Billable vs Non-billable Actual Hours: Examples & Invoicing

Billable vs Non-billable Actual Hours: Examples & Invoicing

Bojan Radojičić
June 21, 2023

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.

The key terms you should understand when it comes to billable hours management are:

  • billable hours tracking
  • time utilization rate (billable utilization)
  • billable hours realization rate
  • billable hours estimate
  • billable rate overrun
  • billable hours from the client’s point of view
non billable hours

Basics of Tracking Billable Hours

Tracking billable hours isn’t only important for creating invoices for clients but also crucial for avoiding providing free work to clients and for analyzing the efficiency and profitability of projects.

That is why key performance indicators, such as time utilization, actual billable hourly rate, and actual margin rate, directly depend on the record of billable and non-billable hours. This is applicable both on a company level and on the level of each 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 an hourly rate)
  • Agreement with the client about invoice specifics
  • The company’s internal analytic recording rules

Types of fees

When you work with a client on a fixed-price basis, you deserve to be paid for every minute of your time. In this case, you can set up a policy of “if the client asks for it, you can bill for it”. 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 the project level.

billable rate

Sometimes, you might think that some tasks, like printing, binding, or visiting offices, are not worth billing the client for. But these tasks are part of your work, and they take up your time.

If you don’t bill them, you end up with a lower billable rate.

For example, if you charge $10,000 for a project that took you 80 hours, but 20 of those hours were spent on non-billable tasks, your billable rate is actually

10,000/80−20=166.67

not $120. This might make you think that you earned more than you did because you forgot to account for the pay rate of the non-billable tasks.

💡 Industry Insights: The average annual number of billable hours per employee in architecture and engineering firms is between 1,600 and 1,900 hours.

billable vs non billable hours

Besides, employees have their billing 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 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.

💡 Industry Insights: The average time spent on non-client-facing billable work such as legal research, court filings, and administrative or managerial work by US legal services professionals was 20 hours or more per week in 2018.

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 have a different way of tracking their billable time. They record every minute they spend on a client, even if it’s something like traveling or waiting. They do this to get a better picture of their work efficiency and profitability. But they don’t charge the client for all that time. They only charge for the hours they agreed on in the contract (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.

💡 Industry Insights: Alternative billing structures are gaining traction in many industries, with law at the forefront.

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.

No matter how you track your billable time, you should always estimate how much time you will spend on a project before you sign a contract. This will help you set a fair price for your work and reach your target billable rate.

internal analytic recording rules

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.

Usual examples of billable hours could be:

  • Working on a client’s project
  • Service performing activities
  • All activity related to the client after signing the contract
  • Project control and supervision
  • Translation services
  • Communication with the client directly connected to the project (calls, emails)

Non-billable task examples

Examples of billable hours could be:

  • Meetings with the clients regarding agreements about future jobs
  • Client’s inquiry assessment time
  • Preparing the offer for the client
  • Preparation of invoices or pro forma invoices
  • All activity related to the client before signing the contract
  • Internal and external education
  • Recruitment activities
  • E-banking, payments, internal accounting
  • Meetings with new targets, contacts, and clients
  • Internal compliance activities
  • Marketing activities
  • Networking
  • Administration and office management
  • General affairs
  • Quality and risk management
  • Employee evaluation and development
  • Other HR activities
  • Reporting for management
  • All other client-non-related activities

Examples of tasks that can be either billable or non-billable

  • Internal meetings for the client
  • Invoicing
  • Creating the contract
  • Commuting to the client’s offices
  • Waiting for the client
  • Visiting banks or administrative institutions to finalize the job

Is travel time billable?

This depends on the purpose of travel. In case travel is related to engagement on a client’s project such travel time should be billable, because you spent your time on the client. But this is something that you need to agree with the client. Generally, travel time is billable but the usual billing rate is 50% of the full billing rate.

Business travel time that is not related to the clients is non-billable.

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.

time utilization rate

It is hard to say what is the perfect time utilization rate because it depends on 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.

💡 Industry Insight: The average time utilization rate can be influenced by many factors, such as the type of service, the size of the firm, the level of experience, the seasonality, the pricing strategy, and the resource management

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 high billability rate this high leads to a decrease in company growth and prevents further development long-term.

