cost over these hours. Putting this exercise into historical context, this example was prepared to show government finance professionals that the total hourly cost of an employee is NOT the annual salary divided by 2,080. (Yes, that’s how it used to be done!)