What are Billable Hours, and How to Track Them?

What are Billable hours?

Billable hours refer to the time spent on work tasks for a client who is bound to compensate or pay according to the agreed-upon payment terms.

In this case, the distinction between billable and non-billable hours must be very clear. To charge the client for the billable hours you spend on the task, keeping track of them is important. Consultations such as legal services, freelance service providers, small businesses, and agencies record their billable time based on the total hours spent directly on the client’s tasks.

The concept of billable hours is a familiar one. The traditional mode of payment calculation has always been task-based, meaning that a person gets paid for the jobs they perform and not for the number of billable hours he spends doing them.

Billable hours are more common among legal professionals who bill clients for legal services directly related to them. The legal profession, however, has faced a lot of criticism, mainly because the number of billable hours does not ensure or record the quality of the task completed.

Billable vs. Nonbillable Tasks

The hours spent directly on the client’s project will be considered billable. While the tasks related to the organization that may help bring or maintain clients but do not link directly to the client’s project are considered non-billable.

The distinction between billable and non-billable tasks needs to be clarified and well-defined. How many billable hours a person spends on a certain task depends on the nature of the business, organization, task, and agreement with the client. By and large, billable hours spent on a client’s project will constitute the following tasks:

1. Any task that helps complete the project.
2. Attending meetings with the client directly related to the assigned project.
3. Responding to the work emails.
4. Reviewing and revising the work submitted.
5. Project planning, such as creating a timeline for the client.

For small business owners and freelancers, some tasks cannot be billed to the clients but must be performed to sustain the business.

1. Creating proposals for winning new clients
2. Pitching new work to the active clients
3. Joining the company’s training sessions
4. Brainstorming meetings
5. Networking and team-building events
6. Consultations and meetings before signing a contract
7. Administrative tasks such as preparing invoices

Is Time Spent Billable or Non-Billable?

To determine whether your time spent on a task is billable or non-billable, you need to follow a simple rule: If you worked for a client-specific job that agrees with you on an hourly basis, your time is billable.

If you worked on a task non-specific to the client, this would be your non-billable time. So, the jobs not directly related to paying clients’ projects, such as client development and office management, do not come in your billable time.

So, basically, yes. Time spent is counted against billable hours, but only when it directly contributes to completing the paying party’s task. For example, if you make a mistake and spend extra hours preparing the client’s project, these hours may only be billable in some cases. In this case, the extra hours will benefit you by helping you provide the already promised service and keep the client.

Similarly, if the client has provided an outline or work brief, and you, as an employee, spend extra hours to provide a complementary service not included in the brief, those hours worked will not be billable. So, the hours worked will be billable if they benefit the client, and those, too, should be according to the contract.

How to Track Billable Hours effectively?

Here is a standard procedure for calculating billable hours for invoicing a client accurately:

Set an Hourly Rate

The first and most important step to calculating billable hours is determining the rate you would like to charge for your billable hours. You can raise it slightly to offset all the administrative tasks, and client-related non-billable time you will be spending. If you are getting an annual or monthly salary, you must divide that by estimating your working hours for the duration.

If you are getting paid hourly, you should know what others in your field and job description are getting paid annually, monthly, or hourly. Having an hourly threshold rate in mind helps keep track of how many billable hours should be built and ensures that your time and experience are valued.

The employer also has to do a lot of due diligence in the case of an hourly-based payment model. As a hirer also, you should research the market rates hourly, monthly, and yearly to avoid discrepancies.

Schedule Invoices and Payments

Invoices and payments should have a predetermined schedule so that there is minimal room for error. Most companies and freelancers prefer a monthly invoice schedule, but weekly and biweekly are also very common and convenient.

Some hiring companies and service providers use tracking software for billable hours, automatically sending invoices according to the schedule. So, a schedule for invoices and payments is even more important in that case. Scheduling also involves determining the payment method.

Track Billable Hours

Tracking billable hours is crucial and may be tricky in some business arrangements. As a service provider or an employer, you may need clarification about which hours are billable and which are non-billable. The initial agreement must contain every detail about time tracking and billable work.

To efficiently track the billable hours, you can do it manually using a spreadsheet. Or you can automate billable hours tracking using any of the software available on the market. Some of these time-tracking software lets you log in and out of your work hours, keeping the numbers authentic for both parties.

