What are billable hours and how to keep track of them?

  • October 7, 2020
  • by Jakub Szyszka
  • No comments

As always, feel free to dive directly into our key takeaways:

Billable hours are the amount of time spent working on projects or providing services that are charged to a client according to an agreed hourly rate.

Non-billable hours are the exact opposite. That’s the amount of time that isn’t directly billed.

✅ Services companies need a clear way of tracking both billable and non-billable hours.

Try TimeCamp for FREE and take control of your billables!

Billable hours in the context of services companies

Professional Services firms across the globe have two things in common:

1️⃣ They either charge a rate or work on a retainer

2️⃣ Regardless of the two variants, they struggle with that.

Whether these are services of a law firm, consulting firm, or a modern-day digital agency, these are either charged on a fixed fee (also known as a retainer or flat fee) or by an hourly rate.

Today we’ll focus on the latter.

More context

Once your agency decides to favor the billable hour model (meaning: you’re charging the client based on the amount of time spent working for them), it opens up the conversation of:

“how do we set up, manage, and optimize our billings”?

You might start off with setting up your hourly rate. Which should cover all your categories of business expenses, including labor cost, overhead, taxes as well as insurance costs, etc.

Crucial to note

Let’s say that you have a software team of 4 full-stack developers, two designers, and one QA tester their work is billed differently.

Overall, you have three types of hourly work, and you’ve set up three different hourly rates for these services.

Your client wants you to build a web app.

Your team has estimated that it will take a total of 850 work hours.

Good.

So, does it mean that you can just multiply it by the different hourly rates and show the estimates to the client along with the projected timeline?

Yes…

and no… at the same time.🤷🏻‍♂️

Why?🤔

Explanation

Well, yes, because, you project the overall cost based on the predicted scope of work and your hourly rates. That’s a good thing.

However, as it usually is in reality, your team won’t spend 8 hours a day on that project.

That’s not possible.

Did you know that on an average 8-hour workday, only 3 hours are spent on actual work?

Now picture that in the context of running a software development company that estimates writing code based on a full 8-hour workday.

That’s not gonna work…

Why is that?

Guess what, we all have meetings, lunch breaks, other interruptions, we help our coworkers and ask for help ourselves.

Regardless of the industry that you work in, lawyers, attorneys, consultants, and marketers have a certain utilization rate that indicates how much of their available work bandwidth contributes to earning revenue.

Sure, but will it impact the overall project costs?

No.

However, it will impact the project’s overall timespan and how much revenue will be generated monthly.

To put it simply:

A software developer or attorney that is capable of working a total of 180 hours a month won’t be able to bill all of his time.

It just doesn’t cut it.

You need to make sure that you operate from a realistic scenario that accounts for the actual average daily working hours.

This is why the concept of the billable hour has been formed.

Once companies opt into billing their clients based on the amount of time spent on working for them, having a precise knowledge of how much time is spent is essential.

What is a billable hour?

Simply put, it’s an hour of work time that a company, team, or person is providing some sort of service for their client.

For example, Steve, a freelance web designer worked a total of 7 hours on Tuesday. Out of which, 5 hours was spent creating a web page for Company XYZ and the remaining 2 were spent on learning new design tools.

Key Difference

Although Steve spent a total of 7 hours at work, only 5 of them can be billed to XYZ. Therefore, Steve’s billable hours (or as legal professionals and big law firm attorneys like to call “billables”) for Tuesday were at 5.

What’s more, some areas of business like law firms and law practices have an inherent problem of determining whether a certain activity directly correlates to earning revenue or not.

To sum it up, once a company (usually software house, digital agency, law firm, or consulting firm) bills their clients hourly, the invoice amount is the sum of all of the billable hours multiplied by their hourly rate (also known as the billable rate).

What are non-billable hours?

These are the hours of work during which a team or an employee doesn’t do work that will not be billed to their clients. Usually, this is some administrative task, training, working on internal projects, etc.

For companies that rely on the billable hour model, it’s essential to be able to determine what part of the work done will be billed and what not.

Of course, that doesn’t mean that as an employee, you won’t get paid for your work. However, a high utilization rate is a big priority among professional services companies.

