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More agencies are running leaner, smaller core teams, supported by a mix of contractors. Some have gone all-in, building delivery models that rely almost entirely on freelancers, even at sizes that once would’ve meant a full-time staff of ten or more.

That shift makes sense. Clients want flexibility. Retainers are shrinking. Project work has replaced long-term commitments. Contractors give agencies a way to match cost to demand.

But there’s a hidden cost to that flexibility: operations. When most of your delivery is done by contractors, you need tighter visibility into utilization and cost of service. Otherwise, what looks like “efficiency” can quietly drain your margins.

What Agency Utilization Measures (and Why It Changes with Contractors)

At a basic level, agency utilization measures how much of your team’s available time is spent on billable work.

Your agency utilization rate is typically calculated as:

Billable hours ÷ Available working hours

When delivery is handled by full-time employees, small inefficiencies often go unnoticed:

• A few extra hours on a client who is on a capped monthly contract
• Too many people in meetings
• Small changes in scope that feel manageable enough

Those issues affect project margins but not always your immediate bottom line, because salaries are fixed.

Contractors change the math. A contractor is always 100% utilized by traditional agency math, which can make them look incredibly efficient. However, with contractors, every hour logged directly impacts cost of service. There’s no buffer. No sunk salary. And in most cases, contractors cost more per hour than employees.

That means tight visibility into agency utilization and project profitability is absolutely vital for healthy margins.

Why Agency Utilization Rate Is Harder with Contractors

Many agencies track utilization loosely, if at all, which can mean that profit is gone before the agency ever realizes it's spending money . A common pattern looks like this:

• An SOW estimates 40 hours of work
• The client asks for small tweaks to the deliverable here and there, each of which is approved by someone (a PM, the strategic lead, whoever is responsible for that)
• The contractor makes these changes and invoices 60–65 hours at month-end
• Project profitability is reduced to almost nothing, and leadership did not realize this was happening until they look at month-end metrics.

When contractors do most of the delivery, it's important that the agency be proactive with its metrics tracking, monitoring hours spend while the work is happening. Without real-time visibility, your profit is gone long before you see the invoice

The Agency Metrics You Need Before You Scale with Contractors

If you want the flexibility of a contractor-based delivery model without sacrificing margin, two things must be locked in first.

1. Clear Utilization Expectations in Contractor Scopes

Your contracts with contractors should define utilization just as clearly as your client SOWs define scope.

That includes:

• Explicit deliverables
• Capped hours tied to utilization and profitability assumptions
• Approval requirements prior to exceeding scope

Clear scopes create predictable utilization, which in turn protects margins.

2. Real-time Tracking of Hours Utilization Rate

If your agency cannot see project hours utilization in real time, you cannot manage delivery profitably.

This almost always requires enforcing time tracking. Yes, contractors resist logging time. Yes, they’re in multiple systems for multiple clients. And still: time tracking is non-negotiable if you care about agency utilization and agency metrics.

Your delivery or ops lead should be able to answer mid-month:

• How much of the scoped work is already burned?
• Is utilization trending above plan?
• Do we need to pause, rebalance, or rescope?

Without this data, utilization becomes a post-mortem instead of a management tool.

The Agency Metrics Conversation Most Owners Avoid

There is a third component to managing agency utilization with contractors, and it's not technical, it's emotional. Contractor-based delivery requires ongoing decisions about:

• Who stays in the pool
• Who is underutilized
• Who is no longer a fit for your delivery model
• Who is fast (and therefore potentially producing better margin on project) and who is slow (and therefore eating into margins) for the same quality of work
  

Having the data and the operational structure to be able to support decisions made about the contractor pool is vital. Not having conversations consistently about how to offboard contractors who are underperforming or secure more time from your best contractors just means inefficiencies that can be tough to see.

Flexibility in Delivery Requires Discipline in Agency Metrics and Operations

There’s nothing wrong with a contractor-heavy model; it can be exactly what your agency needs to grow. But flexibility comes at a cost. You lose tolerance for loose operations. When real-time hours tracking and burn reporting let you spot overages early, you can course correct before profit disappears.

Want to understand more about agency metrics and utilization? Book a call with us!