Managing Overhead: Utilization versus Chargeability

Utilization—hours or payroll dollars—which one tells the story when it comes to managing labor-based overhead (time spent on non-project-related activities)?

A primary approach used by architecture and engineering firm managers to monitor chargeability is reviewing time sheets or time reports for time put to projects. But what if you don’t look at time sheets but you do review the income statements for the firm, the business unit or the team—can you monitor chargeability as well using information on the income statement?

One of the most common entries we see on income statements is raw salaries or wages as a single line item under “Expenses” (or Overhead), which means you have no way of knowing without going back to the time sheets or the time report what the chargeability is.

However, if raw salaries are split between direct and indirect labor costs on the income statement, then you have what you need at your fingertips.

• Direct labor is that portion of raw salaries that can be attributed to projects or the cost of goods sold.
• Indirect labor is the remaining portion of raw salaries that can be attributed to overhead expenses (non-project-related activities).
• Chargeability (payroll dollars) = direct labor in $/(direct labor in $ + indirect labor in $).

The danger is that you can fall into the trap of believing that utilization is not a problem for your firm even though your profits are not where they should be. The main culprit is that in most AE firms the most expensive staff members are the least chargeable.

This is just one example of what you can learn in Financial Management For  AEC  Firm Leaders. This hands-on two-day workshop is extremely useful for those who are looking for all levels of financial information – from understanding basic financial indicators your firm should be tracking to interpreting predictive financial metrics for more accurate financial forecasting.  Fortunately, a few tweaks in some key financial metrics can dramatically reduce the negative cash flow and time it takes to generate positive cash flow in a growing firm.