The Ultimate Guide to Billable Hours
To get paid for services, many agencies, software shops, and consulting companies turn to billable hours, and for good reasons. As they say, time is money, and billable hours are clearly the bridge from one to the other.
Billable hours present the most secure way to tie your work back to the client. Billing clients per time you spend rather than a fixed price turns out less risky and guarantees a higher project margin at the end of the day.
The findings of the 2020’s SPI research show that typically, time and materials-based projects produce the best margins as long as bill rates are set appropriately. Look at IT Consultancies that produced the best time and materials margins at 38.7%, compared to 36.9% achieved with fixed price models. And couple it with the fact that by tracking billable hours, you can monitor everyone's productivity and contribution to the business as well as see where exactly the demand for work is.
As a matter of fact, knowing how to define billable hours and how to work with them can help your teams enter new productivity levels. In this full guide below, you’ll find everything there is to know about billable hours, their impact on project results, and the ways you can track your team performance with the help of billable and non-billable time.
- What are billable hours?
- Billable vs non-billable hours
- The importance of tracking billable hours
- How to calculate and track billable hours
- How to increase billable hours
What are billable hours?
Billable hours, also known as billable time, stand for any time someone spends working on tasks coming from a client, whether those activities are directly or not so directly related to the project in focus. Billable hours simplify cooperation between two parties, bringing some definition as to what tasks should get invoiced and compensated and what tasks shouldn’t.
Even though the term billable hours is vastly used in legal practices, it is also used in all other sectors where someone needs to be reimbursed for working on a project. This term defines how your time can get invoiced and compensated.
While the ideas of what is billable and what isn’t vary from business to business, and project to project, the idea behind them is basically the same. You need to make sure that you are only charging for work performed and not for personal time spent on non-related tasks. Billable hours also provide a measure of efficiency. For example, your team may work at a more or less constant pace throughout the year with well-established norms based on historical performance, but you should still have some form of measurement of efficiency as your billable vs non-billable hours will dictate it.
Here is a list of tasks and activities that could get included in the average billable hours template.
Doing project planning
As you probably already know, project planning is crucial for project success as it helps you see the big picture when outlining the upcoming steps from A to Z. It is the very stage where you get to define all the timelines, set milestones, name and describe tasks that will get you closer to the project finish line. Depending on the size of the project, this stage can take from a few hours to a few days, which is why it deserves a place on every billable hours chart.
Attending meetings and responding to emails
What some clients don’t recognize right away is that you or your team members might often spend quite some time attending meetings and stand-ups, having project-related phone calls, and responding to emails. All these activities usually get included in the billable hours timesheet as, one way or another, it is still project-related work. After all, it will, inevitably, impact your capacity management.
Completing tasks at the very core of the project
This is the part no one can forget about: the tasks and activities that very much noticeably move the project closer to the finish line. These tasks usually constitute the bulk of billable hours.
Doing client-requested project revisions
In some cases, projects need adjustments through no one’s fault: be it due to some priorities changed or new strategies lined up. But it will still stand as a reason for adjustments in capacity planning that’s why in such cases, doing revisions and revisiting projects after their completion will qualify as additional billable hours.
Read more: What an Effective Capacity Planning Process Looks Like in 2021
Now that it’s clear what makes billable time, let’s take a look at what non-billable hours stand for, what sets them apart from billable hours, and what they mean to you and your clients.
Billable vs non-billable hours
In short, non-billable hours make the time companies don’t have to compensate. Everything done during that time is not exactly related to the client or done on their behalf. Instead, it usually covers the things team members do for your company, other internal projects, or just when going about their day.
What counts as non-billable hours, exactly?
Non-billable time includes administrative work, invoicing, office management, business marketing activities, vacations, sick time, and other time-consuming things that are not related to projects. Not to mention the regular daily activities like having lunch or taking a short break from work.
Depending on the industry, project, and collaboration details, you might have to either include only billable hours in your tracking sheets or both, billable and non-billable ones (which is quite rare, but some companies do request that).
Here are a few examples of non-billable hours you might recognize:
- Starting the day by spending 20 minutes responding to recent emails or having a chat with the team.
- Getting on a 30-minute call about a potential project or doing a pitch to a potential client.
- Taking a short break to get some snacks or coffee.
- Getting lunch and taking a short walk.
- Taking another short break a couple of hours before finishing work for the day.
Although those activities are essential and make an integral part of the daily agenda, it is best to do proactive resource management and help your people reduce the number of their non-billable hours. Why? In pragmatic terms, those hours mean that your team makes less money for the company, while for your clients it means that projects might take a little longer than they otherwise would.
Whatever the case, registering time and keeping track of billable hours is paramount if you want to know what to expect from your projects in terms of timing and budgeting.
The importance of tracking billable hours
Having answered the question “how do billable hours work”, you might be wondering if it is really important to track them. That one is a no-brainer: the answer is yes! For one good reason that this tracking can give you valuable business indicators that you can use to make your projects more successful in the future.
