Table of content
Full-time equivalent (FTE) is a key metric for any software or IT company that assigns its specialists to clients on a full-time basis.
Whether it’s body leasing, consultancy services, or dedicated teams, using FTE to plan and forecast resource availability gives you an advantage. It also makes settling easier for your clients. What’s there not to love about FTE?
In this article, I answer all the questions about FTE I keep hearing from companies that use our resource planning and allocation software.
If you learn how to calculate it right, FTE can greatly impact your bench time and profitability.
Table of contents:
- What is FTE? And what is an FTE employee?
- Why calculate FTE? And why is it so important for your IT company?
- Here’s what an FTE report looks like
- ~Example full-time equivalent employee calculation
- How do software companies use FTE to increase their profitability
- What happens if you don’t measure FTE?
- ~Generating an FTE report can be tricky
- How do you calculate FTE?
- How many hours is 1 FTE?
- ~Example scenario for FTE calculation
- ~~It’s easy to end up with different baselines for calculating your FTE
- How to convert FTE to hours?
- How to calculate public holidays and leaves in FTE?
- Keep FTE at the back of your mind when negotiating
- Wrap up
What is FTE? And what is an FTE employee?
Before explaining what an FTE employee is, let’s examine the concept of FT
FTE stands for Full-Time Equivalent, a unit of measurement companies use to calculate employee work and forecast their workforce needs.
An FTE equals the number of hours a full-time employee spends working for your company.
HR departments use FTE to standardize the working hours and salaries of part-time employees.
For example, let’s say that you consider 40 hours per week (8 hours per day) as the baseline for your full-time employees. This means that an employee who works 40 hours per week makes 1 FTE. It also means that 4 employees who work 10 hours each per week make 1 FTE.
How do you calculate this? Continue reading to learn this formula.
Why calculate FTE? And why is it so important for your IT company?
IT businesses often use the full-time equivalent when settling work with clients using man-days.
This is a typical way IT body leasing or consulting companies settle. But other software companies can use it too whenever they assign a specialist to one client only. In this case, settling by hours doesn’t make sense because settling by man-days is so much easier - both for you and the client.
When planning and forecasting your capacity, it’s not enough to know the number of hours available (especially if it’s an abstract number like 7000).
You need to know how many people will be available at a given time.
This is where FTE comes in. It allows you to calculate your available workforce by taking the number of the available working hours and dividing it by man-days.
Here’s what an FTE report looks like
In Primetric, we split the full-time equivalent into several sub-categories to help software companies track, plan, and forecast their resource availability against this incredibly helpful metric.
You can find the following FTE types in the report:
- Capacity as FTE - showing your total available capacity as FTE
- Available Capacity as FTE - showing your available capacity as FTE (includes data about public holidays and leaves)
- Scheduled FTE - based on what you planned for your employees (employees workload)
- Tracked FTE - the actual hours worked and logged by every employee
- Capacity & Billable capacity
Example full-time equivalent employee calculation
So, let’s say that you’d like to check how much capacity you have - measured not by hours but by FTE. You can see a breakdown of that per department, role, and even specific people.
And you instantly see that you have 3 available FTEs of full-stack developers.
This, of course, doesn’t mean that there are really 3 full-stack developers sitting idle at their desks in another room. It means that the total number of hours of full-stack development available to you at this time amounts to 3 FTEs, so the amount of work is represented by 3 full-time employees.
How do software companies use FTE to increase their profitability?
1. Estimating long-term projects and their profitability
Imagine that you need to estimate the amount of work in a new project or project phase. Estimating the specific number of hours your employees will need to complete the project in the long term is difficult.
But what if you could estimate that you will simply need 4 Java developers and 6 PHP developers in a given time period? Calculating by FTEs makes much more sense!
Of course, based on this data, you can easily calculate the estimated costs and the developer day rate to prepare the estimation for the client.
What's more, such rough estimates allow you to easily check if you can find people available for such a project and quickly compare their rates for optimal profitability.
2. Settling with clients like it’s a piece of cake
You can probably tell by now why this metric comes in handy for software development companies. Since many of them use man-days to plan resources, why not do the same when settling with clients.
And settling based on FTE is a piece of cake. A full-time equivalent is a universal unit of measurement you can use between you and the client (or agree on it before starting to work together, keep on reading to see what I mean).