Calculate Total Working Hours

The next crucial step in calculating the billable hours is adding up each client’s billing hours separately. Multiply the billable hours with the determined payment rate to prepare invoices by the end of each billing cycle. Tracking software can automate the process, but double-checking always helps.

Create a Professional, Comprehensive Invoice

After calculating the billable hours and their payment, you must prepare a comprehensive, detailed invoice for the client. It should carry the following information:

1. The date you sent the invoice for payment
2. Your contact information, including your name, contact number, email, and mailing address
3. The client’s contact information, including business name, email, and mailing address.
4. Your account details are according to the preferred method of payment.
5. Itemized list detailing the billable hours for each service.
6. The total amount to be paid and the due date should be mentioned in the payment terms of an invoice. 

How to Get Paid for Non-billable Hours?

Client agreements should clearly state the billable hours and the non-billable ones so that neither gets exploited. There are often inevitable non-billable tasks that the service provider has to handle, which can quickly burden the organization.

Utilization is the total billable hours you can pull out of your employee’s available hours. A staff utilization rate of 85 to 90% counts as a sufficiently profitable one, says research by HubSpot.

How you can charge for your non-billable services is simple: charge your clients enough that it easily compensates for such organizational and management tasks.

Here are some ways you can use to optimize your billable hours and hence compensate for your inevitable non-billable work hours too:

1. Identify the specific clients and the type of projects that take more non-billable hours than billable ones. Cut them off or avoid taking unprofitable clients and projects in the future.
2. Using practice management software automates your billing and administrative tasks that do not count toward billable hours.
3. Ensure efficient time tracking and scheduling to maximize your employees’ work-hour contributions.
4. Track every employee’s contribution objectively to see if his work hours are billable or just another name for inefficiency. 

What Industries use Hourly Billing?

Hourly billing has effectively tracked a professional or service provider’s payment and working hours. Mostly, private firms and freelance service providers charge clients hourly. Industries that commonly use hourly billing include:

1. Law firms
2. Private accounting firms
3. Consultants
4. Advertising agencies
5. Contract-based employees
6. Individual freelancers and freelance service-providing agencies for tasks such as web development and content writing

Billable hours is defined as the time spent working on the project of client’s and that is billed directly to the client. Understanding the importance of billable hours is necessary for setting your hourly rates of your services, managing your projects, arranging quotes and estimates, and making accurate professional invoices. Many businesses, including legal professionals to freelancers, utilize billable hours to calculate their revenue.

What are Billable Hours?

Billable hours refer to the number of hours spent working on a specific project in the course of rendering out the service required by the project. These hours are billable to a client at the agreed hourly rates. In other words, they are the number of hours a company can legally extract from its clients in order to perform work for them.

It is almost impossible to find a service business that doesn’t adopt billable hours, be it a digital agency, accounting or law firm, consulting company, etc. By knowing about billable hours, they can also realize how many hours employees devote to billing work.

Billable Hours vs. Non-billable Hours

The main difference between billable and non-billable hours is the hours spent working on a client’s project. Many companies, like independent consultants, agencies, and contractors, operate at an hourly rate. They track the time spent on a project and then bill the client.

What is Included in Billable Hours

All these tasks vary by industry or profession but may include:

• Participation in meetings related to a specific project.
• Finishing and checking work for the client.
• Conducting research related to projects. 
• Identifying the outlines of projects like the schedule or objectives
• Talking or writing emails or making or returning phone calls regarding a project
• Allowing changes to be made to submitted work where the client asks for this.

What is Included in Non-Billable Hours

All these tasks vary based on your industry, but examples include:

• Going for meetings that do not revolve around the project
• Which include administrative undertakings, such as paying the workers or issuing bills.
• Taking calls or replying to emails not related to the project
• Pitching your services to potential clients
• Assembling offers to new or prospective clients
• Inviting a colleague to come out for lunch.

Why Should You Calculate Billable Hours?

Mentioned below are the reasons why you should calculate billable hours: 

1. To Evaluate Projects

With tracking, you will be able to know the amount of time that was spent on a given project and the many activities that consumed much of your time. It will also assist you in developing more valuable estimates for other future projects that will help minimize dissatisfied clients. You will also be able to differentiate which of the clients or the projects consume most of your time and then set appropriate rates.

