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Iryna Viter

All You Need to Know About Billable Hours

The number of billable hours you record each month is a key metric for any service business. But it's also one of the most misunderstood aspects of working in professional services. What are billable hours? And how can you use them to your advantage?

Billable hours are the bread and butter of professional services firms. Unlike manufacturing, which sells a product, or retail, which sells a service, professional services firms sell the time they spend working.

While this makes calculating profits more straightforward than other business models, it also presents unique challenges. The most important of these is keeping track of time on project-based work (also known as billable work). To do so effectively, registering billable time is a must. But what are billable hours and how do you calculate them?

Learn everything you need to know in our guide:

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What are billable hours?

Billable hours are the total amount of time you spend working on a particular project. These hours are charged to a client according to an agreed hourly rate. In other words, they're the number of hours a company can charge its clients for doing work on their behalf.

Most service businesses - digital agencies, accounting and law firms, consulting companies - use billable hours to charge their clients for the services they provide. Understanding billable hours, they're able to see how much time employees spend on revenue-generating work.

Here's an example of billable hours from the accounting industry. When an auditor performs an audit of financial statements, they record the number of hours worked on the audit and these hours are then billed to the client.

There are also non-billable hours, which are hours that you spend on things like team meetings, email, sales and marketing, business development, or administrative work, but we'll look at these further down the line.

billable hours

All billable and non-billable hours are recorded in your timesheets and then sent over to your billing/invoicing software as soon as a project is complete or when you're ready to invoice your client.

Related: Project Billing - The Ultimate Guide for Professional Services

The importance of tracking billable hours

There are a few reasons why tracking billable hours makes sense for your business. The most obvious reason is that it helps you figure out how much to charge clients. Knowing how long it takes you to complete a project helps you set an hourly rate that allows you to make money and run a sustainable business.

Tracking billable vs. non-billable work also gives you an idea of what projects and clients are most valuable to your business. How much time do you spend on each client? What kind of work do they bring in? Most importantly, what's your profit margin on each client? By answering these questions, you can better decide which clients to focus on and which ones aren't worth your time

When employees fail to track their time properly, it can wreak havoc on company finances. One study revealed that companies that don't track billable hours accurately lose up to $50,000 in annual revenue. A billable hours model will help you benchmark employees' performance, cut down on non-billable hours, and help forecast your team's capacity and revenue.

It is easy to lose track of a billable hour. You might think you're only spending five minutes on a task, but when you look at the clock, it's been an hour! Tracking billable hours will help you keep your finances in order and make sure you get paid for every minute of work you perform for clients.

What are non-billable hours?

Non-billable hours (sometimes called "overheads") refer to any work done that doesn’t get invoiced to clients. Businesses have to have non-billable hours to ensure their internal processes run smoothly, and they can have a positive effect on company culture if they are managed correctly.

Non-billable hours might include:

  • Prospecting, marketing, and other activities related to business development (for example, attending networking events).
  • Meetings with colleagues or staff that don’t necessarily involve client work (for example, administrative tasks such as approving timesheets).
  • Training and learning new skills (for example, reading industry articles or books, watching online courses or webinars, participating in training sessions).

Non-billable hours also include activities that employees do for their own benefit, for example, taking a 5-minute break to freshen up, or eating. These activities are not directly related to work tasks but contribute to the employee's total hours.

The disadvantages of non-billable hours

When employees spend their time on non-billable work, it takes them away from the billable work that directly generates income for the company.

The extra burden of non-billable time can be especially tiring when a client has a strict deadline that must be met. It's not uncommon for employees to have to work overtime or skip lunch breaks just to get their billable work done.

Non-billable work also means lower profits and higher labor costs. When your employees spend most of their time on non-billable activities, it's hard to grow your business without adding more people (which increases fixed costs).

Failing to meet billable hours targets also spells slower growth. If you don't have enough billable resources to keep up with new clients or projects that come in the door, you'll need to turn down business which will slow growth.

How to calculate billable hours

Do you find it hard to calculate your working hours? It can be confusing if you are new to this approach. Here is how you can calculate billable hours.

