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
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 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 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 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
Usual examples of billable hours could be:
- Working on a client’s project
- Service preforming 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
The 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
- Administration and office management
- General affairs
- Quality and risk management
- Employees 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
- 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 is depends on purpose for travel. In a case travel is related to engagement on client’s project such travel time should be billable, because you spent your time on client actually. But this is something that you need to agree with client. Generally, travel time is billable but usual billing rate is 50% of full billing rate.
Obviously, 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.
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. For better time utilization monitoring, we suggest to try 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 actually billed hours. The realization rate represents this ratio. The closer it is to 100%, the company has higher operational efficiency.
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.
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.
If you have defined a fixed fee with a client, we suggest giving the client the amount of time included in that fee when contracting the job. For example, our service includes calls from clients for a total of three hours per month. Or, you have the right to 5 calls and 2 meetings within this fee.
This way you’ll define the client’s expectations upfront and put things in their place. At the same time, this method will help you optimize your billable hours.
In the case of invoicing fees by the hour, we recommend informing the client in advance that each call will be included in invoiced hours.
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 in 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 giving a billable hours assessment for their specific engagement
- Managers and partners making an estimate for 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.
Why Communicate Billable Hours with Clients
Essentially, billable hours are all the hours the client is willing to pay. Hence, everything you spend and communicate to the client will be considered billable.
It is very important that the client knows which part of your work they are paying for, as well as the way you will present it to them with transparent invoice appendix.
It is crucial to be clear in advance, right after the engagement, and determine the tasks that are a part of your job for the client. This is especially significant if you accompany your invoices with a list of tasks with spent billable hours.
Which industries use billable hours utilization as 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 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.