What are Billable Hours?

Whether you’re a freelancer, entrepreneur, consultant, or business owner providing your services to multiple clients, accurately tracking work hours for ongoing projects is necessary to get paid for all your work. But when it comes to work, not all the time you spend is billable, i.e., can be charged to the client. So, how can you know what your billable hours are and how can you differentiate between and track these hours to increase them?

Read our detailed blog to learn the difference between billable and non-billable hours. Also, discover which activities are included in billable hours and how to increase your billability to maintain profitability without straining your relationships with the clients.

What are Billable Hours?

Billable hours are the total time you or your employees spend working on a project for which the clients are billed at an agreed-upon rate.

In other words, billable time is the number of hours a company can charge its clients for work done on their project.

For example, in consulting firms, billable hours refer to the time spent on a service for which the client is charged at an agreed-upon hourly rate. Tracking these hours is essential for consulting firms as it offers valuable data to make informed decisions and improve their ROI.

What are Non-billable Hours?

Unlike billable hours, these are the hours that your employees spend working on activities that support the business, such as administrative meetings or business development processes. However, these are not directly related to any specific clients’ work so you can’t charge them for these hours.

The actual number of work hours may comprise both billable and non-billable. That is, these include the hours that your employees worked on both billable and non-billable activities collectively.

Difference Between Billable & Non-billable Hours

With a busy schedule and back-to-back meetings and activities, differentiating between billable and non-billable hours may sometimes seem challenging.

As a thumb rule, if your employees are working on a client’s specific project, in which you get paid for every hour they work, then you can consider those hours as billable. However, suppose your employees work on non-client-specific tasks or activities during their project work, such as filling out timesheets or attending webinars. In that case, you won’t be able to include such activities in billable time.

What to Include in Billable Hours?

As mentioned above, you generally include the time spent working on the project’s tasks, which can be billed to clients. However, before embarking on the project, discussing it with your clients is better. Doing this can give you clarity on which tasks they expect to be billable and non-billable.

Here are a few common tasks that you can consider as billable in most of the cases:

• Having communication with clients over emails and messages
• Attending meetings with clients
• Meetings for revisions or alterations
• Working on the client’s projects or deliverables, such as designing, coding, or writing
• Making alterations and revisions
• Drafting project-related documents and synopsis
• Developing schedules, allocating tasks, and creating progress reports
• Doing research work for the client’s project or learning new tools or technology for the project’s requirements
• Time spent on travel, which is the requirement of the project (based on the client’s agreement)

What to Include in Non-billable Hours

As mentioned earlier, non-billable hours are the time spent on tasks that are not directly linked with the client’s project and you can’t charge these to the client. These hours are mostly spent on administrative or overhead projects that aren’t directly linked to client services.

Here are a few common tasks that you can consider as non-billable in most of the cases:

• Checking and responding to internal teams’ emails
• Administrative work such as invoicing, filling timesheets, or working on internal paperwork
• Business marketing, such as working on social media marketing, creating blogs for your website
• Business development and pursuing new clients, such as proposal writing, nurturing relationships with clients, pitching, sending cold emails, etc.
• Professional development and training, such as attending webinars or seminars, upskilling via a course, or attending conferences
• Resolving any technical issues or system errors
• Learning a new skill or technology for personal growth
• Time spent on breaks or helping a colleague with their issues

Importance of Tracking Billable Hours

Invoicing Accurately

By accurately tracking billable hours and generating their detailed breakdown, you can help clients understand how their money is being spent and whether it has been put to good use. This practice lets clients know how much time has been spent on which tasks and fosters transparency and trust.

Accurate billing and effective use of such hours also make them more likely to trust you and avail of your services in the future. That’s because they know that you use billable hours efficiently and charge your clients for the right amount of work.

Moreover, the billable data tracked from the projects helps organizations ascertain the estimates related to time and resources for future projects of the same client.

Optimizing Workflow

By tracking billable hours accurately, you can gain insight into how much time and resources are spent on each project. This helps create an efficient workflow and identify areas where productivity lags. Thus, you can optimize workflow and improve project efficiency.

Also, tracking these hours helps management understand how long it takes to complete a task and which resource takes more time. Then, managers can allocate appropriate tasks to the right resources according to their skills to make the best use of their bandwidth and billable hours. Furthermore, tracking these hours for a project helps organizations estimate the time required to complete similar projects in the future, and they can remove any redundant tasks as well.

Ascertaining Profitability

Knowing the billable hours helps you ascertain your total profit in a particular project. The revenue earned from billed hours vs. the total project cost will help you understand how much profit you made through a project.

Tracking the billable hours lets you know how much profit you make per project and whether your billing is more than your spending.

Accurately tracking the time that resources spend on client projects ensures that you bill clients for all the services rendered. This enables you to maximize your revenue by invoicing for every billable hour you work and ensures that you don’t miss any potential revenue opportunities.

Comparing Billable Hours With Non-Billable

By comparing hours that can be billed with non-billable hours, you can ascertain the ratio of spending vs. profits. More billable hours mean more profitability. Though more non-billable hours don’t mean you’re completely at a loss; it’s just that the client doesn’t pay for these hours.

Thus, by comparing both hours, you can optimize your strategies to increase billable hours. You can also reduce non-billable ones by automating some repetitive tasks that may not require much manual intervention.