2. To Determine Profitability

Billable hours are probably one of the simplest measures that a project manager can use when considering an organization’s or project’s potential. The idea behind billable hours is simple: if you bill more hours than your cost, you are generating revenue for your organization.

3. To Make Invoicing More Accurate

Recording billable or non-billable hours will help you bill all your clients without miscalculating or guessing the amount of time you’ve spent working. This means that you will be paid for what is worth and not force yourself to earn low prices in order to attract clients.

Invoices are easily generated when you have recorded the amount of time you spent on tasks for your clients. You will not overcharge your services if you have the precise duration of the cases that are required. As a result,  it will allow you to gain your client’s trust so that, in the future, you will be able to attract more potential customers.

You will also be able to provide much better estimates and quotes. Historical timesheets collected from other past projects can be a gold mine when preparing for your bids since they help you offer the right estimates of the time you will require to complete a contract or part of a continuing contract with a client.

4. To Track Efficiency

Measuring billable hours also makes it easier for organizations to know whether or not their employees are working efficiently. Notably, before workers can adopt the billable hour method, they must constantly keep records of the precise amount of time spent on each of their client’s cases or projects daily. This information also enables measurement of the level of utilization.

When targets are set in terms of the hours to be billed against a project, it becomes possible to know how productive a team is and whether it is meeting, exceeding, or under-achieving its target.

It eliminates inefficiencies by preventing you from knowing how many hours an employee spends on a project and whether they could be working more quickly. It will also assist you in remunerating them when you charge your clients through-the-hour rates.

5. To Improve Team Management

Recording work hours will let you know about the time your team uses to complete a task. You can distribute tasks before your team burns out because you will know if your team is under too much pressure. You will also realize whether your employee is spending more time on non-billable hours than billable, and you can then highlight this issue.

6. To Boost your Earning Potential

Recording billable hours will help you and your team to have a clear picture regarding the amount of time spent on each task. In this way, you will have a better understanding of where you and the team can improve and maximize your earning potential.

If you’re an employee who receives a salary or if you spend your time working on projects that aren’t billable, you must show the amount of time you spent on billable work. This information can help you get paid fairly for your efforts when you’re seeking a raise or promotion.

How To Calculate Billable Hours?

Follow the below-mentioned steps to record your billable hours more effectively:

1. Set an Hourly Rate

First, you need to decide how much you want to charge the clients for the hours you work. To set the rate, you can determine the annual salary you want to earn. The base of this salary can be how much you’ve made working as a salaried employee or the amount that the people in your industry earn for this type of work. Do not forget to add personal or professional expenses which you have to cover. Once you’re done establishing your salary, you need to divide it by the number of hours that you plan to work during the year.

2. Schedule your Invoices and Payments

Next, you need to figure out when you will send invoices to bill clients for the work that you’ve completed. You can select whichever schedule best suits your needs, but the two very common options are monthly or bi-weekly. You can also set up a payment deadline. Similarly, this depends on the clients or your needs, but creating a payment schedule can help keep clients accountable. You might also want to agree on the preferred payment method. To help you make timely payments, select one which is easy for the client to process.

3. Track your Hours

When logging your time, make sure to track the hours you’ve worked on each project separately. By taking this step, it becomes possible to charge the correct amount for each client every time multiple projects are worked on. You have many different ways to do time tracking, either manually or with the help of special software. For a manual time log, you can make a spreadsheet to track the projects you worked on, as well as the dates and hours you’ve spent on them and the tasks you completed during that time.

However, there are numerous software programs that help you track and organize your time more efficiently and accurately. Sometimes, they allow you to use a punching-in feature and/or set time for particular tasks you do. The programs can vary from very basic to more advanced, and they can give you reports of how many hours you have devoted to each project in a given day.

4. Add Up Your Billable Hours

You’re required to add up the hours you worked on a project at the end of your billing period, which is based on your invoice schedule. Once you’ve discovered the sum of your billable hours, you have to multiply that number by your hourly rate to determine how much is needed to charge the client for the period. Using software will help in automating this process, though you’re required to double-check calculations to ensure you charge the client correctly.

5. Create an Invoice for the Client

Once you’re done calculating the hours you worked on a project during the billing cycle and the appropriate payment amount, you’re required to send an invoice to the client.

