South African Association for Consulting Engineers Survey of Manhour Utilisation Rates and Overhead Factors

MIS SURVEY: July - December 2001

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Introduction
We were requested by the South African Association of Consulting Engineers (SAACE) to provide feedback on manhour utilisation rates and overhead factors weighted according to firm size and job category. In essence the objective of the analysis is to provide updated multipliers when determining hourly cost rates and to compare these cost rates with the Gazetted multipliers and the maximum hourly rates as Gazetted.

Method
SAACE provided Industry Insight with results of a membership survey, which was done in conjunction with their regular bi-annual SAACE MIS Survey for the period July December 2001. In total 89 surveys were returned of which 80 were used to compile the manhour utilisation rates and 58 to compile the overhead factor, with weights calculated accordingly. Since results had to be weighted according to the size of the firm (based on employment) returns can be categorized as follows: Table 1: Survey Response rate Category A B C D E TOTAL Employment distribution > 500 100 - 499 50 - 99 10 - 49 < 10 Number of firms used to calculate utilisation rates 3 3 8 35 32 81 Number of firms used to calculate overhead factor 2 3 7 23 23 58

Emphasis was placed on quality rather than quantity, resulting in the exclusion of obvious outliers or misinterpretations. Note that the number of firms employing less than 50 people account for 84% of the surveys returned, but this has a relatively small weighting when the analysis is based on the number of people employed. The analysis required two separate calculations namely a) manhour utilisation rates and b) the nett overhead factor.

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Manhour utilisation rates: The manhour utilisation rate is defined as follows: Manhours spent on fee-earning work / Nett available hours after deducting leave, etc. Nett available hours are generally accepted by the industry as 1760 hours per year, although in previous studies chargeable hours ranged from 1200 to 1700, depending on staff category. Overhead factor: The overhead factor is defined as follows: (Total firms expenses including salaries, etc of technical staff) / salaries, etc of technical staff) The following were given as a guideline: Table 2: Example provided by SAACE Code 1 2 3 4 5 6 7 8 9 10 11 12 Description Salaries of technical personnel Admin personnel salaries etc Telephone and communication Rental of premises, including electricity, water and taxes Transport Paper, stationary, consumables Audit, bank charges, interest, insurance Marketing Office equipment Training and development Project direct expenses not recoverable Other (ie Head office expenses) could vary widely NETT OVERHEAD FACTOR (before mark-up for profit) Example 1.00 0.30 0.10 0.12 0.08 0.02 0.15 0.10 0.15 0.01 0.03 0.09 2.15

One point of contention is whether or not the salaries of Directors / Partners were included in either Technical or administrative / support salaries. This was left to the firms discretion.

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Findings
The last available study done in 1991 for SAACE by Ernst & Young, concluded the following: The time charge-out rate currently is 15 cents / R100 / hours of annual salary plus bonus. This formula is applied in respect of all staff at this time. An essential component of this formula is the number of chargeable hours, which are applied to different categories of staff. We recommend that the following charge-out rates per R100 per hour should apply in respect of the different staff groups: Table 3: Proposed charge-out rates (1991) Category Charge-out rate

Partners / Directors

23 cents / R100 / hour

Associates / Snr Engineers

18 cents / R100 / hour

All other technical staff

16 cents / R100 / hour

Charge-out rates were based on annualised chargeable hours ranging between 1200 and 1700, allowing for unproductive time. Current Gazetted Manhour charge-out rates are compared with recommendations made in 1991 and are shown in the table below: Table 4: Proposed charge-out rates (1991) vs current Gazetted rate Category Partners / Directors Category A1 Category A2 Category B Associates / Snr Engineers Category C All other technical staff 18 cents / R100 / hour Charge-out rate1 Gazetted Rate 19.5 cents / R100 / hour (max of R695/hr) 19.5 cents / R100 / hour (max of R570/hr) 17.5 cents / R100 / hour (max of R405/hr) 15 cents / R100 / hour (max of R325/hr)

23 cents / R100 / hour

16 cents / R100 / hour

From this it is clear that current Gazetted charge-out rates are below recommendations made in 1991. The study undertaken by SAACE was primarily aimed at determining an acceptable charge-out rate, given the information provided by the members. Although the information obtained is considered to be real, there are some unavoidable assumptions still required. The TACE of the various job categories may vary from company to company, as well as the total available
1 Ernst & Young 1991 report. Including mark-up for profit

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

charge-out hours. For the purpose of this study an annualised rate of 1800 total available hours is applied to Directors and 1760 hours for all other staff.

