CRO Utilization - Part #2

A few weeks back in Part #1 of my article on CRO utilization, I focused on the components needed to calculate utilization and how utilization can impact CRO profitability. Theoretically, a high utilization rate should equate to a strong gross margin (assuming pricing is correct). However, in this article, we are going to discuss how utilization does not measure worker efficiency. Utilization and gross margin analysis should be completed in tandem to get a better picture of overall performance.

Potential Flaws in the Utilization Calculation

We previously discussed that utilization is calculated by dividing total hours billed into total hours paid (below is the example I used in my previous article).

Lets apply our concepts to a sample project. The schedule below shows that our project has 5,800 budgeted hours (in a year), however it takes us 7,072 hours to complete the project (1,272 hours more than planned).

7,072 hours would equate to roughly 85% utilization - which was our target a few weeks ago. We know we spent 7,072 hours, because our employees coded 7,072 hours in our labor tracking system to billable hours on this project. Our utilization calculation:

Keep in mind that the client agreed upon budget only allows us to bill 5,800 hours (not 7,072) - please refrain from change order jokes. We'll come back to this point shortly.

Financial Impact

Our bill rate and internal cost rate assumptions are in the table below - to keep things simple, I am assuming a 50% gross margin for each function.

We now have all the elements required to calculate the actual gross margin for our project.

  • Revenue = Hourly Bill Rate * Budgeted Hours

  • Service Costs = Hourly Cost * Hourly Cost * Actual Hours

  • Gross Margin $ = Revenue - Service Costs

  • Gross Margin % = Gross Margin $ / Revenue

The income statement below shows that our hours overrun has resulted in a 38.1% gross margin compared to a budgeted project margin of 50%. We materially missed our target, however our 85% utilization is excellent! (fyi - that is sarcasm)

"True" Utilization

A majority of labor tracking systems (I'm hesitant to say all) do not separate hours tracking between project hours that can be billed and can't be billed. I would define "true utilization" as an individual/department's hours worked than can be billed to a client by total hours paid. The calculation below shows that our "true" utilization was only 69.7% - well below our 85% target. We may have gotten the job done, but it took us 1,272 (or 22%) more than we originally expected.


Billability is a concept I have seen discussed at numerous CROs. According to, billability is defined as, "percentage of worked project hours which are billed to the customer (and conversely the percentage that could not be billed". Logically, if our utilization hits the 85% target and we can bills all 1,768 hours to the client, then our billability % would be 100%. A 100% billability % would mean that we were 100% efficient and able to bill every hours of labor back to the client. The billability % for our example (see below) is only 82% - see we left some potential revenue and gross margin on the table.

The lost opportunity (calculated below) was $203,300. Keep in mind that we paid our staff for these hours, but our inefficiency on the project caused us to burn additional hours that could have been used to service another project (and thus more billable hours).

A more simplistic way to think about the impact would be if you were a self-employed consultant. Spending more hours than anticipated means that you would be working more hours and earning less for your time - no one wants that.

Why the Disconnect Between Utilization and Gross Margin %

The disconnect is simply due to the fact that gross margin % tracks the actual profitability for a project, while utilization measures the percent of time spent on potentially billable services. Utilization tracks productivity not efficiency. When entering time into a labor tracking system, employees are focused on correctly entering their time, not determining if it was billable. Correct time entry data is invaluable, without it CROs would not have the ability to determine:

  • Which functions are efficient/inefficient?

  • Do the budget algorithms need to be adjusted?

  • Are there tasks being completed that are missing from the budget?

  • Are there additional services being requested by the client (i.e. change order) not in the original budget?

Wrapping Up

CROs would be wise to simultaneously measure/track the following items to assess profitability, productivity and efficiency:

  1. Gross Margin - Track profitability

  2. Utilization - Workforce productivity

  3. Actual vs. Budgeted Project Hours - Workforce efficiency

  4. Billability % - The % of hours worked that can be billed

CROs employ large global project teams running complex clinical trial budgets - it is unrealistic to assume that one metric can be used to successfully manage a CRO. A great example would be a basketball player that leads him team in points, but makes a low percentage of shots. A review of multiple metrics is needed to tell the full story and better understand where adjustments are needed.

Jason Monteleone is CEO of Clinipace & President at Pivotal Financial Consulting, LLC. Clinipace is a global mid-size CRO with operations in the Americas, Europe and Asia-Pac serving small and mid-size pharma and biotech sponsors. Pivotal provides Divestiture Assistance, Acquisition Advisory Services and Strategic Planning to the Pharmaceutical Outsourcing Industry. Jason can be reached at, Follow me on Twitter @JMPivotal. Sign up for Jason's latest blogs and updates at my