The situation
The partners watch two numbers: revenue and how busy people are. Both are up. The agency’s standard rate is $160 an hour and an hour of work costs it $105, so a full team should mean a good quarter.
It does not, and the income statement cannot say why. It shows total fees and total payroll. It does not show what each hour earned.
What each hour earned
Divide the revenue of each type of work by the hours actually worked on it. Retainer clients earn $158 per hour, close to the standard rate. Fixed-fee projects earn $120. They used 44% of the agency’s hours and left $15 of margin per hour.
| Type of work | Hours worked | Revenue | Revenue per hour worked | Margin per hour |
|---|---|---|---|---|
| Retainer clients | 2,400 | $380K | $158 | $53 |
| Fixed-fee projects | 3,100 | $372K | $120 | $15 |
| Hourly projects | 1,500 | $207K | $138 | $33 |
| Total | 7,000 | $959K | $137 | $32 |
Where the hours went
The fixed fees were priced for about 2,325 hours at the standard rate. The projects took 3,100: 775 hours more, 33% over. At the standard rate those extra hours were worth about $124K, and the agency gave them away.
Nobody decided to do that. The scope grew a little in every meeting, and no one was comparing hours used against hours sold while the projects were running.
What management can do with it
- Track hours used against hours sold on every fixed-fee project, every week, and review any project above 80% of its hours.
- Write down what is included in each fixed fee, and price additions separately before doing them.
- Price the next fixed-fee project from the hours similar projects actually took, not from the last quote.
- Decide how much fixed-fee work the agency wants at this return.
The management questionWhat does each hour of our people earn, by client and by type of work?