Imagine this scenario:
So let's say that the client pays you $400 for each working day. The client understands the daily wage as a wage for 7 hours of work. To properly convert this value, you can set the base FTE value to 7 hours. Finally, you can issue an invoice using the FTE report. Thanks to this, FTE allows you to be on the same level of understanding as the client.
3. Planning resources for greater utilization
During a resource planning session, you might want to know how many FTEs you have per specific technology or team (backend/frontend) to know where to focus in sales or recruitment.
Sometimes planning works better with FTE than hours. Consider this:
If you see that you have 5000 hours of frontend development available in the next three months, it sounds great, but you also have no idea what it means. This number is just very abstract.
But what if your report shows that you have 28 FTE? This means that you have 28 full-time engagements available for frontend development projects. It means that you have 28 full man-days available that you can start planning for and selling.
4. Forecasting to avoid bench time
When you want to check the available workforce in the next month, hours aren’t going to tell you much. As an employer, what you need is to know that you have the amount of work available, equaling the number of full-time employees.
That’s why the full-time equivalent is critical for forecasting your future availability - in a way that both you and your potential client can understand easily.
How is FTE different from capacity?
Why can’t you just use capacity? Because when you calculate capacity, you calculate for a given person.
For example, an employee that works part-time can have a capacity of 100% and a person that works full-time can have 100% capacity. But for the former, it means 4 hours of work (provided that your full-time is 8 hours). For the latter, it’s 8 hours. Quite a difference, isn’t it?
When you compare this to FTE as your baseline, you’ll see that part-time makes 0.5 FTE. This instantly gives you a sense of how much workforce you have available.
- How to measure employee performance? Read this: How to track employee performance: expert guide
What happens if you don’t measure FTE?
If you fail to give the full-time equivalent proper attention, you’ll end up not knowing how many man-days you can sell, or how many specialists you have available, and in which technologies.
This will impact your planning abilities. Your bench time will increase and project profitability will drop.
In smaller companies, not measuring FTE might not be a problem because you always kind of know what others are up to. But larger companies can lose a lot if they don’t measure the FTE.
Another issue is having a bird's eye view of who is available in the coming months to generate an offer for a potential customer faster, or analyze which employees are usually on the bench and which ones are usually busy.
Generating an FTE report can be tricky
Let's take an example: a workshop from one of our clients who prepares the FTE report once a week.
Before implementing Primetric, it took the company quite a long time to calculate the FTE and generate the report. It was necessary to ensure that all the data was correct and up-to-date and then pull them from different systems and present them in one consistent report.
This is the report broken down by week:
And this is the report broken down by month:
As you can see, such a report gives you and your managers the knowledge at first glance to what extent specific technologies are used in your company, what employees will be on the bench, and how it relates to your overall capacity.
When using Primetric, you can also easily take into account all kinds of absences, the number of uncertain FTEs (draft - 50% probability, and reserved - 70% probability), as well as dynamically change reports to specific dates, teams, projects, etc.
Thanks to this, you can analyze the current or future workload of your employees without waiting and worrying about the uncertainty of the current data.
How do you calculate FTE?
Here’s a step-by-step guide to calculating FTE:
- Set the goal for calculating your FTEs. Do you want to do it to easily forecast the employee occupancy and availability? Or maybe you want to settle accounts with clients more easily?
- Then define your baseline.
- ~If you hire employees from various countries, it’s worth setting one baseline for the entire company. The most common determinant will be value for the company's main location. If your company operates in Europe or the US, your baseline will most likely be 8 hours a day.
- ~If you settle with the client on the basis of FTE, then it is worth setting the base value for which you will be billing the client, e.g., 7 hours per day.
- Then consider:
- ~public holidays that your organization or client celebrates,
- Calculate your baseline.
- ~For example, in May, your baseline will be: 20 working days (taking into account public holidays of your organization) * 8h = 160h.
- Finally, you need to consider:
- ~Employee time-offs
- ~Employee contract terms
So let's say you have 50 full-time employees, 20 part-time employees. In addition, 3 employees have taken a week off, and one full-time employee leaves your company in mid-May. What will your FTE be in May?