Recommendations
Table 4.2: Proposed charge-out rates by firm size

Firm Category by
size A B C D E TOTAL Directors Professionally registered Technical staff Directors

Directors 21.44 24.50 21.67 22.85 20.10 21.78

Professionally registered 16.77 17.50 17.32 17.60 17.29 16.91

Technical 17.38 14.69 17.52 16.58 16.88 16.71

1800 hours x utilisation rate 0.63 = 1200 (rounded) 1760 hours x utilisation rate 0.83 = 1500 (rounded) 1760 hours x utilisation rate 0.84 = 1500 (rounded)

The recommended charge-out rate is 21.8 cents / R100 / hour based on a weighted average utilisation rate of 0.63 and a nett overhead factor of 1.90. Professionally registered The recommended charge-out rate is 16.9 cents / R100 / hour based on a weighted average utilisation rate of 0.83 and a nett overhead factor of 1.90. Technical The recommended charge-out rate is 16.7 cents / R100 / hour based on a weighted average utilisation rate of 0.84 and a nett overhead factor of 1.90. It also strongly recommended that the maximum charge-out rates should be reviewed. At an average TACE of R350 000 for a Director the maximum charge out rate should be no less than R760.00/ hour. Table 5 summarises the findings of the survey by firm size and employment category, comparing man-hour utilisation rates and nett overhead factors. It also compares the total manhour utilisation rates with and without administrative staff. Table 6 and 7 compares the nett overhead factors by item according to firm size and a weighted average for the industry. Table 8 compares the composition of the nett overhead factor in 1991 with results from the latest survey. Table 9 is a cost to company comparison per firm size based on a TACE of R250 000

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Table 5: Weighted utilisation rates and nett overhead factors by firm size
Manhour Utilisation Rates Firm size Total excl Directors Professionals Technical Administration Admin

Nett Overhead factor

Staff Number Lowest Highest A > 500 Average Median Stand Dev Weighted average Staff Number Lowest Highest B Average 100 - 499 Median Stand Dev Weighted average Staff Number Lowest Highest C Average 50 - 99 Median Stand Dev Weighted average Staff Number Lowest Highest D Average 10 - 49 Median Stand Dev Weighted average Staff Number Lowest Highest E Average < 10 Median Stand Dev Weighted average Staff Number Lowest Highest TOTAL Average Median Stand Dev Weighted average

208 0.50 0.69 0.62 0.67 0.10 0.65 78 0.35 0.68 0.54 0.60 0.17 0.51 83 0.44 0.90 0.68 0.71 0.15 0.68 142 0.25 0.85 0.61 0.60 0.15 0.61 49 0.25 0.95 0.69 0.70 0.16 0.69 560 0.25 0.95 0.65 0.67 0.16 0.63

572 0.70 0.91 0.79 0.77 0.11 0.85 119 0.68 0.84 0.76 0.75 0.08 0.73 100 0.70 0.91 0.86 0.90 0.07 0.87 103 0.00 1.00 0.63 0.80 0.36 0.81 17 0.00 1.00 0.26 0.00 0.41 0.82 911 0.00 1.00 0.52 0.76 0.41 0.83

749 0.00 0.85 0.55 0.80 0.48 0.82 347 0.83 0.91 0.88 0.90 0.04 0.87 258 0.60 0.95 0.85 0.89 0.11 0.86 378 0.68 1.00 0.86 0.86 0.08 0.86 41 0.00 0.97 0.41 0.00 0.43 0.84 1773 0.00 1.00 0.67 0.84 0.36 0.84