An invoice includes the below-mentioned important information:

• The date: Include the date you wrote or sent the invoice to show the billing cycle’s end. If you and your client agree on a specific timeline for payments, then the timer also starts for when they need to pay you. 
• Your contact information: All the invoices require your name, the name of your business, your email address, your phone number, and your business address. These details ensure that the client can contact you when they need you. 
• Client’s contact information: These details should include your client’s name, phone number, email address, and business name and address. This information shows who the client is, and it is important to know how to reach them when necessary.
• Itemized list of services: Your invoice adds a list of the services or tasks that you conducted on behalf of the client during the billing cycle. Generally, you give a brief description of all these tasks along with the hours you’ve worked and the hourly rate of those services. 
• Payment terms: You might have set the payment terms at the beginning of the project, but your invoice needs to reiterate these details. This section should contain information regarding the total amount owed to you, the payment deadline, and the forms of payment you accept.  

Billable Hours Example

Billable hours are defined as the time you invoice a client for, meaning that it should be directly connected to the client’s work. The table below shows the common tasks that are defined as billable hours, as well as some of the non-billable tasks for comparison.

How To Increase Billable Hours?

If you’re thinking of boosting your profile, then you should consider increasing your billable hours. However, you need to make sure that you increase the actual time that is spent working on client projects rather than just adding illegitimate time.

The following tips mentioned below will help you ethically maximize billable hours:

1. Track every billable task

Tasks may require several hours of your time, while others will just demand a few minutes of your time. However, don’t forget to track those shorter tasks because they do add up throughout the billing period. For Instance, record a time log, although a phone call with a client takes less than five minutes. As always, billable time means work done for the project; therefore, a call with a client counts as billable, while a call with another worker from the same project does not.

2. Use real-time tracking

If you still record your billable hours by hand, be sure to note the start and end times of all tasks accomplished in the day. This method allows you to track the total time spent on work during the day instead of attempting to determine the time you have spent on each particular task. In this case, you may not be able to capture some tasks that are billable the moment you do them if you do not track them in real time.

3. Be mindful of non-billable time

Try to track the time that you spend on non-billable tasks in addition to billable tasks. Remember to keep the two differences to ensure accuracy. After that, you can review your non-billable time to search for inefficiencies in your workdays.

For example, you may discover that you go more often on coffee breaks than necessary. It is during such breaks that you could engage in some billable work instead of having the coffee break.

4. Use automation tools

Every administrative activity you may perform will not be recorded for billing, yet there is often software to assist with such activities. This method avoids manual work, thereby giving more time to work on other billable activities. It means that even routine tasks could be made easier by automation or that invoices to clients would be sent on time.

What jobs commonly use billable hours?

Jobs that require employees to work on particular projects usually use billable hours to track their time and charge the client.

The industries and professions that commonly use billable hours when conducting work for clients include:

• Consultants
• Contractors or temporary employees
• Freelancers, such as web developers, writers, or graphic designers
• Advertising agencies
• Public relations agencies
• Legal professionals
• Public accountants

How to Get Paid for Non-billable Hours?

Hourly rates should be defined within the client agreements, such as which ones are billable and which ones are not, so that both are not taken advantage of.  The service provider is usually faced with some non-billable activities that cannot be billed, and such activities soon become overwhelming for the organization.

Implementation is the total hours that you can bill your employees and the number of hours that are available. According to HubSpot research, 85 to 90% of the staff utilization rate is profitable enough.

How you can charge for your non-billable services is simple: that is, make your clients pay sufficiently so that it covers all these organizational and management tasks.

Below are some ways that you can use to optimize your billable hours, and then you can compensate for your inevitable non-billable work hours, too:

• Find out which clients are booking and what kind of projects are likely to consume more non-billable time than billable hours. Divest from them or never engage in futile business with those who cannot generate good income in the future.
• With the help of practice management software, all your non-billable work, such as billing, is taken care of for you.
• To optimize contributions from your employees’ working hours, time must be efficiently tracked and scheduled.
• Track each employee’s contribution objectively to notice if his work hours are billable or just another name for incompetence.   

What percentage of hours should be billable?

The target set for billable hours is typically a 70/30 split—that means 70% of time should be billed to clients, leaving only 30% to be spent on non-billable work. This is also termed a 70—to 80 percent level of resource utilization.

The percentage of billable and non-billable hours is essential for the organization’s revenues and billings, employees, clients, and work.

