In our previous article, “Calculating cost price: start with working days”, we explained how to convert calendar days into working days. However, this does not immediately make it clear how many hours are actually available for productive work.
To calculate costs accurately, it is important to look beyond simply the hours that staff are present. After all, not every hour spent at work is immediately billable or can be used productively. Consider, for example, meetings, administrative tasks, internal coordination, travel time, waiting times, training, maintenance or other indirect activities.
In this article, we explain how to distinguish between hours worked and productive hours, why this distinction is important, and how to use it to calculate a more realistic cost price and hourly rate.
From working days to hours worked
In the previous article, we showed how annual costs can be broken down into costs per working day. This provides an initial practical insight into the minimum amount a business needs to earn each day in order to break even.
To further refine the cost calculation, the next step is to convert these working days into hours. This makes it clear how many hours staff are, in theory, available to carry out work.
If we assume an average of 220 working days per employee per year and an 8-hour working day, this means:
220 days × 8 hours = 1,760 hours worked per year
These 1,760 hours do not automatically form the basis for your cost calculation. This is because some of this time is spent on work that cannot be directly allocated to clients, projects or assignments.
What are productive hours?
By ‘productive hours’, we mean the hours that can be directly allocated to work that can be charged to a client, assignment or project.
Examples of non-productive hours include:
- pauses;
- internal consultation;
- administration;
- courses;
- planning and coordination;
- journey time;
- waiting times;
- in-house projects;
- general organisational activities.
Although this work is necessary for the running of the business, it cannot usually be invoiced directly to a client or for a specific project.
Why productive hours are important
Many organisations still base their hourly rates on contract hours or hours worked. As a result, the actual cost is often underestimated.
If indirect hours are not adequately taken into account in the calculation, this may lead to the following problems, amongst others:
- sales or hourly rates that are too low;
- underestimation of labour costs per production hour;
- loss-making contracts;
- wrong (investment) decisions;
- a distorted picture of profitability.
In hourly-based businesses in particular, even small differences in productivity have a direct impact on profitability.
How do you work out the number of productive hours?
The calculation is usually carried out in three steps.
Step 1: work out the number of hours available
Building on the previous example:
220 working days × 8 hours = 1,760 hours worked
Another way to calculate the hours worked is based on the contract hours.
Assuming a full-time working week of 8 hours per working day, 2026 has a total of 261 working days (365 calendar days minus 104 weekend days). This amounts to 2,088 contract hours per year (261 × 8 hours).
The hours not worked must then be deducted from these contracted hours:
- 6 public holidays × 8 hours = 48 hours
- An average of 35 days’ leave × 8 hours = 280 hours
Total absence: 328 hours.
That leaves us with:
2,088 − 328 = 1,760 hours worked per FTE per year.
Step 2: determine the percentage of indirect time
Next, you determine which proportion of the hours worked is not directly productive or billable.
In a typical company that operates on an hourly basis, this might consist of, for example:
- 5% breaks and interruptions;
- 4% consultation, administration and internal coordination;
- 3% training programmes, planning and other indirect activities.
Total indirect time: approximately 12%.
Step 3: Calculate the productive hours
1,760 hours worked × 88% productivity = 1,549 productive hours
For the purposes of this example, we have rounded the figure to 1,550 productive hours per employee per year.
So, whilst the employee is present for 1,760 hours, they are only directly productive or billable for 1,550 hours.
Detailed breakdown of the example hours-based scheme
We’ll expand on the example from the previous article.
Situation
A company that operates on an hourly basis has:
- 10 staff members;
- total annual staff costs of €600,000;
- annual overheads of €250,000;
- annual accommodation and IT costs of €150,000;
- total operating costs of €1,000,000;
- 220 working days;
- 1,760 hours worked per employee;
- 1,550 productive hours per employee.
Calculation of cost price per production hour
The company’s total annual costs amount to €1,000,000.
When these costs are spread across the hours worked, the result is:
10 employees × 1,760 hours worked = 17,600 hours worked
€1,000,000 / 17,600 hours = €56.82 per hour
At first glance, this seems like a logical internal cost rate. In reality, however, only some of these hours can be directly allocated to billable work.
That is why the calculation must be based on productive hours:
10 employees × 1,550 productive hours = 15,500 productive hours
The actual cost is therefore:
€1,000,000 / 15,500 hours = €64.52 per productive hour. This represents a difference of approximately 13.5% compared with the calculated cost price of €56.82 based on hours worked.
When an organisation bases its calculations on hours worked rather than productive hours, the cost price is therefore systematically underestimated. This often results in rates that do not adequately cover costs.
Productivity varies greatly from sector to sector
The percentage of productive hours varies considerably depending on the sector, the type of work and the organisational structure. For this reason, there are no fixed standards in practice, but rather ranges that are used as guidelines.
In companies that charge by the hour, productive or billable hours often account for between 65% and 85% of the total hours worked. The exact ratio depends, amongst other things, on the nature of the services provided, the degree of automation, the amount of internal coordination and the complexity of projects.
It is important to distinguish between the productivity of individual staff members and that of the organisation as a whole. For example, a consultant or production worker may be billable for 85%, whilst the organisation’s overall productivity is lower due to management, sales, planning, administration and internal support.
Furthermore, higher percentages are not automatically better. Organisations that systematically strive for very high productivity often face a greater risk of:
- staff burnout;
- loss of quality;
- not enough time for innovation;
- less focus on training and development;
- increased workload;
- less flexibility in planning.
Optimal productivity therefore varies from organisation to organisation. For example, a consultancy firm that focuses heavily on knowledge development and internal coordination will have a different level of productivity to a highly standardised service provider.
Benchmark figures are therefore primarily intended as a guide. It is important to analyse your own organisation periodically and gain an understanding of the ratio between direct and indirect hours.
Improving productivity
Increasing the number of productive hours often has a direct impact on the operating profit.
In our example, an increase in productivity from 88% to 90% means:
1,760 hours worked × 90% = 1,584 productive hours
With 10 staff members, this results in:
10 × 1,584 = 15,840 productive hours
Compared with the original situation of 15,500 productive hours, this results in 340 additional productive hours per year.
These extra hours could, for example, be used for:
- additional turnover;
- higher billability;
- greater capacity without extra staff;
- shorter lead times;
- less overtime;
- better planning;
- higher profitability.
When these extra hours are fully billable, this often has an immediate positive impact on the organisation’s profitability.
That is precisely why productivity is often a key performance indicator for profitability and growth in companies that operate on an hourly basis.
Conclusion
To calculate costs reliably, it is not enough to look solely at contract hours or hours worked. The actual available productive hours provide the correct basis for determining costs and hourly rates.
By gaining an understanding of indirect time and productivity, you can prevent rates from being set too low and gain a more realistic picture of your organisation’s profitability.
In practice, it turns out that it is precisely this step that often makes the difference between focusing on turnover and focusing on return.
In the following article, we will look in more detail at the application of productive hours and the comparison of actual productive hours against the standard.