755 0.04 0.18 0.11 0.10 0.07 0.12 261 0.00 0.13 0.08 0.10 0.07 0.06 110 0.00 1.00 0.18 0.08 0.34 0.16 152 0.00 1.00 0.23 0.07 0.34 0.34 36 0.00 0.97 0.16 0.06 0.25 0.23 1314 0.00 1.00 0.19 0.08 0.30 0.14

1529 0.78 0.87 0.81 0.78 0.05 0.81 -1066 0.73 0.87 0.80 0.80 0.07 0.79 441 0.71 0.94 0.83 0.84 0.07 0.83 623 0.61 0.92 0.78 0.79 0.08 0.79 107 0.50 0.95 0.75 0.75 0.12 0.77 3244 0.50 0.95 0.78 0.79 0.10 0.80

1.73 2.15 1.99 2.09 0.23 1.93 1.55 1.90 1.67 1.56 0.20 1.73 1.60 2.53 2.02 2.07 0.32 2.04 1.50 3.18 1.96 1.97 0.36 1.93 1.22 3.80 1.90 1.87 0.55 1.92 1.22 3.80 1.93 1.92 0.43 1.90

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Table 6: Weighted Nett Overhead factors by item Firm Size

> 500 A 100 - 499 B 50 - 99 C 10 - 49 D < 10 E TOTAL

Description Salaries of technical personnel Admin personnel salaries etc Telephone and communication Rental of premises, including electricity, water and taxes Transport Paper, stationary, consumables Audit, bank charges, interest, insurance Marketing Office equipment Training and development Project direct expenses not recoverable Other (ie Head office expenses) could vary widely Total

1.00 0.24 0.05 0.14 0.06 0.02 0.07 0.02 0.06 0.02 0.11 0.14 1.93

1.00 0.26 0.03 0.13 0.01 0.03 0.05 0.02 0.04 0.01 0.00 0.15 1.73

1.00 0.19 0.06 0.11 0.06 0.03 0.09 0.04 0.09 0.05 0.1 0.24 2.04

1.00 0.21 0.08 0.14 0.09 0.04 0.12 0.03 0.08 0.03 0.04 0.08 1.93

1.00 0.16 0.09 0.12 0.09 0.04 0.09 0.04 0.09 0.02 0.03 0.15 1.92

1.00 0.23 0.05 0.13 0.05 0.03 0.08 0.02 0.06 0.02 0.08 0.14 1.90

Table 7: Summary of Overhead Factors

Weighted average Example by SAACE

Description Salaries of technical personnel Admin personnel salaries etc Telephone and communication Rental of premises, including electricity, water and taxes Transport Paper, stationary, consumables Audit, bank charges, interest, insurance Marketing Office equipment Training and development Project direct expenses not recoverable Other (ie Head office expenses) could vary widely Total

Min

Max

Median

Stdev

1.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 1.22

1.00 0.62 0.25 0.65 0.35 0.25 0.45 0.20 0.30 0.20 0.37 1.80 3.80

1.00 0.18 0.08 0.11 0.08 0.03 0.09 0.02 0.08 0.01 0.03 0.06 1.94

0.00 0.11 0.05 0.09 0.07 0.04 0.08 0.04 0.06 0.03 0.07 0.25 0.42

1.00 0.23 0.05 0.13 0.05 0.03 0.08 0.02 0.06 0.02 0.08 0.14 1.90

1.00 0.30 0.10 0.12 0.08 0.02 0.15 0.10 0.15 0.01 0.03 0.09 2.15

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

How has the overhead factor composition changed since 1991?

Table 8: Nett overhead comparison Description Salaries of technical personnel Admin personnel salaries etc Telephone and communication Rental of premises, including electricity, water and taxes Transport Paper, stationary, consumables Audit, bank charges, interest, insurance Marketing Office equipment Training and development Project direct expenses not recoverable Other (ie Head office expenses) could vary widely Standard margin @ 30% Nett overhead factor before TAX
1991 SAACE Example Survey results

