The Divisor Nobody Chose
A rate is a quotient and the denominator usually arrives by default. The four choices, what each assumes, and what the spread between them is.
The same loaded cost of £47,400, divided four ways
Assumes every paid hour can be charged.
Leave recovered; absence and non-chargeable work not.
Absence recovered too.
Only the hours that reach a job.
One cost, four defensible divisors, and a spread of £12.61 an hour — 52 per cent. None of them is a mistake. The mistake is that in most organisations nobody can say which one is in use. One employer's own figures, not a benchmark.
A labour rate is a quotient, and in most organisations the numerator has been thought about and the denominator has not. It arrived as a default in a system, or as a round number somebody used once, and it has never been written down.
The practical lesson in “The Divisor Nobody Chose” is that a convenient number should begin a review rather than end one. A team assessing read the current implementation notes for small business time tracking can add timely time and project context, with transparent settings, proportionate access and a documented correction process around every material use.
The choice moves the rate by fifty per cent or more. It is the single largest unexamined decision in labour costing.
Additional context for “The Divisor Nobody Chose” is available from ILO working-time resources. Current legal, payroll, tax and accounting requirements should be confirmed for the relevant jurisdiction.
The four candidates
Contracted hours. Paid hours less leave. Attended hours. Chargeable hours.
Each is defensible, each assumes something different about what the cost has to be recovered over, and each produces a materially different rate.
Contracted hours
The largest divisor and the lowest rate. It assumes every contracted hour can be charged, which is true in no operation anywhere.
It is the default in many systems because it is the easiest number to obtain.
Paid hours less leave
Recovers the cost of leave by removing those hours from the base. Does not recover sickness, training, supervision or anything else that is not chargeable.
A reasonable middle position and the commonest deliberate choice.
Attended hours
Removes absence of all kinds. Still includes supervision, training, quoting, administration and rework — all the hours that are attended and not chargeable.
Chargeable hours
The smallest divisor and the highest rate. Recovers everything: every paid hour that does not reach a job is carried by the hours that do.
This is the only divisor under which the rate, multiplied by charged hours, recovers the full cost of the function.
Which is right
Chargeable hours, for a rate used to price or to cost jobs — because that is the only basis on which the total gets recovered.
The others are right for other questions: contracted hours answers "what does a contract cost", attended hours answers "what does a present person cost".
Why the biggest divisor is so popular
Because it gives the lowest rate, and a low rate is easier to quote, to defend and to compare favourably with a competitor.
It is also the rate under which an operation is busy all year and somehow does not cover its costs.
The circularity
Chargeable hours depend on how much work is won, which depends on the price, which depends on the rate, which depends on chargeable hours.
It resolves by using a budgeted chargeable figure and reviewing it against actual, which is the subject of its own note here.
Spotting which divisor is in use
Multiply the rate by last year's chargeable hours. If the result is well short of the loaded cost of the department, the divisor is too large.
One multiplication, and most organisations have never done it.
The under-recovery it causes
A rate built on contracted hours in an operation with seventy per cent chargeability recovers about seventy per cent of its cost. The remaining thirty per cent surfaces as a general overhead problem that nobody connects to the rate.
How the default got there
Usually from a system implementation where somebody needed a number of hours per year and used 1,950 because it is 37.5 times 52.
It is a tidy figure and it assumes nobody takes leave, falls ill or attends a meeting. Nothing about it was decided; it was the value that let the configuration screen be completed.
The divisor and the headcount plan
The two must agree. A rate built on 1,284 chargeable hours per head and a capacity plan assuming 1,604 are describing different people.
Where they disagree, one of them is producing decisions that the other contradicts, and because they live in different functions the disagreement can run for years without surfacing.
What to check first in somebody else's rate
Not the layers — they are usually roughly right. The divisor, and whether anybody can state it.
If the answer is a round number, or nobody knows, the rate is almost certainly too low and the operation is almost certainly under-recovering without having diagnosed it as that.
Divisors that differ between systems
The quoting tool, the job costing system and the capacity model frequently each carry their own hours assumption, set by whoever configured them.
Where the three differ, the organisation is quoting on one basis, costing on another and planning on a third. Checking all three against each other is a half-hour exercise that is almost never done and almost always finds something.
The sentence beside the rate
One sentence next to the rate: "£36.92 per chargeable hour, where chargeable hours are 1,284 per full-time person per year, budgeted."
Twenty words. They settle more arguments than any other sentence in this collection, and their absence is why two people can both be right about what an hour costs and differ by half.