Productivity: Are You Getting the Hours You’re Paying For?
Your team can be busy all day without all of that time actually being productive.
In a labour-based business, one of the simplest numbers you can understand is Productivity. It tells you how much of the time you pay for is actually being converted into billable work.
The calculation is simple:
Hours Billed ÷ Hours Paid = Productivity %
If an employee is paid for 38 hours in a week and you can bill customers for 28 hours of their time, the calculation is:
28 ÷ 38 = 73.7% Productivity
That means roughly 74% of the hours you paid for became billable hours. The remaining 26% may have been spent on administration, travel, annual leave, sick leave, quoting, meetings, training, cleaning, waiting for materials, rework, downtime, not working, or anything else that was not charged to a customer.
Some of those things are necessary. The point is not to get rid of every non-billable hour. The point is to understand where the time is going, whether the result makes sense, and what you can do to improve it.
What Is a Billable Hour?
A billable hour is basically an hour you can charge to a client.
For do and charge work, this is normally straightforward. If someone works eight hours on a job and you charge the customer for eight hours, those are eight billable hours.
Quoted work is a little different. If you quote a job and allow ten hours of labour, then those ten hours are effectively the billable hours available on that job, regardless of how long the job eventually takes.
If the job takes eight hours, you have created some efficiency. If it takes fourteen hours, you have used fourteen paid hours to create ten billable hours.
The same logic applies to quoting. If you charge the client for the quoting time, it can be billable. If you do not charge for it, it is non-billable.
This is important because we are not really trying to measure whether people look busy. We are trying to measure how many of the hours the business is paying for can actually be recovered through the work being sold.
What Are Non-Billable Hours?
Hours You Can Charge
A billable hour is an hour you can charge to a client. For do-and-charge work, that is usually the actual time worked. For quoted work, it may be the labour hours allowed for in the quote.
If you allow 10 hours in a quote and the job takes 8, you have created efficiency. If it takes 14, you have used 14 paid hours to create 10 billable hours.
Hours You Cannot Charge
Non-billable hours are paid hours that cannot be directly charged to a customer.
They may include travel, meetings, training, admin, collecting materials, rework, downtime or other activities needed to run the business.
Non-billable hours are paid hours that cannot be directly charged to a customer.
Every business has some non-billable time. People need meetings, training, travel, administration, cleaning, time to collect materials and all the other things required to run a business properly.
The issue is not that non-billable time exists. The issue is when you do not know how much of it there is, where it is going, or whether it is reasonable.
If productivity is lower than expected, you can start asking much better questions:
Is too much time being spent travelling?
Are jobs being scheduled efficiently?
Is rework consuming hours?
Are we not invoicing jobs sometimes?
Are employees waiting for materials, information or decisions?
Are meetings and administration taking too much time?
Do we not see all timesheets before invoicing?
Are we taking hours off invoices for ‘fairer client bills’?
Are we allowing the right number of hours on jobs?
Are our systems helping the team work efficiently?
Are we actually short of staff, or are we simply not getting enough from the capacity we already have?
That last question is particularly important because one of the most common reactions when a business gets busy is to hire another person.
Sometimes that is exactly what needs to happen. But often, adding another employee simply adds more cost to the same problem.
If scheduling is poor, people are waiting around, jobs are being under-allowed, systems are clunky or the business is carrying too much non-billable time, putting another person into that system does not automatically create more output. It actually makes everyone slower and less interested in working effectively. Work expands to fit the time available. Add more resource in this case and the work will all take longer so people don’t feel bored.
We actually find that in plenty of businesses, output increases after the number of staff decreases. It sounds backwards, but business owners often try to solve operational problems by adding more people when what really needs improving is how the existing capacity is being used.
Capacity Isn't How Many People Work for You
This is where a lot of businesses get it wrong.
Capacity is not simply the number of people you employ. Capacity is the number of hours you can actually convert into billable work.
You can have ten people on the tools and still have less usable capacity than another business with seven if the second business is much better at converting paid hours into billable hours.
No joke, we have a client that went from under $1 million in annual income to more than $4 million with essentially the same productive team. There were no extra people on the tools creating that growth.
The growth did not come from simply putting more people on the tools. It came from improving the way the existing capacity was used: better systems, less waste, stronger job flow, better value creation and a culture that understood efficiency.
A lot of things changed. We worked on LEAN principles, systems, reducing waste, creating more value from the work being performed and changing the culture around efficiency, lots of small changes in the same direction adding up big time.
Importantly, the conversation was not about expecting people to work at 120% all the time. It was about asking a much better question:
How do we use the hours we are already paying for better?
That is really what productivity is about. It is not about flogging people. It is about removing the things that stop good people from producing the work the business needs. It is also about finding the work that people are happy to pay for.
Why Knowing Your Productivity Matters
There are two main reasons productivity is worth measuring.
The first is that it gives you something measurable that you can improve.
If productivity is 68% this year and you can move it to 72% without adding staff, you have created more capacity from essentially the same cost base. You can then track whether changes to scheduling, quoting, systems, training, job preparation or team structure are actually making a difference.
It is also useful when looking at individual employees or crews. Productivity is not the only measure of whether someone is a good employee, but it can be a very useful one when viewed with the right context.
A person who consistently converts more of their paid hours into good-quality billable work can create a materially different financial result for the business.
For example, assume an employee is paid for 38 hours per week, 52 weeks per year, and the business generates an average True Hourly Profit of $150 for each billable hour.
