Billable hours represent the amount of time employees have spent on tasks that are invoiced to clients.
Non-billable hours are the hours spent on tasks that don’t get invoiced. They are most often dedicated to different internal tasks.
Tracking billable hours isn’t only important for creating invoices for the clients. It is also crucial for analyzing the efficiency and profitability of projects and clients as well as of the entire company.
That is why key performance indicators, such as time utilization, actual billable rate, and actual margin rate, directly depend on the record of billable and non-billable hours. This is applicable both on company level and on the level of each individual client.
This kind of analysis also enables the management to make better decisions, identify top performers and underperformers easily, as well as differentiate between profitable and non-profitable clients.
Which tasks are included in billable time?
Firstly, it is important to know that not all hours regarding working with a client are billable. Deciding whether the time will be billable or not depends on
- Types of fees (do you charge a fixed fee or at an hourly rate)
- Agreement with the client about invoice specifics
- Company’s internal analytic recording rules
Types of fees
If you charge a fixed price and the company policy is that all activity regarding working with clients is billable, all activity a client requires counts as billable time. This is important for figuring out effective time utilization and actual billable rate.
For example, the total rate for a project is $10.000. The team used their time on the following tasks:
- Working on the project – 50 hours
- Meetings with the client – 10 hours
- Going to different administrative institutions – 10 hours
- Copying and binding the reports – 10 hours
- Communicating with third parties regarding the project – 20 hours
By this hours tracker app report, you have spent 100 hours total on the project, so the effective hourly rate is $100. Let’s assume that, according to this project’s time analytics, the pay (cost) rate is $110. We can now conclude that there was a loss as a result of the difference between the billable rate and the pay rate on project level.
If, for example, you consider the hours spent copying and binding and going to relevant institutions non-billable, even though they de facto relate to working with the client, we’d come to the billable rate of $10.000/80hours = $120. This calculation can bring us to the wrong conclusion that there was a gain because of the difference between the billable rate and the pay rate.
Besides, employees have their personal billable rates in most corporations. For example, an employee who has worked on an earlier project can have a set target rate of $115/hour. Based on our analysis, we can conclude that this employee didn’t reach their target billable rate because their hourly rate on this project was $100. On the other hand, if administrative activities don’t count as billable time, we’d come to the wrong conclusion that the employee actually reached their target.
Now let’s examine a situation when the company makes a deal to be paid for every hour invested in the project. In that case, you will account for the time as per the deal with the client. Simply put – the tasks you invoice are considered billable.
Agreement with the client about invoice specifics
A task being billable or non-billable can depend on the deal you make with the client. For example, you can agree that the time you spend commuting to the client’s offices isn’t billable, even though that time de facto does impact working with them. Another option is that the commute time charges for half the billable rate.
Sometimes service providers will complete tasks outside the agreement (free of charge) for a client, and they track such work as non-billable. That way they can analyze the efficiency of their relationship with the client.
The company’s internal analytic recording rules
Some companies decide to count all time spent on a client as billable because of the information the company requires for internal analytics. They don’t invoice all that time (for example time spent commuting), but only the hours according to the agreement instead (invoicing hours). That way they get an effective time utilization and billable hourly rate. According to this practice, time utilization is effectively higher and the billable rate is lower.
On the other hand, some companies only track the hours they have directly agreed upon with the client. They disregard the fact that some client-related activities don’t count as billable. This time, time utilization is effectively lower and the billable rate is higher.
As a general rule of thumb, hours spent working for a client after signing the contract should be billable. On the other hand, the hours regarding the client before the signing are non-billable.
Either way, you will need to consider the entirety of the predicted time you’ll invest in a project when negotiating a contract to achieve the desired billable rate with that client.
Billable related task examples
- Working on a client’s project
- All activity related to the client after signing the contract
- Project control
- Translation services
- Communication with the client directly connected to the project (calls, emails)
Non-billable task examples
- Meetings with the clients regarding agreements about future jobs
- Client’s inquiry assessment time
- Preparing the offer for the client
- All activity related to the client before signing the contract
- All other client-non-related activities (internal education, general jobs, HR, administration, office management, marketing, networking)
Examples of tasks that can be either billable or non-billable
- Internal meetings for the client
- Creating the contract
- Commuting to the client’s offices
- Waiting for the client
- Visiting banks or administrative institutions to finalize the job
Average time utilization rate in the service industry
Time utilization rate is a productivity indicator that measures an employee’s total billable hours within their total work hours.
It is hard to say what is the perfect time utilization rate, because it depends from many factors, such as industry, employee skills etc. Still a good time utilization rate is between 60% and 80%. If the rate is higher than that (for example 90%), the adequacy of company management can be brought into question. In those cases, you can easily deduce that the employees are overwhelmed by their projects. If so, they don’t invest their time in education, learning leadership skills, personal growth, and other strategically important activities. Additionally, if the management reaches the same high rates, it most likely means the bosses aren’t committed to educating their employees, project planning, business development, marketing activities, and activities related to increasing company image. A billability rate this high leads to a decrease in company growth and prevents further development long-term.
The utilization rate depends on employee seniority as well. For example, senior-level workers spend most of their time on projects, so their rate can be optimal at 80%, while the management deals with strategizing. In some cases, time utilization of the partners and CEOs is lower than 10%, considering they are dedicated to developing a strategy, leadership, employee personal development, as well as activities related to finding new clients.
If you were wondering why some companies remain small (personal preferences of the owner aside), it is because the owners and directors carry a large part of the operational and client work.
What is Billable Rate Overrun
Billable rate overrun is the degree to which the planned billable rate surpasses the actual billable rate. For example, the set fee for a project is $10.000. the plan is to work for 100 hours with an hourly rate of $100 per hour. After the project is completed, the time analysis shows the project took 125 hours. That is to say, the actual billable rate is $80 per hour. In that case, the billable rate overrun is 100/80=1.25
Project planning is more efficient the closer this number is to 1. If the number is smaller than 1, the project is more profitable than expected.
In these cases, you should examine why the hourly overdraft occurred. You can use the conclusions to define employee expectations, as well as when negotiating similar engagements in the future.
How to properly measure hourly efficiency rate indicators?
Most companies use simple online billable time trackers. Here is what is important when using these solutions:
- Tracking total work hours, billable as well as unbillable ones
- Tracking these hours by employees, projects, tasks, and clients
- Tracking billable rates and pay (cost rates) per employee
- Receiving high-quality reports to assess the profitability and efficiency of each project, as well as all projects the company is currently working on
- Receiving accurate reports regarding employee productivity rates
- The tracker should be user-friendly and shouldn’t be overwhelming or time-consuming for the employees.
These types of solutions can significantly affect your decisions which can bring a raise in billable rate and productivity.
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