1.00 0.34 0.07 0.15 0.10 n.a 0.17 0.06 0.16 0.03 n.a 2.08 0.63 2.71

1.00 0.30 0.10 0.12 0.08 0.02 0.15 0.10 0.15 0.01 0.03 0.09 2.15 0.65 2.80

1.00 0.23 0.05 0.13 0.05 0.03 0.08 0.02 0.06 0.02 0.08 0.14 1.90 0.57 2.47

The most noticeable change is the marginalisation of the nett overhead factor from 2.08 in 1991, to a suggested 2.15 to a real 1.90. Administrative staff salaries declined from 0.34 to 0.24, whilst head office expenses are far greater than anticipated. Finance charges (including audit, bank charges, interest, insurance etc) also declined from an overhead factor of 0.17 in 1991 to 0.08 in view of lower interest rates at 13% (at the time of the survey), compared with 20% in 1991. Marketing and office equipment costs also represent a smaller contribution in terms of total costs. Rental and communications remained relatively stable.

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

The TACE is an important variable when determining cost-to-company comparisons between the respective firm sizes. For this reason a separate table presenting various cost to company scenarios based on a range of TACEs, utilisation rates and nett overhead costs is included. Table 9. Revised Scenario based on a TACE of R250 000 Nett overhead factor 1.93 1.73 2.04 1.93 1.92 1.90 Cost to company R338 / hr R311 / hr R349 / hr R347 / hr R354 / hr R337 / hr Charge-out A1 R395.06 16.72% 27.00% 13.16% 13.84% 11.54% 17.10% A2 R395.06 16.72% 27.00% 13.16% 13.84% 11.54% 17.10% B R354.54 4.75% 13.98% 1.55% 2.17% 0.10% 5.09% C R303.89 -10.21% -2.31% -12.96% -12.43% -14.20% -9.92%

Firm size A > 500 B 100 - 499 C 50 - 100 D 10 - 49 E < 10 Total

Utilisation

0.81 0.79 0.83 0.79 0.77 0.80

Based on a TACE of R250 000

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Table 10: Scenarios

Cost-to-Company excluding profit

TACE 200,000 250,000 300,000 350,000 400,000 450,000

Manhour utilisation rate

0.5

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

409.09

371.90 464.88 557.85 650.83 743.80 836.78

340.91 426.14 511.36 596.59 681.82 767.05

314.69 393.36 472.03 550.70 629.37 708.04

292.21 365.26 438.31 511.36 584.42 657.47

272.73 340.91 409.09 477.27 545.45 613.64

255.68 319.60 383.52 447.44 511.36 575.28

240.64 300.80 360.96 421.12 481.28 541.44

227.27 284.09 340.91 397.73 454.55 511.36

215.31 269.14 322.97 376.79 430.62 484.45

204.55 255.68 306.82 357.95 409.09 460.23

Nett Overhead Factor

511.36 613.64 715.91 818.18 920.45

1.8

200,000 250,000 300,000 350,000 400,000 450,000

431.82

392.56 490.70 588.84 686.98 785.12 883.26

359.85 449.81 539.77 629.73 719.70 809.66

332.17 415.21 498.25 581.29 664.34 747.38

308.44 385.55 462.66 539.77 616.88 693.99

287.88 359.85 431.82 503.79 575.76 647.73

269.89 337.36 404.83 472.30 539.77 607.24

254.01 317.51 381.02 444.52 508.02 571.52

239.90 299.87 359.85 419.82 479.80 539.77

227.27 284.09 340.91 397.73 454.55 511.36

215.91 269.89 323.86 377.84 431.82 485.80

Nett Overhead Factor

539.77 647.73 755.68 863.64 971.59

1.9

SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Manhour utilisation rate TACE

