'Good' Employee Utilization Rates Are Rigged: Here’s Why

Employee utilization rates are those magical numbers that are supposed to tell you how productive your employees are.

You know the formula: total billable hours divided by total available hours (hours worked).

It all sounds pretty straightforward, right? The higher the number, the more satisfied you are with your employees’ productivity. Or at least that’s the idea.

In reality, “good” utilization rates are as reliable as a broken GPS sending you to a random address. They’re fake numbers that create the illusion of efficiency while hiding an imbalance in workload and misaligned priorities.

In fact, the obsession with perfect utilization rates (which implicitly forces employees to report 8 hours of work every single day and leads to skewed data) can create a culture where employees are chasing metrics instead of real productivity.

And you don’t want your employees being efficient at being stressed and burnt out.

If you are thinking what I’m thinking, stay with me. In this article, we are diving into why employee utilization rates are rigged, how such an innocent-looking number can ruin your employees’ work-life balance and creativity, and how you can use utilization rates to drive sustainable productivity.

Let’s roll.

What is an employee utilization rate?

Just a quick recap: here’s a quick & simple employee utilization formula:

Utilization Rate = (Total Billable Hours/Total Hours Worked) x 100

To give you an example, if your employee works 40 hours per week and spends 35 of those hours on billable tasks, the calculation would be:

Utilization Rate = (35/40) x 100 = 87.5%

This means that an employee has a utilization rate of over 87%, indicating that they spent most of their available time on billable work, which sounds awesome.

What is a good employee utilization rate?

Well, it depends.

Employee utilization rates vary across different industries and sectors. Here’s a quick overview of average utilization rates by industry:

• In professional services (such as consulting and legal services), utilization rates are between 70% and 85%, with top performers going above 80%. 
• In IT, IT experts generally report utilization rates ranging from 60% to 75%. These rates are determined by project scope changes and the (im)balance between client work and internal tasks.
• In manufacturing, utilization rates are measured in machine and labor usage and are between 70% and 80%.

These figures seem like solid benchmarks, don’t they?

In reality, these utilization rates are inflated, inconsistent across firms, and, frankly, made up to fit industry norms.

How so, you may be wondering?

Because these unrealistic, general industry benchmarks are based on inaccurate data. Here’s why.

Why most utilization rates are based on inaccurate data

There are a few reasons. Here are some of them:

• Companies do not understand the concept of delivery hours AND delivery margin. Many companies don’t seem to understand the difference between billable hours and actual delivery hours (I’ll explain this in detail later in the article). Just because an employee is scheduled to work on a project doesn’t mean every hour is billable, productive or value-generating. Additionally, companies often don’t account for the margin needed for project oversight, or training, which leads to a false view of efficiency.
• Companies are inconsistent with time tracking. Utilization rates are as accurate as the data they rely on, so daily (automatic!) time tracking is a must. If employees log their hours at the end of the day, week, or even retroactively for an entire month, they are estimating, not reporting precise numbers. Hence, the utilization rate figures will be unreliable and inconsistent.
• Companies tend to rely on a complicated time tracking system. Many companies rely on unnecessarily complex time tracking software that requires employees to manually track time, making data entry error-prone. Plus, when employees find time tracking tools frustrating or confusing to use, they avoid using them properly or rush through time entries, which leads to false data in reported utilization rates.

• Not all employees in companies track their utilization rates. A common issue is that not everyone in the company tracks their time equally; especially managers. And if managers or senior employees don’t log their hours, their time and effort won’t be included in the utilization calculations. This makes it seem like the rest of the staff is working at a higher utilization rate than they truly are, which creates a false picture of efficiency and productivity.
• There’s pressure to report “perfect” utilization rates. Some companies created a culture where employees are obligated to report 8 or more hours of work every single day (!), regardless of their actual workload, projects, and tasks. This unspoken pressure resulted in employees inflating their numbers to meet unrealistic expectations, making the data completely untrue and unreliable. Over time, the managers have the illusion of high efficiency and don’t face the real issues like overwork, inefficiency, and burnout.

But what does this all mean for your company and employees?

I’d say, ditch blindly following the industry-standard utilization rates.

Focus on creating realistic, sustainable goals and utilization rates that align with your company and its projects and circumstances.

You can do so by implementing automatic time tracking, and understanding the importance of delivery margins. After all, your job is to create a culture that values efficiency over appearances.

How to change your perspective on employee utilization rates

The first step towards being more realistic about utilization rates is listening to our 30% method course.

This isn’t another shameless promotion or me being biased.

This free course is designed to help you understand why time tracking is essential and how it connects to profitability. In the course, Niclas Preisner, our CMO, explains why you need to track time daily and how time entries are connected to utilization. He also explains how you can achieve a 30% net profit in your business by optimizing just 3 metrics.

The one-and-a-half-hour-long course will teach you how to:

If you don’t have over an hour to watch it all at once, you can review the utilization chapters.

And if that sounds like too much work, just keep reading this article.

I’ll cover the TL;DR on utilization rates. You’ll get clear, practical employee utilization tips you can apply immediately.

Let’s go.

