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Quantify Your Business’s Efficiency with the Efficiency Factor
Like everyone else in the A/E consulting industry, and I’m sure many other work arenas, I’ve worked my fair share of overtime over long nights and weekends. It’s always great to deliver for a client when they need you most. There is nothing better than to be able to stand behind your word when you tell them, “Yes, we can get that to you by then,” even when the sudden change in schedule or scope is caused by them. In the A/E industry it’s just a fact of life that every once in a while, or what may feel like all the time, overtime is an absolute necessity to be able to deliver to your clients and keep a competitive edge, but this all comes at a cost to our personal lives. In an ideal world we would be able to go to work and do what we love to do, while at the same time working a reasonable 40 hours a week. I don’t believe there is anything wrong with striving to work 40 hours a week so you can enjoy your free time at home, with your family or friends.
This article may not answer the question of how to become more efficient with your time so you can work 40 hours and still deliver for your clients, but we will introduce a ‘business metric’ that will help you quantify your efficiency on each individual project you and your company work on. If you employ this metric and track it on every project that comes through your door, you will know when to question the execution of a project or when to observe a success and learn from it. We all want to be more efficient with our time, so why not track efficiency rather than loosely estimate how efficient you and your business are.
The efficiency factor itself is quite simple. We define any time spent as overtime as inefficient. A project completed with no overtime spent is 100% efficient. A success is defined when a project is 100% efficient and the project makes its target profit and schedule. From a business standpoint, the last two targets are the most important of the three. Imagine a work environment cultivated on nailing targeted profit and schedule while being 100% efficient a majority of the time. If your business can create that scenario and sustain it, you will have a successful business and an extremely happy work force.
In the form of an equation, the efficiency factor is as follows:
Where total hours are defined as follows:
Keep in mind that A/E consulting industry employees are typically paid on a salary basis, but when we determine an individual’s billing rate we take that salary and divide it by 2,080 hours/year. That breakdown is based on a 40 hour work week for 52 weeks in a year. If you want to learn more about establishing billing rates, see Overhead, Profit, and Everything In Between.
The efficiency factor we introduce is based on hourly rates. We define overtime hours as any hours spent in a week over the regular 40 hours. Keep in mind that because the employees we are basing this on our salaried employees, meaning they are exempt employees, any time spent over 40 hours does not cost the company any additional money since our salary breakdown is based on the 40 hour work week. Salaried and except employees do not get directly compensated for time over 40 hours like an hourly non-exempt worker would.
At first blush with this idea, you may think that is not fair to not be compensated directly for your time, but if you work for a company that shares it profits and is open about the business’s financial successes and failures, you will realize that overtime for a salaried employee can be an opportunity to make a lot of profit on a project, while ensuring that your client receives what they need on time. The only true negative of working overtime is we are either not working efficiently throughout the week or we are working at peak efficiency and are just over-worked.
In order to easily employ the efficiency factor at your company, you first must have timekeeping software that all of your employees use to track their time on a per project basis, which most, if not all, A/E firms already do. The timekeeping software your business uses most likely is able to track overtime hours separately. Once that is in place, your time keeping software should allow you to set up custom and automated tracking of metrics on a project. It is best if your time keeping software can track both project fee and hours budgeted. Once in place, the most important thing is to utilize the information provided.
Let’s go through an example to put numbers to what we’ve been talking about. Company ABC has a project in house that has a fee of $14,000. Your company’s aggregate billing rate, not including profit, is $80/hour. Target profit is 10%, which equates to $1,400. Based on the project fee, target profit, and the company’s aggregate billing rate, the project has a budget of 157.5 hours. 157.5 hours was determined by taking $14,000, less the $1,400 target profit, giving us $12,600. We then divide the remaining $12,600 by the aggregate billing rate of $80/hour and we get 157.5 hours. Throughout the following weeks you have various employees who work on the project and keep track of their regular hours and overtime hours spent on the project. At the end of the project your company spent 140 regular time hours and 30 overtime hours. The total hours spent on the project is 170 hours, which is over the hourly budget, but the company only paid for the regular time hours. The profit earned on this project would be as follows:
The efficiency factor for this project would be as follows:
Looking at this example project the profit ended up being twice as profitable as planned and was completed 82% efficiently. Ultimately 100% efficiency is the goal, but whether 82% is good or not will be relative to all the other projects completed and what their efficiency factors are. If the company averages 82% efficiency on every project that comes through the door, then that is the standard that should be used to judge efficiency on a project. From there the company needs to try implementing different strategies to drive the average efficiency up, while remaining profitable and keeping clients happy. Overtime in this sense is difficult because on one hand we want to reduce that amount of overtime spent because of overall quality of life for you and your employees, but on the other hand when we look at this example we can clearly see that overtime hours can be very valuable in regards to a project’s profitability.
The goal should not be to completely eliminate overtime hours. In the A/E consulting world, we don’t always have the luxury of constant steady business. There are often slow times and blazing fast times and you have to make that money when you can, but every good company should strive to get at least 1% better all the time. The intent of the efficiency factor, as presented here, is to provide you with a litmus test as to whether your company is getting 1% better or are you just continuing to repeat the same mistakes or missing out on the same opportunities to improve over and over.
One disadvantage to the efficiency factor on a project to project basis is when you work on several projects at a time. If your company only gets to a project late in the week and spends all overtime hours on that project, then the project would appear to have been completed extremely inefficiently, but extremely profitably. Because of this scenario it may be best in some cases to track efficiency as a department or as a company for a given week and then relate that efficiency to how much profit was made on each individual project that week. The key with that approach is to figure out a way to have your timesheet and project management software automate the project and weekly timesheet metrics for you, so you’re not becoming inefficient yourself while trying to figure out how to be more efficient.
This article tells you how to track your efficiency but, if you’re interested in making yourself more efficient, you should check out Five Ways to be More Productive and Improve Efficiency. Also, for a big picture approach of how to operate your business more efficiently check out Finding Your Company’s Sweet Spot with The 80/20 Rule. For future articles on making your company more efficient and utilizing the numbers, subscribe to our Business Metrics learning series at PAEVEN.
Aaron Mitchell, PE, SE
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