Chargeable hours galore: it's busy season! Do you know how much of your work is actual going to make your firm money?
If you understand or have heard of "utilization rates" and "chargeability", then you likely work for a professional services firm.
If this is all new to you, the simple explanation is in order: consultants, auditors, lawyers and others bill their clients based on the number of hours of work performed.
Those who work by themselves, running their own business, make their own invoices and send them out the client, much like a private detective bills for services rendered - there's nothing complicated there.
In larger firms, however, you'll find a person or a whole department dedicated to sending out those invoices. They take all the information compiled by the personnel working on audits or lawsuits or whatever, and use it to make the invoice.
For example, if
- a partner works 2.5 hours on a job at two thousand bucks an hour,
- a manager works 10 hours at five hundred bucks an hour, and
- the fresh-faced kid puts in 100 hours at two hundred bucks an hour...
... you'll end up with an invoice for $30,000. Plus tax, naturally.
This all sounds rather straightforward, doesn't it? Of course, when accountants are involved it gets complicated in a hurry.
Now before I continue, remember that these rates are all fictional and used
because they simplify the math - some of those rates are off, some
might be close, and I don't know by how much, because everyone charges
for work at different rates!Moving right along, let's say you agreed with your client to charge a maximum of $25,000 for the job - assuming certain conditions. Now that $5000 difference had to come from somewhere.
There's two things to consider: what happens to the money, and what happens to the "charged hours". I'll deal with the money first, because I figure that appeals to general readers more - cash is interesting, right?
One of two things, or a combination of these two things have happened: you did $30k of work because your own staff was slow or it turns out that the job was more complicated than expected.
Depending on what happened, either the firm forgets about the extra five grand, or it determines if it can convince the client to pay. Or of course some combination of the two.
If the firm's staff screwed up, good luck getting the money back - the client won't care that the kid straight out of university photocopied everything backwards or set their laptop computer on fire.
If your client's books were flawed, however causing more work for the staff, then that's another story - the budget was agreed to based on certain assumptions, which usually involve the assumption that "everything is okay". If there's trouble, then a smart manager will inform the client about the nature of the problem, and also explain that additional work was necessary and what effect it will have on the final bill. Boom - you got your $5k and everyone's happy - except perhaps the client.
Now what happens if the firm can't get the money back? This is where you stumble into
the original reason behind this post: discerning the difference between chargeable and billable hours.
Chargeable hours are the time staff report to their company. If they say they did 55 hours on an audit, then that's the number of hours they charge
to their own firm. If, due to the billing arrangements, the company can only bill the client for 45 hours, then there will only be 45 billable hours to speak of.
Does it matter to the staff if there's a discrepancy?
Only to the extent that they want to show that they were doing "real" work, and not just 'running up the clock' by sitting around and wasting time. They don't actually make the billing decision in most normal firms so as long as they can show that they got work done as efficiently as possible, they're "safe".
For the manager, though, it does matter, because they are evaluated, in part, on the percentage of hours they actually earn back from the client. This ties in nicely to the next question you may have: why would staff willingly try and do 55 hours of work in a 40 hour work week, aside from the fact that their bosses need them to do it - hence the key word "
willingly"?
Simple answer:
they need 2500 chargeable hours to get their CA!
Once they get those hours, they're set for life.
Why do they keep pushing themselves after that point? Well by then they're usually more than halfway to being managers - hitting that rank takes fives years, and it'll take about three years to get your CA from the time you start work.
And managers, you see, are usually the lowest rank of employees who make billing decisions - asking themselves the question, "do we antagonize the client by billing them for extra time, or do we just 'eat' the time and forget about it?" As mentioned above, they look bad if they don't bill enough hours, but they also look bad if they leave hours "unbilled". It's a fine line to walk and one of the many reasons many drop out of the profession and go into "industry" down the road.
Are people trying to innovate away from the hours-based mentality to reduce the insanity? Yes, but there's no widespread trend going on, just isolated movements here and there. And there's no guarantee that all these schemes will reduce the madness. For example, I just read about
an American firm that decided to reduce the size of an hour to 54 minutes. Seriously.
There'll always be moves to change the system one way or another, although all that I've seen so far are essentially sophisticated ways of altering the semantics of how bills are issued.
In the end, people do work, charge their time, the client gets billed, the client pays, the people get paid, and the cycle repeats itself until the anti-capitalist forces destroy the System.
So, for the foreseeable future, nothing's changing - at least you can rest assured that knowing how this system works will be one nugget of knowledge which won't go obsolete within a week.