#1 Think about the Delivery Margin

First, let’s talk about the Delivery Margin. It’s a key metric in evaluating the efficiency and profitability of delivery operations. The formula for calculating the Delivery Margin is pretty straightforward:

Delivery Margin = Gross Income - Delivery Costs

In simple terms, the Delivery Margin tells you how much profit is left after covering all delivery-related expenses. A higher Delivery Margin means a more efficient and profitable business, while a lower margin can indicate high operational costs that are eating into your earnings.

One way you can improve the Deliver Margin is by increasing Gross Income, meaning you need to improve the utilization rate.

Speaking of utilization rate, here’s a new formula I want you to remember:

Utilization Rate = (Delivery Hours/Capacity) x 100

This formula calculates the percentage of available capacity that is actually being used for delivering services (or products):

• There’s the total number of hours spent on actual deliveries. So, if your team spends 40 hours per week actively delivering goods, then the Delivery Hours = 40.
• There’s the total number of hours available for delivery within a given period or projects. This includes all scheduled working hours, so if your team has 50 hours available per week for deliveries, then the Capacity = 50.

#2 Mistakes to avoid when measuring the utilization rate

There are 3 most common mistakes most companies make while calculating the utilization rate:

• They miscalculate the number of total available hours (capacity), not subtracting sick days, vacation days, days for training, etc. Often, companies take the total contracted or scheduled hours as the basis for utilization calculations without accounting for actual working hours. Not subtracting sick days, vacation days, or public holidays from the available hours and overlooking time spent on training, and tasks that do not contribute directly to productivity, they assume a higher utilization rate than reality. This can lead to unrealistic expectations, and poor staff planning.
• Not including employees who don’t work on client projects. You create an inflated utilization rate if you exclude employees who perform essential internal functions (such as HR, finance, IT, marketing, or management). This can make it seem like your company is more efficient than it actually is. For example, if only billable employees are counted, the utilization rate might appear to be 80%, but if you include non-billable roles, the real utilization rate could be closer to 50-60%.
• Calculating total billable hours (invoiced hours) as delivery hours. Billable hours represent the time charged to clients, they don’t always reflect the actual time spent delivering services. If only invoiced hours are counted as delivery hours, extra work done outside the agreed scope may not be accounted for, meaning employees are working more hours than recorded, reducing profitability without the company realizing it.

How do you fix these mistakes?

It’s pretty simple:

#3 Focus on calculating delivery hours

One of the most important factors in measuring utilization rate is accurately calculating Delivery Hours; that’s the actual time spent delivering services.

Many companies make the mistake of using incomplete, outdated, or inaccurate data, which creates false utilization rates and lost revenue.

According to Niclas, to ensure that your Delivery Hours data is reliable, you must meet 3 key criteria:

1. Completeness, meaning every employee in a project should track time. If only a portion of employees track their hours, the data won’t represent the full scope of work done. Incomplete data leads to underreported utilization, making teams seem less productive than they actually are. Companies can assume they have extra capacity when, in reality, employees are overworked.

2. You need to have up-to-date data that’s logged daily. Employees who log their hours only once a week or at the end of a project may forget or misreport their actual hours. Delayed time tracking leads to guesswork, reducing data accuracy.

3. Accuracy, as logged hours should reflect the actual work done. If employees overestimate their hours, utilization rates may look artificially high, hiding inefficiencies. On the contrary, If employees underreport their hours (due to forgetting or trying to appear efficient), utilization will seem lower than it actually is.

What does this all mean?

Inaccurate delivery hours data can lead to billing errors, incorrect capacity planning, and unrealistic expectations.

You can prevent all these potential issues by introducing daily time logging to ensure that hours are recorded while the work is fresh. You and your team should use a desktop time tracking app with automatic logging features. Something like Memtime.

#4 Use Memtime

We at Memtime believe you should say “goodbye” to manual time tracking; it’s incomplete, inaccurate, or time-consuming. It leads to lost billable hours, incorrect utilization data, and miscalculated delivery margins.

Memtime is an automatic time tracking tool that gives you a clear and ACCURATE record of how your time is spent. If you want your team to focus more on efficiency and profitability, here’s how Memtime can help:

• Our app captures and displays all computer activity in 1-60 minute intervals, helping you visualize your entire workday. No more guessing how much time was spent on each task.

• You can convert captured activities into precise time entries and sync them with your project management software for invoicing and accurate project tracking.
• It even tracks VoIP phone calls from specific providers and iPhone call activity, recording every client interaction.
• Your recorded activities are visible only to you and stored offline on your computer.

By removing human error from time tracking, Memtime helps you:

I highly suggest you try Memtime for free for 2 weeks; no credit card required. Simply create a Memtime account (takes less than 10 seconds!), download the app, and start tracking.

Wrapping up

Employee utilization rates are anything but the magical numbers that tell you the story of employee productivity… They are full or “corrupted” data, and a whole lot of guesswork.

If you love playing detective, manually tracking hours, and pretending that every employee operates like a robot, keep doing what you’re doing. 🤷

Or you could ditch the outdated time tracking methods and let Memtime do the heavy lifting.

Try Memtime for free, and let’s bring some accuracy back to time tracking and utilization rates. No fake numbers. Just real data and real productivity.