Indicator 1: How productive your team was
Whether the ‘team’ is your full-time employees that provide services to clients and partners or contractors you invite in so that they work on your projects, calculating billable hours will help you see how productive they were on the project. When your team members register time, you can measure the percentage of billable work and spot early on if someone’s doing overtime or if something is taking too much of their time (i.e. calls, meetings, training, etc.) On top of that, you get to see how accurate all the initial estimations were when you were doing project planning.
Indicator 2: How much time was needed to finish a task or project
Having tracked billable hours once, you will have the needed information to figure out how much time your team needs to deliver certain tasks and projects. This means that it will be easier for you to do accurate task estimation and plan project resources well which can, in turn, bring more clarity to your budget planning process, resource management, and workload management.
Read more: 9 Resource Management Tools of the Highest Caliber
Indicator 3: How to make future projects more successful
Tracking makes it easier to uncover what you need to do to make future collaborations and projects more profitable and successful. It gives you this baseline you can look at later on to predict what kind of planning will give you what outcome. It will also help you avoid certain pitfalls and risks in your future projects, especially if you choose to use some billable hours software for tracking.
Indicator 4: How cost-effective the project was for the business
Doing effective billable hours accounting will help you figure out how much time, funding, and other resources were required for a specific project or collaboration. Instead of struggling with ballpark numbers, you get specific data that will help you make fast and effective decisions when planning future projects and selecting clients to work with.
Billable hours also help to avoid any possible misunderstanding with clients as the matter of who is doing what. Billing in such way helps to show what activities are being done under the scope of the project and, therefore, need to be paid for with the client’s money.
Read more: Why Time Tracking is Important for You & Your Organization
How to calculate and track billable hours
To calculate billable hours, follow these steps:
- Decide what’s billable and non-billable in your company.
- Get the team to log time, even if they spend it responding to client’s emails or having project-related calls.
- Approve time registrations and put all the billable hours together.
- Lock time registrations to avoid any mishaps.
Ironically, tracking billable hours will increase your non-billable hours as it can require quite a time investment. Plus, imagine how distracting it will be for the team when they are working in full swing, but need to take a break to write some notes every time they spend a few minutes answering emails or attending an ad hoc meeting. Luckily, there are intelligent time tracking tools that allow you to register time where it really belongs and save time. Forecast, for instance, provides your team members with time suggestions and cuts the admin in half.
If you are still looking for the best way to track billable hours, you don’t want to miss Forecast’s massive Utilization report either. It automatically tallies up your billable hours from the timesheets, calculates utilization rates as well as tracks hours spent on non-billable work. The only thing you need to do to get this data is to make time registrations a staple in your routine. It even offers you this cherry-on-top function called “Hide/Show” where you can see not only the billable time but also compare what was planned for the team member to work on and what was actually delivered.
Tracking billable hours is one way to increase project profitability, but there is another trick you can use for this: reducing non-billable hours (and increasing billable time). Here’s how you do it.
How to increase billable hours
If you happen to think that there is little value you can get by recording billable hours, you are discarding a promising opportunity to level up your project results. It is actually not so hard to increase billable time for yourself and your team, but it is definitely worth the effort. These are some simple things you can do to take the driver’s seat in that billable hours game:
Remove distractions and tackle procrastination
Not sure what’s eating away at your billable time and increasing your non-billable hours? Take a moment to consider how much time you or your employees spend every day procrastinating, doing low-value tasks, or getting distracted by calls and social media notifications. The truth is, 88% of people admit that they procrastinate at least 1-2 hours a day. Perhaps it is a good idea to research some ways to enhance productivity at work?
Automate non-billable hours
Non-billable tasks can take a lot of time out of the day, but the good news is that you can automate some of the time-consuming things that increase your team’s non-billable time. In order to get there, you need to analyze all non-billable hours to see what tasks take too much time. In many cases, people say that they waste time creating invoices, writing reports, and doing administrative work. And this is where you can push that billable time up: get a billable hours app for your team to manage projects faster and spend minimal amounts of time on non-billable work.
For example, Forecast is an all-in-one tool you can use for project management, invoicing, time tracking, and administrative work. With its invoicing feature, you can save time by generating invoices within a few clicks and easily tracking all payments after sending the invoices. What’s more, you also get an overall overview of what you invoiced to your clients, what has already been paid, and what is still pending.
Your team might also benefit from the feature for creating reports: all the relevant data will be generated in the blink of an eye.
Track all the billable time, even the minutes
Five minutes for an email here, half an hour for an unplanned call there — this is how billable hours go unnoticed if you don’t track them. By making an effort for billable hours tracking, you can get the real picture of just how much time your team invests into projects.
Automatically monitoring all billable and non-billable hours will give you more control over your projects and resources, generating valuable insights about team productivity and the demand for their work. You get to basically reinvent your resource management practices, discover internal trends, forecast demand, and increase project profit. And the best thing — you can get on that ship right now. Sign up for a free trial and enjoy all the benefits our platform has to offer, tracking billable and non-billable hours being only a small part of them.
