Why staff use up assigned hours, what’s the risk and what can you do
How to separate Contingency and Profit when estimating Fees
Have you noticed that staff often use all their assigned hours? I believe this is because we are perfectionists and pan out the work to fit the hours given. Remember how much you get done the day before going on holiday when you give yourself less hours!
In the 3. Staff Efficiency article I discussed the benefits of staff seeing the remaining hours in their timesheet, to ensure an early warning if more hours are needed. This is good, but if staff are working to the assigned hours, any delay will eat into your profit.
I suggest you hold back a few hours as contingency rather than assigning all hours to staff.
You may feel contingency is covered by the charge rate being more than business costs, but I recommend you separately them…
a) Profit, achieved by billing (charge) rates being more than ‘survival’ (cost) rates, and
b) Contingency, achieved by ‘holding back’ a few hours as a $ amount.
So how is this done?
- Estimate the Hours for Roles or Staff working on each Stage.
- Multiple by rates to get the Planned Charge.
- Determine the Fee by % of the contract, # drawings, gut feel, and to be competitive etc.
- Check that Fee – Planned Charge is positive which is the Contingency, and adjust if not!
- During the project, track Contingency as Fee – Forecast Ie: Fee – (Actual Charge + Remaining Charge).
Staff will likely complete their work in the assigned hours thanks to the ‘pre-holiday syndrome’ but, if needed you have some hidden Contingency to minimise eating into profits.
ASIDE NOTE…
eTrack’s Contingency is different to Margin and Markup accounting terms defined as follows…
Contingency = Fee – Charge (eg $100 – $90 = $10)
Margin, Markup or Profit = Fee – Cost (eg $100 – $80 = $20)
Contingency % = Contingency / Fee (eg $10*100/$100 = 10%)
Margin % = Margin $ / Fee (eg $20*100/$100 = 20%)
Markup % = Margin $ / Cost (eg $20*100/$80 = 25%)
