1. What is Resource Planning?
Resource planning is the process of allocating people, time, and budget to complete a project or maintain a business function efficiently. To do this accurately, you must understand the difference between Gross Paid Hours (what an employee is paid for) and Net Productive Hours (how much actual work gets done).
2. Utilization Rate vs. Shrinkage
Humans cannot work at 100% efficiency for 40 hours a week. Accurate resource planning requires calculating two critical buffers:
- Utilization Rate: This accounts for time spent at work but not directly on the core task. It includes administrative duties, team meetings, bathroom breaks, and idle time. A standard utilization rate for software or agency work is 75% to 80%.
- Shrinkage (Time Off): This accounts for time completely lost to the business, including paid vacation, sick leave, federal holidays, and lateness. A standard shrinkage rate is 10% to 15% over a full year.
3. How to calculate Required Headcount (FTEs)?
To find out how many Full-Time Equivalent (FTE) employees you need to finish a project, follow this formula:
- Step 1: Calculate Net Weekly Hours per employee.
40 hrs × 80% (Utilization) × 90% (After Shrinkage) = 28.8 Net Hours/Week - Step 2: Calculate Total Net Hours an employee can contribute to the specific project duration.
28.8 hrs × 4 weeks = 115.2 Total Net Hours - Step 3: Divide your Target Project Hours by the Total Net Hours.
1000 Target Hours ÷ 115.2 = 8.68 FTEs needed.
4. Cost Estimation
When budgeting for a project, you must pay for Gross Hours, not just Net Hours. Using the example above, you must pay 8.68 FTEs for 40 hours a week, for 4 weeks. This equals 1,388 gross paid hours. Multiply this by the blended hourly rate to find your true labor cost.