How is utilization calculated?
Divide billable hours by available hours for the same period, then multiply by 100. Available hours are the hours a person is paid to work, not the hours they happened to log. A salaried employee on a standard schedule has about 173.3 available hours per month, which is 2,080 hours per year divided by 12.
Agencies disagree on what to subtract from the denominator. The strict version leaves the 173.3 hours alone. The lenient version removes paid time off, public holidays and sick days first, which raises the reported rate by 5 to 10 points without changing anything about the work. Pick one method and apply it to every person, or the numbers will not compare.
Billable hours should be hours that a client can be charged for under the engagement, whether or not they end up invoiced. Hours on a fixed-fee retainer count as billable even when the retainer is already consumed. Whether those hours were actually recovered is a different metric, the realization rate.
What is a good utilization rate for an agency?
A healthy marketing agency runs between 60 and 70% billable across the whole team, with delivery staff higher and management lower. Rates above 85% for an individual are usually a sign that time is being logged to clients that should not be, or that the person has no slack for training, sales support and internal work. Rates below 50% for delivery staff mean the agency is paying for capacity it cannot sell.
Benchmarks vary by role because the roles are paid to do different things. Typical targets for a 10 to 50 person agency:
- Specialists and producers (paid media, SEO, design, development): 70 to 80%
- Account managers and project managers: 55 to 70%
- Creative directors, heads of department: 40 to 60%
- Founders and principals: 10 to 30%
- Operations, finance, sales: 0%, and they should not be in the denominator
Why does utilization go wrong in agencies?
The most common failure is a bad denominator. Agencies count only logged hours as available, so a person who logs 100 billable hours and nothing else reports 100% utilization while actually working 173. The fix is to derive available hours from the employment contract, not from the timesheet.
The second failure is treating utilization as a target rather than a reading. When staff are told to hit 75%, they hit 75%, by moving internal time onto client codes. Realization then falls and nobody can explain why the retainers are unprofitable. Utilization is useful for capacity planning and hiring decisions, and much less useful as an individual performance metric.
The third failure is averaging across roles. A 65% agency-wide figure can hide a design team at 90% and an account team at 40%, which are two different problems needing two different actions. Verbial reports utilization per person and per department from approved time entries against each person's contracted hours.
How does utilization relate to capacity and pricing?
Utilization sets the ceiling on revenue per head. A specialist with 173.3 available hours at 75% utilization produces 130 billable hours per month, which at a $150 blended rate is $19,500. Multiply that across the delivery team and you have the agency's maximum revenue from time, before any write-offs.
It also drives pricing. If the agency plans at 65% and the team lands at 55%, every hour sold has to carry more overhead than the rate assumed. Agencies that price retainers from a blended rate should recheck that rate whenever utilization moves more than 5 points.
Worked example
A 12-person agency has 10 people in delivery and account roles and 2 in operations. Each delivery person has 173.3 available hours per month, so the delivery pool is 10 × 173.3 = 1,733 hours. In August the team logged 1,127 billable hours. Utilization is 1,127 ÷ 1,733 × 100 = 65.0%. Broken out by role, the 6 specialists logged 780 hours against 1,040 available (75.0%), and the 4 account managers logged 347 hours against 693 available (50.1%). At a $150 blended rate the 1,127 billable hours represent $169,050 of billable value for the month, of which the $15,000 retainers and hourly invoices will recover some fraction, measured by the realization rate.
Questions
Should paid time off be removed from available hours?
Either method works as long as it is applied consistently across the team and across months. Removing PTO gives a truer picture of how a person spent the hours they were actually present. Leaving it in gives a truer picture of what the agency paid for. Most agencies report both, labeled clearly.
Is 100% utilization possible?
Not for any sustained period. Every employee needs time for internal meetings, training, admin and sales support, which is why 75 to 80% is the practical ceiling for delivery staff. A person reporting 100% is almost always logging non-billable time to client codes.
What is the difference between utilization and realization?
Utilization measures how much available time was billable. Realization measures how much of that billable time was actually invoiced and collected at standard rates. An agency can have high utilization and low realization at the same time, which usually means the team is working hard on retainers that are over-serviced.