0.5

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

200,000 250,000 300,000 350,000 400,000 450,000

454.55 568.18

413.22 516.53 619.83 723.14 826.45 929.75

378.79 473.48 568.18 662.88 757.58 852.27

349.65 437.06 524.48 611.89 699.30 786.71

324.68 405.84 487.01 568.18 649.35 730.52

303.03 378.79 454.55 530.30 606.06 681.82

284.09 355.11 426.14 497.16 568.18 639.20

267.38 334.22 401.07 467.91 534.76 601.60

252.53 315.66 378.79 441.92 505.05 568.18

239.23 299.04 358.85 418.66 478.47 538.28

227.27 284.09 340.91 397.73 454.55 511.36

Nett Overhead Factor

681.82 795.45 909.09 1022.73

2.0

200,000 250,000 300,000 350,000 400,000 450,000

477.27 596.59

433.88 542.36 650.83 759.30 867.77 976.24

397.73 497.16 596.59 696.02 795.45 894.89

367.13 458.92 550.70 642.48 734.27 826.05

340.91 426.14 511.36 596.59 681.82 767.05

318.18 397.73 477.27 556.82 636.36 715.91

298.30 372.87 447.44 522.02 596.59 671.16

280.75 350.94 421.12 491.31 561.50 631.68

265.15 331.44 397.73 464.02 530.30 596.59

251.20 314.00 376.79 439.59 502.39 565.19

238.64 298.30 357.95 417.61 477.27 536.93

Nett Overhead Factor

715.91 835.23 954.55 1073.86

2.1

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Table 11: Scenarios

: Charge-out rates according to Nett overhead factors and Utilisation rates

Nett overhea Available hours d factor 1760 1.8 1.9 2.0 2.1 2.2 2.3 26.59 28.07 29.55 31.02 32.50 33.98 24.17 25.52 26.86 28.20 29.55 30.89 22.16 23.39 24.62 25.85 27.08 28.31 20.45 21.59 22.73 23.86 25.00 26.14 18.99 20.05 21.10 22.16 23.21 24.27 17.73 18.71 19.70 20.68 21.67 22.65 16.62 17.54 18.47 19.39 20.31 21.24 15.64 16.51 17.38 18.25 19.12 19.99 14.77 15.59 16.41 17.23 18.06 18.88 14.00 14.77 15.55 16.33 17.11 17.88 13.30 14.03 14.77 15.51 16.25 16.99

Manhour utilisation rate

0.5

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

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Graphs

Nett Overhead factors by item Weighted according to firm size

0.30 0.25
Overhead factor

0.20 0.15 0.10 0.05 0.00 1 2 3 4 5 6 7 8 9 10 11

Nett Overhead Factor (before mark-up for profit) Weighted according to firm size
2.10 2.05 2.00 1.95
Overhead factor

1.90 1.85 1.80 1.75 1.70 1.65 1.60 1.55 A B C D E Total

Firm size

Manhour Utilisation Rates vs Nett Overhead factor Weighted (according to firm size)
0.80 0.70 0.60
Utlisation rates 2.00 Overhead factor 2.50

0.50 0.40 0.30 0.20 0.10 0.00 A B C D E Total

1.50

1.00

0.50

0.00

Firm size

Manhour Utilisation rates vs Weighted Nett Overhead factor

2.50

2.00

Nett Overhead factor

1.50

> 500 100 - 499 50 - 99 10 - 49 < 10

1.00

0.50 Size of circles = Weighting according to total employment 0.00 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

Manhour Utilisation rates

SAACE MIS December 2001

Manhour utilisation rates and overhead factors

MANHOUR UTILISATION RATES By Firm size and employment category 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Directors Professionals Technical Administration Total

A B C D E TOTAL

Exluding Technical staff = 1

Net overhead factor

Other (ie Head office expenses) could vary widely Project direct expenses not recoverable Training and development Office equipment Marketing Audit, bank charges, interest, insurance Paper, stationary, consumables Transport Rental of premises, including electricity, water and taxes Telephone and communication Admin personnel salaries etc 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35

Survey

Guide

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SAACE MIS December 2001

Manhour utilisation rates and overhead factors

Definitions
Median
Returns the median of the given numbers. The median is the number in the middle of a set of numbers; that is, half the numbers have values that are greater than the median, and half have values that are less. Estimates standard deviation based on a sample. The standard deviation is a measure of how widely values are dispersed from the average value (the mean). Returns the smallest value in a range. Returns the largest value in a range. Returns the average (arithmetic mean) of the arguments. Returns the average (arithmetic mean) of the arguments according to either a pre-determined weight or according to a variable definitive within the argument present in all the variables (ie turnover, employment)

Standard Deviation

Minimum Maximum Average Weighted Average

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