The utilization rate also varies by the level of the employee. Senior-level workers are mostly focused on project work, so they aim for a rate of 80%. Management, on the other hand, spends more time on planning and decision-making. That’s why some partners and CEOs have a rate of less than 10%. They are busy with growing the business, leading the team, and finding new clients.

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, the 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.

For better time utilization monitoring, we suggest trying some of the time management tools.

What is the Realization Rate?

The biggest problem in billable hour management is the question of why all billable hours (the ones that are invoiced to the clients by nature) haven’t been invoiced.

Hence, you need to recognize the difference between billable and billed hours.

The realization rate represents this ratio. The closer it is to 100%, the company has higher the operational efficiency.

💡 Industry Insights: The average law firm realization rate has been on the decline. That is to say, it has dropped from 92% in 2007 to 82% in 2019.

Realization Rate

What is the Billable Rate Overrun

Billable rate overrun is when you end up working more hours than you planned, and your billable rate drops. For example, suppose you charge $10,000 for a project that you expect to take 100 hours, at $100 per hour. But when you finish the project, you realize that you worked 125 hours. That means your billable rate is only $80 per hour.

Your billable rate overrun is

80/100​=1.25

In other words – you worked 25% more than you intended.

Billable Rate Overrun

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.

Optimizing the time spent on calls with clients

Whether you have agreed upon a fixed fee or a variable fee per the billing rate, calls with clients are one of the biggest time consumers.

This is especially important if you have a fixed fee. You cannot control the clients calling you. If you want to meet their expectations, the calls can last for 20 or 30 minutes. If you want to make the calls shorter or not answer them, you can increase the dissatisfaction of the client and lead to potential client loss. The problem occurs if the time you spend on calls isn’t included in the time you bill for.

When you work with a client on a fixed-fee basis, you should always specify how much time you are offering for that fee.

For example, you could say that your service covers three hours of calls per month, or that you can have 5 calls and 2 meetings within the fee. This will help you set clear expectations with the client and avoid scope creep. It will also help you maximize your billable hours.

If you charge by the hour, you should also let the client know that every call counts as billable time. This will prevent any surprises or disputes when you send your invoice.

Industry Insights: Some of the strategies that can help you optimize the time your employees spend on calls include

  • Staff training and coaching
  • Providing a comprehensive knowledge base
  • Creating a ticketing system
  • Establishing alternative communication channels

Billable Hour Estimate

When you get an inquiry from a client, it is important to estimate the total number of hours required for the project. It is a good idea to set aside half an hour with each team member for a constructive meeting and assess the pricing realistically. This is a better option than determining a fixed price with a wrong estimate of the potential engagement.

You can conduct the billable hour estimate by:

  • Basing it on the time tracked on a similar job that was completed
  • Each team member gives a billable hours assessment for their specific engagement
  • Managers and partners estimate the total number of hours based on their personal experience

If the estimates through all three techniques aren’t very different, we can say the assessment has a higher reliability level.

Once the assessment is made, it is necessary to determine the price for the specific job based on the employees’ billable rates. In any case, the estimate of the number of billable hours is crucial for the process.

💡 Industry Insights: Billable hour estimates can vary widely across different industries and professions. For example, the average billable hour estimate for a lawyer in the US is 1,800 hours per year, while the average billable hour estimate for a management consultant is 2,000 hours per year.

Why Communicate Billable Hours with Clients

Billable hours are the hours that the client agrees to pay for. That means everything you do and tell the client about is billable.

The client should have a clear idea of what you are charging them for, and how you will show them your work in a transparent invoice appendix. It is important to be upfront and honest, as soon as you start working with the client, about what tasks are included in your service. This is especially true if you send your invoices with a breakdown of your billable hours.

Which industries use billable hours utilization as a performance indicator?

Tracking of billable hours is suitable for:

  • Law firms
  • Accountancy business, audit, and tax consulting
  • Creative industry, digital marketing agencies
  • IT industry and developers
  • Architects and engineering
  • Construction and real estate
  • Human resources and recruitment agencies
  • Finance, banking, and insurance

Bojan Radojičić

Bojan Radojicic, Master Degree in Economics, is a financial performance consultant with more than 15 years of experience. He is responsible for adding value services based on innovative solutions.

Join thousands of companies that grow with Time Analytics

WTS
Finexepertiza
ASW
BIB
Arcadius
Fidelis
Miras Managment
Zabriskie studio