Calculation formula = ((50 employees * 8 hours a day * 20 business days + 20 employees * 4 hours a day * 20 business days) - (3 employees * 8 hours a day * 5 business days) - (1 employee * 8 hours a day * 10 business days)) / 160 hours in May = 9508h / 160h = 59.43 FTE
This means that in May you can actually offer your clients 59 full-time employees, even though you might think you have 70 of them.
That’s why FTEs can be so useful for making estimations and planning for the future.
Let's see some additional examples below.
How many hours is 1 FTE?
For this metric to make sense, you need to decide what “full-time” means in the first place. And this isn’t always as straightforward as it sounds. Things can get tricky if you have offices in countries that define and regulate full-time employees differently. Or if your client does.
Example scenario for FTE calculation
In Thailand, full-time employees work 8.5 hours per day, while in Australia, it’s 7.5 hours per day.
- How do you calculate the FTE if you work with a client from Australia and outsource some of your development work to a team in Thailand?
- What if as an employer you have three company branches located in different countries where man-days are regulated differently?
It’s easy to end up with different baselines for calculating your FTE
So, which one should you choose? Which one should become your benchmark for calculating the availability of your resources and settling with clients?
We recommend setting one baseline for FTE and planning resources, and settling with clients on its basis.
Why? Because when planning a 100% utilization of an employee, you’ll get a different result depending on where this employee is located.
If your HQ is in Europe, where one FTE amounts to 8 hours but you work with a team in Thailand where full-time employees work 8.5 hours, you end up having more FTEs than you would considering the number of your employees.
How to convert FTE to hours?
As an employer, you might want to have a closer look at the exact hours your employees work. You already have their FTE, so how do you convert it back to the actual hours worked?
To convert the number of hours an employee will be working based on their FTE, you need to reverse the process of calculating the FTE based on the number of hours worked by that employee.
Take a look:
Let’s say that you have a frontend developer named Mark who is one of your part-time employees. He has a 0.6 FTE.
And let’s assume that you take 8 hours of work per day as a baseline for calculating your FTEs. After all, this is how much your full-time employees spend working for you.
So, if Mark works 0.6 FTE, how many hours does he work per year?
If Mark has a 0.7 FTE on an annual basis, you need to multiply his FTE by the average number of hours worked by a full-time employee in your company per year. If it’s 8 hours a day, it means it’s 40 hours per week. Multiply it by 52 weeks per year and you get 2,080.
Now you’re ready to calculate the number of hours Mark works for you:
0.6 x 2,080 = 1,248 hours per year
And if you want to know how many hours per week this amounts to, you can just divide it by 52:
1,248 / 52 = 24 hours per week
And finally, to check whether we got the FTEs and hours right, you can verify that by taking the full-time employee’s workload into account:
24 hours per week / 40 hours per week = 0.6 - just like your FTE!
How to calculate public holidays and leaves in FTE?
Many software companies rely on spreadsheets for keeping data about the availability of every single employee, including their planned holiday leaves and public holidays.
It makes sense for an employer to include these factors in the full-time equivalent calculation.
But how to properly keep track of it all when the situation is changing? People get sick or take vacation leaves all the time. An employee team in one branch might have a public holiday when their team members in another location are working.
We designed Primetric to handle this problem for you. It automatically calculates the available FTEs to help you plan and forecast your capacity. It takes into account public holidays across your locations, leaves, contract length, and type (part-time employees, full-time employees, contractors, or freelancers).
Keep FTE at the back of your mind when negotiating
Your client might pay you per FTE, which in your case equals 8 hours of work.
But you know that your employee works 7 hours per day because they spend 1 hour on internal projects. So this means you will settle for 7 hours.
If you set your baseline for the FTE as 8 hours, then the employee will always log 0.875 FTE (7 hours per day/8 available hours).
In the end, you’ll never charge the client properly.
So it makes sense to set the baseline as 7 hours to get 1 FTE per man-day and settle correctly.
You can get away with calculating the full-time equivalent employee manually if you run a small software company where everyone knows what everyone is working on at all times.
But even then, you run the risk of making a mistake that could lead to long bench time.
Moreover, if you do all of that manually, you can only cover a specific period. And the data you’re dealing with is dynamic. So to keep an eye on your FTE, your reports require frequent updates.
Why do it manually and risk errors when you can automate this process with a solution like Primetric?
Primetric includes a smart FTE report with the full-time equivalent divided into planned, available, and tracked. Sign up for a demo to see how it works.