Basically, you want to have as many billable hours during the day and minimize work that doesn’t directly correlate to billings. Welcome to the headaches of relying on hourly billing.

Determining billable and non-billable hours

While on the surface, it seems like a no-brainer, not all companies have such a clear outlook on this.

Here’s another story from my agency past, so to speak 😂

I once signed quite a significant consulting firm to build them an interactive web app, one of their requirements was preparing a portfolio of suggested design themes and layouts as a benchmark.

I was designated to assemble a team that would help me do that.

So I decided to take our most experienced designer to create a mood board worth of designs.

The client enjoyed them, signed off on the creative direction, and the whole project started.

(Yeah, I know it wasn’t that much of a dramatic story as previously.

But hey, maybe next time 😎 )

Real-life examples of billable hours

Question: Should my and the designer’s work be billed to the client?

Yes.

And no.

Why is that?

Well, the designer provided his core services, which are design work as well as a design consultancy.

However, when it comes to me, my skills of assembling a team (regardless of how small it was, haha) and facilitating the contact with the client isn’t exactly either a core service as well as any sort of service in a context of an agency-model company.

Bizdevs are required to do anything to maximize their chances of signing a client.

The reality

They get paid by commission.

So, what is the answer?

The client was signed, so:

1) The design efforts were billed

and

2) My time spent on this wasn’t billed.

This leads us to…

Issues with billable and non-billable hours

To put it simply, to some degree, you need to rely on judging whether a part of work should be considered as billable or non-billable.

However, it doesn’t mean you shouldn’t strive to minimize the confusion that comes with stories like mine.

Let’s face it, the dilemma of “how much we should bill Company XYZ for last month?” is an excellent problem to have in the context of running a digital agency, software firm, or any other professional services firm.

However, you don’t want to spend too much time on creative accountancy to figure out what your revenue should be.

Solving the issues

If you need clarity with determining between billable and non-billable hours, that’s kind of a good thing.

Why?

Well, it means that you have some means of keeping track of your team’s work time. Whether that’s having a punch in-and-out card or an attendance register.

That’s a good thing.

That’s where we can take things a step further.

These basic means of collecting time data are useful and already provide a fair share of transparency. However, they’re still lacking a bit of scalability and ease of use.

I’m sure you’re still not so keen on spending countless hours trying to figure out how much non-billable activity was in your team this month, right?

Okay, let’s take things up a notch.

Measuring billable hours

It’s no industry secret that time tracking is already considered a must-have tool at your belt.

Whether it’s a simple timer or a multi-feature app (psst, like TimeCamp 😎) or a timesheet app like FreshBooks, you’ve finally found an easy way to have clear insights into how your team and staff performance across projects and in the course of a working day.

The advantages of using a time tracker

In case you didn’t know, using a time tracking app can give you a huge advantage when keeping track of both billable and non-billable activities.

Here’s just what you need to do:

Using TimeCamp to track billable and non-billable hours

Start your free trial and keep track of your billable hours!

This is a simple feature that lets you assign billable parameters to each task and project in TimeCamp.

This way, your team can focus on their work while TimeCamp will automatically track the time spent on any computer activity.

Whether that’s a lawyer going through their documents preparing for a client‘s case or a software developer working on a new feature as part of a project, TimeCamp will automatically track the time spent and assign it to either the billable or non-billable category.

a screenshot of TimeCamp's app
Tracking billable hours is easy as pie!

This way, you’ll have a hand-on view on how much time was spent on billable tasks as well as non-billable activity.

Simple as that 😎

Let’s wrap it up

Agencies, software companies, law firms, and other services companies need to prioritize their efficiency when it comes to their billable services.

Without an effective way of measuring the time spent on their work, they may be at risk of deflating their project and overall profitability which has a long-lasting and negative impact on their growth.

The first step

In order to work smart and efficiently, you need to surround yourself with the tools that reflect your approach.

Let us know how do you approach measuring and keeping track of your billable hours?

What sort of tools or frameworks do you use?

Let us know in the comments!💻👇🏻

Jakub Szyszka

Content Marketing Specialist at TimeCamp. Passionate about being another frustrated musician ;) Most recently immersed in the adventurous world of content marketing and brand building.

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