Effective Rates and Earnings
Effective Rate attempts to measure an individual's contribution to a phase's revenue and profit, based on the hours they worked relative to others on the same phase. It's a useful lens for looking at productivity and profitability by person, but it is not a perfect measure and should be interpreted with that in mind.
How Effective Rates Are Calculated
Effective Rate is calculated on a phase-by-phase basis. A phase's revenue and profit are allocated across the time slips logged against it on a weighted scale — an hour worked by a more highly compensated staff member is weighted as contributing more than an hour worked by a lower-paid staff member.
The weighting differs depending on how the phase is billed:
- Hourly phases use each person's billing rate to weight their earnings.
- Fixed Fee phases use each person's pay rate to weight their earnings.
Example — Fixed Fee Phase
Consider a Fixed Fee phase with $2,000 in revenue, and two staff members who logged time against it:
- Staff A is paid $20/hour and logged 18 hours → labor cost of $360.
- Staff B is paid $50/hour and logged 5 hours → labor cost of $250.
Total labor cost across the phase: $360 + $250 = $610.
To weight the $2,000 in revenue proportionally to labor cost, divide revenue by total labor cost:
$2,000 ÷ $610 = 3.279
Apply that factor to each person's labor cost to calculate their credited earnings:
- Staff A: $360 × 3.279 = $1,180.44 ($65.58/hour)
- Staff B: $250 × 3.279 = $819.75 ($163.95/hour)
Staff B's higher pay rate means each of their hours is weighted more heavily, so they're credited with a larger share of the phase's revenue despite working fewer hours.
A Note on What This Actually Measures
Effective Rate is not an exact measure of individual contribution — it's impossible to say with certainty how much any one person's effort actually drove a phase's earnings. The calculation is a weighted allocation based on pay or billing rate, not a direct measurement of performance or value added.
For example, if a staff member is genuinely underpaid relative to the work they're doing, this calculation will understate their contribution and shift credited earnings toward higher-paid staff on the same phase — regardless of who actually did more to earn the phase's revenue. Keep this limitation in mind when reviewing effective rates, rather than treating them as a precise measure of individual performance.
Best Practice
Use Effective Rate as one data point among several when evaluating phase profitability and staffing efficiency — not as a standalone judgment of individual performance. It's most useful when comparing patterns across many phases and projects over time, rather than drawing conclusions from a single phase or a single person's numbers.
Summary
Effective Rate is calculated per phase by allocating that phase's revenue and profit across logged time slips, weighted by billing rate (hourly phases) or pay rate (Fixed Fee phases). Higher-weighted hours are credited with a larger share of earnings. Because this weighting is based on rate rather than actual measured contribution, Effective Rate is a useful but imperfect proxy and should be interpreted with that limitation in mind.