RHACOVA

Labor and overhead

Billable Hours vs Productive Hours

You pay for every hour. You can only recover cost through the hours you actually bill. The gap between those two counts sets your rate.

The short answer

Use productive hours — the hours actually worked on jobs — as the denominator when you convert annual costs into an hourly figure. Paid hours include time you cannot bill, so dividing by them understates cost. Billable hours are narrower still: they are the productive hours a customer actually pays for.

Three different counts

Paid hours
Everything you pay for: field work, shop time, training, holidays, paid leave, meetings.
Productive hours
Hours worked on jobs. Paid hours minus holidays, leave, training, shop and downtime.
Billable hours
Productive hours the customer pays for. Rework, unbilled travel and warranty visits are productive but not billable.

The formulas

Productive hours = paid hours − non-productive paid hours

Cost per productive hour = total annual labor cost ÷ productive hours

Utilization = billable hours ÷ paid hours

Worked example: the same employee, two assumptions

Identical wage, taxes, insurance and benefits. The only difference is how many of the 2,080 paid hours are treated as non-productive.

  • Optimistic — 80 non-productive hours: 2000 productive hours, $40.42 per productive hour
  • Realistic — 400 non-productive hours: 1680 productive hours, $48.11 per productive hour

The total annual cost of that employee is identical in both rows — $80,832.00. Only the denominator moved, and it moved the hourly cost by several dollars. Every estimate built on the optimistic row is short by that difference on every hour.

Which count belongs where

  • Labor cost per hour: divide by productive hours. This is what cost per productive hour means.
  • Overhead recovery per hour: divide by the productive hours of everyone whose time can carry overhead — see construction overhead.
  • Estimating a job: the hours you will bill for that scope, priced at a rate built from the two figures above.

The hours nobody bills

Some productive hours never become billable: fixing your own defect, a second trip because the material was wrong, a warranty callback. They are real cost with no revenue attached, which is exactly why rework and warranty cost comes straight out of margin. Counting them honestly in the hour split is the only way the rate covers them.

Common mistakes

  • Using 2,080 hours as though every paid hour were billable.
  • Using a different hour count in the labor rate than in overhead recovery.
  • Counting drive time as productive when the customer does not pay for it.
  • Setting a utilization target first and then calling it an assumption, instead of measuring what last year actually produced.

Quick answers

What is the difference between paid and productive hours?
Paid hours are every hour you pay for, including holidays, training and shop time. Productive hours are the hours actually worked on jobs.
Are productive hours the same as billable hours?
Not always. Productive hours are worked on jobs; billable hours are the hours a customer pays for. Rework and unbilled travel sit in the gap.
What happens if I overstate productive hours?
Every per-hour cost comes out too low, so the rate built from it is too low, and the shortfall is invisible until the year's numbers close.

Run the numbers

Total annual employer cost, burden percentage, cost per paid hour and cost per productive hour.

Open the Labor Burden Calculator

Free, no account, and the answer stays on the page.

Fix the hour count in one place

Your Numbers stores the productive-hours assumption behind your labor and overhead defaults, so two estimates cannot quietly use two different counts.

Open Your Numbers

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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