At 80% productivity, that employee creates:
1,976 paid hours × 80% × $150 = $237,120 gross profit per year
At 70% productivity, the same employee creates:
1,976 paid hours × 70% × $150 = $207,480 gross profit per year
That's a difference of $29,640 per year from one employee.
What looks like a relatively small movement in productivity can create a very large change in gross profit when it is multiplied across a team.
On the surface, 80% versus 70% does not sound enormous. Across a team, it can be.
With six productive employees, that same ten percentage-point difference is almost $178,000 of gross profit per year.
Gross profit in this case goes straight to the bottom line. So that’s also a Net Profit increase of $178,000.
That is why relatively small movements in productivity can have a surprisingly large impact on the business.
Productivity Also Changes Your Break-Even Rate
The second reason is probably even more important.
Knowing your productivity allows you to properly calculate your break-even hourly rate and the target hourly rate required to make the net profit you want.
A common mistake is to calculate hourly rates using the number of employees, or the total hours those employees are paid for.
For example, a business might have six full-time employees and assume:
6 employees × 38 hours × 52 weeks = 11,856 hours available
Then it divides its costs by those 11,856 hours.
The maths looks fine. The problem is that the business cannot actually bill all 11,856 hours.
If you calculate your hourly rate using all 11,856 paid hours, you are spreading your costs across hours that you cannot actually sell. At 70% productivity, only 8,299 hours are available to recover those costs.
If productivity is 70%, it only has:
11,856 × 70% = 8,299 billable hours
Those missing hours still cost the business money. The wages still get paid. The vehicles still run. The rent still gets paid. Insurance, software, administration and everything else still exists.
But there are fewer billable hours available to recover those costs.
This is how a business can have a very busy year and still make a loss.
The hourly rate looked profitable because it was calculated using hours that were never actually available to sell.
A Small Change in Productivity Can Create a Very Different Result
Here is a simplified example.
Assume a business has six productive FTEs, each paid for 38 hours per week. The business generates an average $150 of True Hourly Profit (THP), and it has approximately $1.206 million of annual costs that need to be funded by that gross profit.
The only thing we will change is productivity.
A Small Change in Productivity Can Create a Very Different Result
| Business A | Business B | |
|---|---|---|
| Productive FTE | 6 | 6 |
| Paid hours per year | 11,856 | 11,856 |
| Productivity | 75% | 65% |
| Billable hours | 8,892 | 7,706 |
| True Hourly Profit | $150 | $150 |
| Annual gross profit generated | $1,333,800 | $1,155,900 |
| Annual costs to cover | $1,206,000 | $1,206,000 |
| Net Profit/Loss | $127,800 profit | $50,100 loss |
Same number of employees.
Same hours paid.
Same $150 generated per billable hour.
Same annual cost base.
One business makes about $128,000.
The other loses about $50,000.
The difference is productivity.
This is why simply saying “we have six tradespeople” does not tell you much about capacity. What matters is how many billable hours those six people actually create.
And it is also why setting an hourly rate based on FTE alone can be dangerous. If the rate assumes that every paid hour can be billed, it will normally be too low.
You can be flat out all year, have a full order book, keep everyone busy and still discover at the end of the year that you lost money.
Turning Productivity Into a Break-Even Rate
Find Billable Hours
Find Break-Even
Set a Profit Target
Once you know your productivity, you can estimate how many billable hours the business actually has available.
The calculation is:
Paid Hours × Productivity % = Billable Hours
You can then calculate how much each of those billable hours needs to recover.
A simple break-even calculation is:
Annual Costs ÷ Billable Hours = Break-Even Hourly Rate
Then, if you want the business to produce a particular level of net profit:
(Annual Costs + Target Net Profit) ÷ Billable Hours = Target Hourly Rate
That second number is important because breaking even is obviously not the goal of being in business.
If you want the business to produce $300,000 in net profit, that profit has to come from somewhere. Your productive capacity has to generate enough to cover the costs of running the business and the profit you want to make.
That does not necessarily mean the number calculated here becomes the exact hourly rate you put on an invoice. Businesses recover profit in different ways. You may make money from labour, materials, subcontractors, fixed-price work or a combination of all of them.
What it gives you is a financial benchmark. It tells you what the business needs to generate from the billable capacity it actually has, rather than from an imaginary number of hours that happen to appear on a payroll report.
Productivity Is a Driver, Not Just a Score
This is why we treat productivity as more than another KPI on a dashboard.
It connects what happens operationally in the business with the financial result.
If productivity improves, you have more billable capacity without necessarily increasing wages or headcount. That can reduce the break-even amount required from each productive hour and increase the gross profit the existing team can generate.
If productivity falls, the opposite happens. There are fewer billable hours available to recover the same costs, so every hour you do bill has to work harder financially.
Once you understand that relationship, productivity becomes useful for decisions around staffing, scheduling, quoting, pricing, systems, job selection and even which people or crews are creating the strongest results.
That is what we mean when we talk about profitable capacity. It is not simply how many people you employ or how many hours you pay for. It is how many of those hours can actually be billed and what the business earns from those hours.
Calculate Your Productivity
Enter your paid hours and hours on jobs below. The calculator will work out your productivity for you.
Productivity Calculator
Enter the hours you paid your team for and the hours they spent on jobs. We'll calculate the percentage of your paid labour that was productive.
What Does This Number Mean?
This is the percentage of the paid labour hours you converted into billable hours.
Do not get too hung up on whether the number is “good” or “bad” on its own. Different businesses operate differently. What matters is understanding your number, tracking it consistently and working out what is causing it to move.
Once you know it, you can start asking a much more useful question:
What can we change to get more value from the hours we're already paying for?
