Many companies, as well as independent consultants and contractors, operate at an hourly rate. You negotiate a rate, track the time spent on the project, and bill it to the client. On the surface, the process may sound pretty straightforward. However, in reality, organizations often struggle to come up with an effective system of time tracking to optimize their earnings.
Even the most efficient workers will spend non-billable time working on a project. Sad but true, employees use up only 2.8 hours of their day on productive tasks. The rest of the time is often wasted on the so-called 'non-billable' administrative tasks. Sometimes, they are unavoidable and equally critical for your business to earn a profit, but you cannot bill clients for them.
It's important to understand the difference between billable and non-billable work, because time that's not billed is time for which the firm does not receive revenue and does not cover its expenses.
So here's our breakdown.
Billable work embraces all tasks that are directly related to the client's project. It includes every unit of work that you can put on your invoice to the client. In other words, billable work consists only of those tasks that are to be compensated; this determines how you will get paid for the time you spent on the project. These are usually tasks that are outlined in a contract between you and your client.
The terms billable hours, billable work, or billable tasks all describe a task that can be charged to a client. Billable work is one of the main sources of income for service based companies like consultancies, agencies, law firms, and accounting agencies, and usually the main metric used to judge the performance of employees.
To avoid confusion, it's best to define what is billable and what is not before you begin to work on a project. In general, the following tasks are considered billable work:
Billable work is also typically broken down into three categories:
Time-based billing is by far the most common form of billable work. An employee will track their time, and then charge a client an hourly rate for their time.
However, not all billable work falls under time-based billing. For example, if you're working with a client on a new web design project, you can offer them a fixed price for your services. This means that you won't be tracking hours - instead, you'll simply bill them one fixed amount at the end of the project.
Non-billable work is defined as any work performed by an employee that cannot be billed to the client – even if it is related to a billable task. This type of work includes vacation time, sick leave, continuing education leave, holidays, personal business time, and other unclassified time. For example, if you spend three hours reviewing your email inbox before starting a billable engagement with a new client, those three hours would be recorded as non-billable time for the day.
Non-billable hours are essentially spent on any other tasks you do at work, from administrative tasks like emailing to attending events that might result in new business to training. In short, if you’re not directly charging a client for the work or it’s not customer-facing, it’s most likely non-billable work.
Even though non-billable work is not requested by a client, it is equally important to keep your business running smoothly. For example, employee development will contribute to the quality of different tasks, but can rarely be assigned to a single client's project. Social activities may be important for team morale, but you cannot charge clients for these work hours.
While these activities cannot be billed to the client and fall under the category of non-billable work, you need to pay your employees for the time and effort they put in. The following are a few examples of non-billable tasks:
Some of the tasks mentioned above are crucial for business success. Nonetheless, it is important to keep track of how many hours you and your team spend on these non-billable activities, as oftentimes they're eating your profits.
It will depend on the nature and scope of the project, but first of all, you have to negotiate with your client what tasks are billable and which ones won't make it to the invoice.
As the next step, don't forget to communicate this to your team members. Make sure everyone assigned to the project understands what is billable work and what is not.
Now, when you're working on a project, how do you know how many hours to bill your client for? With time tracking set up, you can calculate billable hours as well as track any non billable time.
Traditionally businesses used spreadsheets to register and track time. However, this process is inefficient and cumbersome. It requires employees to enter the working hours manually, which ultimately increases your non-billable hours, and is likely to result in less accurate data.
Instead, use time tracking software. Ask your team to use the software even when they are engaged in small project-related tasks like answering phone calls or replying to clients' emails. At the end of the project, calculate the total billable hours.
When you start tracking billable time, you can also measure your billable utilization rate - to understand how much revenue-generating work your teams are carrying out.
Keeping track of your non-billable time allows you to compare the number of hours you spent on billable and non-billable work. If your non-billable hours are disproportionately high, you will want to make improvements and change processes for next time.
Track billable hours as well as non-billable time to get the full picture. By tracking time not spent directly on a client's projects, you can understand how much a project costs you and whether a project is profitable or not.
You can discern the productivity of each employee by comparing their billable and non-billable time. If you see an employee has unreasonably high non-billable hours, you can intervene and take necessary steps to help them improve their performance.
Tracking each non-billable hour will help you plan your future projects better. You will know exactly how much time you need to complete the project and what the total cost will be. If you do not take the non-billable hours into account, the chances are you will end up setting an impractical deadline or lower price.
More non-billable hours hurt your business. In some industries, the non-billed hours outweigh the total billable hours. For example, in law firms, members of the legal profession often spend more time on non-billable work than billable tasks. This is affordable for the law firm when the per hour rate of the legal professionals is significantly high. It doesn't work that way in most industries. They must balance non-billable time to make a reasonable profit margin.
Here are some steps that you can take to restrict non-billable time.
Avoid distraction and make use of the time efficiently. Taking regular breaks is important and can increase productivity overall. However, tracking employee time can help you make sure you and your team are not delaying tasks unnecessarily.
You can limit the total hours you spend on administrative duties by utilizing automated solutions. Look at the non-billable times and identify the most time-consuming projects. Find software that is easy to use.
For example, the invoicing process often adds non-billable time. Automated invoices will do the job more quickly and save you some time - more hours for your staff to spend on billable work!
More billable hours will help you balance the overall cost of a project. Make sure you and your team count every minute you spend on a project. It may be a little overwhelming at the beginning, but it will come easily once you make it a habit.
Your project profitability depends on how many billable hours you log. However, the non-billable tasks are important for your business, and you can't eliminate them. You need to make sure that you are aware of non-billable expenses before a project begins. While planning the budget, make sure to include both billable and non-billable time.
When you're working with limited resources, it's important that you know how best to use them. You can't just throw them around willy-nilly; you need to use them in a way that makes sense for your business and helps your company grow. That's where resource allocation tools come in.
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