An unbalanced ratio can lead to:

• Reduced profitability: If there are too many non-billable hours, then profitability can be reduced. 
• Ineffective resource utilization: If there is an unbalanced ratio, then it can lead to misallocated resources. 
• Decreased client satisfaction: Undue response time to client requests is likely to reduce client satisfaction and, ultimately, client loyalty.
• Limited long-term growth: Too much non-billable time can also restrict the opportunities to increase the offer portfolio, attract new customers, or invest in a company.

Challenges of the Billable Hours Model

Billable hours are a concept that helps you optimize processes and extract more business value. It assists you in identifying areas of inefficiency, redesigning work, and better-distributing work to maximize resources.

However, you’ve got to keep things in their right proportions. Never forget that no business should always aim at generating profits only; it needs to offer what is best for its clients.

Because, if you have an approach that is too focused on obsessively optimizing with the aim of achieving high billable utilization rates, many risks can materialize, which will damage your organization in the long run:

1. It can build extra pressure on staff

Logging time can be stressful in itself, if and only if it is accompanied by a nasty culture where people know what will happen to them if their billable utilization rate is too low.

In some cases, using the clock as a monitoring tool for how one spends one’s working time can also bring about a feeling of being supervised and accounted for. To exclude this, it is important to explain why one needs to register one’s time in the first place.

It’s not intended to keep a check and punish colleagues who are not receiving enough work. Instead, it is used for resource planning and workload forecasting—both of these activities will benefit the teams by enabling a stable, right-sized pipeline of work in the future and creating conditions where projects can progress very smoothly.

2. It can make you deprioritize important activities

The main focus of billable work is increasing profitability, and this is when you can get lost in focusing on the financial gain and ignoring the activities that aren’t billable.

For Instance, having efficiently realized how to create some time in your team’s calendar, you may immediately go ahead and overload the team with more work, maybe on other projects. Rather than that, the opportunity is there to look at upskilling and training initiatives or some of the team attending networking occasions or a conference.

Interestingly, it is possible to remark that obsession with time results in rising burnout rates for your teams because your teams and personnel will think that there is nothing they can do unless they work more to complete tasks that generate direct income for your business. Relationship building and professional development are necessary.

3. It makes you favor time over value

If you focus only on time, this might incentivize inefficiency as you shift from value delivered to time spent.

If you’ve decided to charge your customer per hour, billable work will encourage people, mainly contractors or independent contributors, to extend the time it takes to complete their assigned work. After all, they will be paid more.

This challenge is specifically relevant in environments where enhancing work and increasing billable hours is a criterion of success. Tasks that can be done automatically, for example, might be manually completed to fill the hours that were paid for.

This approach can go wrong when it’s the client’s responsibility. The client might feel frustrated for not receiving the work at the expected time as they charge every minute, especially if they know that the work is not done efficiently.

FAQs

What are billable hours in BPO? 

Billable hours refer to the extent of time of any particular employee’s working period that can be claimed from the client. Employers cost their clients sometimes at different rates depending on which employee.

How to track billable hours for law firms?

Billable hours need intentional tracking rather than automating logging. To correctly capture these hours, a structured approach is very important.

The three prevalence methods are mentioned below:

• Calendars: Many people choose to manually record all the tasks and hours in the calendar, whether on the daily basis, weekley, or monthly. Although this method is commonly used it can lead to disorganization  and can cause errors.
• Excel sheets: Excel sheet provides a more organized alternative to calendar entries, giving a quicker means of tracking and calculating billable hours. However through this method errors can still occur if hours are not recorded promptly after each task.
• Time tracking software: Time tracking software is also progressively merging with the time tracking solutions used by the law firms. Such software can operate independently or can also integrate into a larger practice management software package.

How can I tell if my time is billable?

Billable hours is something that is directly related to client work. If you’re not certain whether a particular task is billable, then consider whether or not it’s important for the project and activity advances progress. If you want time to be billable, then it should be spent working on tasks that are mentioned in the project’s contract.

What industries bill by the hour?

Billing by the hour is common practice in many industries, like law firms, accounting practices, consulting agencies, and advertising. Hourly billing is also very common for many freelancers in the field of graphic design and web development.

What are billable hours vs actual hours worked?

Billable hours is defined as the hours worked and for that you can bill the client, alternatively actual hours worked is something which include the time spent on other projects for which you can’t be charged to your client. If you want your time to be billable, it should be the time spent directly on client work.