  • Set your agreed hourly rate.
  • Start tracking your billable hours. You can track and record all the hours spent on the project and then separate billable and non-billable hours or you can simply record billable hours and leave out non-billable hours.
  • Add your total billable hours (daily, weekly, monthly).
  • Multiply your billable hours by your billing rate.
  • Add applicable fees or taxes to the client's invoice.

To assess your profitability, use your billable utilization rate as a reference. Billable utilization rates are the total employee billable hours, as a percentage of total working time. They vary depending on the industry. Skilled workers may need to be onsite to track billable hours while consultant workers can track work from the office or remotely.

New to resource utilization? Learn more in our kit here:

What can project managers learn from law firms about billable hours?

The concept of billable versus non-billable hours is widely used in the legal profession. In fact, many law firms require that their attorneys track their time throughout the work day so that all billable and non-billable times can be accurately recorded.

Law firms set their lawyers billable hours targets, and these are also used to assess bonuses — these targets can range from 1700 to 2300 hours a year. Every law firm will use billable hours as a measure of charge for their legal services.

Law firms also use attorney billable hours chart to track:

  • Lawyer downtime
  • Sick days
  • Personal time off
  • Family emergencies

As billable hours are used as a basis for their charges, law firms prioritize this method of working. Billable hours charts make it easier for law firms to track time for invoicing as they spend less time calculating billable hours manually.

When legal professionals use law practice management software, they can meet their billable hours' targets, while keeping track of non-billable time. Both partners and associates can see at a glance how much time was used doing billable or non-billable tasks.

Why you should calculate billable hours

Here are the benefits you will enjoy once you start using billable hours:

To evaluate projects

Tracking will help you know how much time you spent on a project and what tasks took up the most time. This will help you create better estimates for future projects, and reduce the chance of unhappy clients. You'll also be able to identify which clients or projects use more of your time than others and adjust your rates accordingly.

To determine profitability

Billable hours are one of the most basic metrics that a project manager can look at when determining the profitability of an organization or project. The idea behind billable hours is simple: if you bill more hours than your costs, then you are making money for your organization.

To make invoicing more accurate

Tracking billable and non-billable hours will help you to bill your clients without underestimating or guessing the amount of time you've spent working. You will get paid for what is worth without underselling your services.

You can create more accurate invoices by tracking the time you worked for your clients. You won’t overcharge for your services if you know exactly how much time each case requires. As a result, you will gain your client's trust, which will enable you to attract more potential customers in the future.

You will also produce more accurate estimates and quotes. Historical timesheet data from previous projects can make it much easier to provide accurate estimates when you bid for new business, or when you have ongoing projects with changing scopes.

To track efficiency

Measuring billable hours also makes it easier for organizations to determine if their employees are working efficiently or not. To charge by the billable hour, workers need to track the amount of time they spend on each client’s case or project every day. This information can be used to measure utilization.

By tracking how many hours are billed against a project, it becomes easier to see how productive a team is, and if they are performing above or below expectations.

You'll know exactly how many hours each employee spends on a project and will be able to determine if they could be working faster or more efficiently. You can also use this information to pay them fairly when billing clients based on hourly rates.

To improve team management

Tracking work hours helps you as a PM to know how much time your team uses. You can delegate tasks before your team burns out because you will be able to tell if they are under too much pressure. You will also know when your employees are spending more time on non-billable hours than billable, and can then address the issue.

To boost your earning potential

Tracking billable hours allows you and your team to have a clear picture of how much time is spent on each task. This way, you can identify where you or your team can improve and how to maximize earning potential.

If you're a salaried employee or if you spend time working on projects that aren't billable, it's important to show how much of your time is spent doing billable work. When it is time for a raise or promotion, this information can ensure that you're getting paid fairly for your efforts.

How to track billable hours to increase profitability

The example of law firms using billable hours has become a model for companies who also need to find ways to charge for their services that is accurate and measurable. Here are some of the ways to effectively track billable hours for increased profitability:

Keep track of all work

Setting a real-time tracker is better than logging hours manually. This method will help you identify who is approaching the work in a way that is too laid back, and those who work overtime and put in too many hours. You will also be able to keep tabs on the project and improve profitability.

Record non-billable hours. Since some non-billable hours help speed up the project, it is good to track this, so you can know how much non-billable time is required for a particular project. If more non-billable hours are required for a project, you may be working at a loss. You may need to renegotiate with the client or add the non-billable hours to the invoice and let the client know why you need to be paid for these.

It is best to track working hours by project separately, even if the different projects belong to one client. You also should record projects separately so you know which projects consume most of your time, which are profitable, and which projects need to be reviewed in order to increase profitability.

Set goals for billable hours

Each day or week set a goal for how many billable hours you want to record. This should be based on the amount of time you have available each week and the number of clients or projects you're working with. You can use tools such as calendars and spreadsheets to help track your progress and make sure you are meeting your goals.

Detail your invoices

A detailed invoice is better than a blocked invoice. This is because your client will be able to grasp how much work was involved to make the project a success.

If you have a good automated invoicing system, you will stay consistent and thus avoid missing invoices. Let the client know when to expect the invoices. It is standard practice to send invoices monthly but for projects that need more resources, you can work out a bi-weekly schedule with your client.

Review regularly

Look back at what you or your team have accomplished each day or week, especially if there is a large gap in time between projects or clients. Reviewing your progress can help point out any issues with tracking not only your hours but also your team's.

Tracking time is not difficult and once you get a hang of it, you will find it to be more useful. Time tracking software like Runn will help you track billable hours more efficiently and accurately.

How to increase your billable hours

Getting rid of distractions is a great way of increasing billable hours. Instead of spending time checking up on social media or watching videos, you can use that time to work on your client's projects. Turn off social media notifications and check emails at the end of the day to increase billable hours.

Sometimes clients may complain if you add non-billable hours to the invoice even though the hours were spent indirectly for the client's benefit. To avoid difficulties arising, include detailed descriptions in your invoices that show just how these hours of work benefitted the client.

Delegate tasks such as answering emails, running errands, updating files, making copies, and other less important tasks to the juniors. This will help focus on the project at hand thus increasing billable time.

Prove how much time you spend working, so it can be easy to negotiate a higher salary or billing rate. It's difficult to argue with numbers — if you can show you are spending 40 hours working each week instead of the 35 you had earlier agreed to, then your client will be willing to add 5 more hours.

Get clear on what is billable

It's true that it may be difficult to determine if time spent on a particular non-billable task is billable or not. However, there is a simple way around it. If the task you are working on can help you complete the project faster or more efficiently, then you can add the time under billable hours. You should let the client know in detail so they can approve the payment.

When you spend time and resources training workers so that they can handle the project effectively, is a non-billable time that clients need to know about so that they can pay for it.

Use time-tracking software like Runn

Companies that track billable hours typically use an online timesheet system that makes it easy for employees to record the exact amount of time they spend working in a given week.

A good time-tracking software like Runn works wonders for your billing process and your entire firm's well-being. Runn is a time-tracking resource management solution that will save you both time and money.

Runn software has easy timesheet tracking and management interfaces to help you and your team record billable and non-billable time. The Runn billable hours tracker ensures that the data is centralized and safe, as opposed to using paper-based solutions or cumbersome spreadsheets.

Final thoughts

The most important thing about any business is time – time to complete a project, time to meet a deadline, and time to make sure you get paid for the hours you work. Without effectively tracking billable and non-billable hours, freelancers and independent contractors have no way to measure their billing rates and ensure that they’re being compensated for every billable moment.

Without proper tools, it’s also difficult to factor in project expenses when invoicing clients. Many workers end up realizing that they’ve been working for less than what they could have earned if only they had been able to track the hours they spent on each project. It is, therefore, a good idea to track time and leverage the benefits of time tracking tools.

A billable hours chart will help project managers, clients, and yourself to how many billable hours in a year were used in a particular project. A time tracking system with a billable hours calculator will help you to efficiently track billable hours and ensure you get paid as you should.

Optimize your team's billable hours with Runn's resource scheduling software. You can use it to monitor your billable and non-billable hours, along with other aspects of resource management to make your project run like a dream. Start a free trial with us today!

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