Utilizing Employees Properly

By tracking billable hours, you can evaluate resource utilization rates. More hours like these lead to greater productivity and higher utilization rates; that is, more time has been spent on client work than other administrative tasks.

Also, by tracking billable hours for each team member, you can ensure that no employee overworks. Thus, by monitoring this data, you can provide a better work-life balance to your employees and prevent them from burnout.

Making Informed Decisions

Tracking billable hours can help you evaluate each project’s and client’s profitability. By analyzing billable hours and the revenue generated, you can make strategic decisions, such as stopping certain projects that are squandering your resources or adjusting the billing rates for specific projects.

How do you Calculate Billable Hours?

Set the Invoicing Period

Whether you’re a freelancer or a business owner working with clients on their projects, setting the invoicing schedule is the first step in tracking and calculating the billability. You can set weekly, bi-weekly, or monthly invoicing schedules to track such hours and invoice the clients.

Set the Hourly Rate

Most businesses deal with multiple clients for their project requirements. The billing rate for these can be the same for everyone or different depending on:

• the complexity of the project,
• the work responsibilities involved, and
• resource requirements.

So, if you set different rates for each client, then make sure to document the hourly rates in the respective agreements. Also, create a separate document mentioning hourly rates for various clients for your reference.

Consult With the Clients

Discussing the billable and non-billable tasks with clients is a good practice to ensure transparency about which tasks will be chargeable and which activities both parties won’t consider as billable. This practice helps clients and businesses stay on the same page by distinguishing between what will be considered billable and non-billable. It also reduces the chances of misunderstanding and disputes regarding invoicing.

Track the Number of Billable Hours

There are several ways to track billable and non-billable hours, such as by using paper-based timesheets or spreadsheets. However, such timesheets are prone to errors, and the missed or double entries can result in underbilling or overbilling the client, leading to conflicts over billing.

To overcome this challenge, it’s a good idea to leverage any efficient time-tracking software. It can track these hours accurately and automatically. Moreover, it can give a holistic view of how resources use their work hours. Since resources may work on multiple projects simultaneously, the timesheet software organizes the timesheets according to tasks, projects, and clients. This data can help you distinguish between hours devoted to each project by resources.

Consider tracking non-billable hours separately, as it gives visibility into how much time is being utilized in administrative tasks and how you can reduce it to devote more time to billable tasks.

Add the Billable Hours

Now, as per the schedule set, add the total number of billable hours for each day on a weekly/monthly/biweekly basis. Add the billable hours of each client separately and create reports for how these hours were spent on different activities.

Multiply the Billable Hours with Hourly Rate

Once you have added the billable hours, multiply it by the agreed-upon hourly rate for individual clients.

Total Billable hours * Hourly rate = Invoicing amount

Also, consider including factors such as taxes and any external fees as per the agreement to calculate the final invoicing amount for each client. If you use a common hourly rate for all clients, you can multiply each client’s billable hours by the same rate. You can include additional charges, such as material costs, when calculating your final invoice amount for clients.

Send Invoices

You can leverage automated billing software to streamline the process of invoicing for clients. Alternatively, you can use a spreadsheet or an invoice template to generate invoices for each client. Consider mentioning your organization’s name, project name, address, and contact details on each invoice. Also, itemize the billable hours with respective tasks to clarify how these were spent.

How can you Increase Your Billable Hours?

Get Clarity on What is Billable

Before signing the agreement, be clear about which tasks and activities will be billable and which will be non-billable. You can document the billable tasks in the agreement, such as research work, meetings, design, and revisions. You can also discuss this with clients, in case you’ll consider any new tasks added beyond the agreed scope during the billing process.

Set Targets for Billable Hours

You can set targets for your employees to increase your billable hours. Consider setting monthly or biweekly billable targets for your employees and offering bonuses or incentives to employees who meet the target.

Track all Billable Hours

Whether it is a 5-minute Zoom catch-up with the client or sending them a progress report, it makes sense to track each minute of billable work to account for all your billable hours.

You can use time-tracking software to track both hours accurately. Also, ascertain which non-billable activities are consuming more time and whether there is a way to automate or minimize them to improve productivity and efficiency. For example, you can leverage automation tools such as invoicing software or time-tracking software. These can help you automate mundane tasks to avoid manual work so your employees can focus on value-generating tasks.

Tip: Ask your employees to consider using a time management strategy, such as setting some time apart for non-billable tasks or delegating them to other team members so they can focus on the billable tasks.

Track & Monitor Non-billable Hours

When you track non-billable hours, you can see in which areas your employees can become more efficient by reducing, delegating, or automating some of the non-billable tasks. For example, you, as an employer, can invest in invoicing software to save the resources’ time spent on calculating invoices manually. You can also hire an assistant to look after the back office or administrative tasks. That way, resources can focus on billable activities and the resource utilization rate can improve.

Also, consider tracking these hours in real time using any time-tracking software so that every hour gets tracked and not a single billable hour is missed, reducing the risk of underpayment.

Assess Which Projects Require More Billable Hours

Mostly, businesses work with multiple clients and employ resources to complete the deliverables. However, it is necessary to monitor which projects require more billable hours and which ones less.

Projects with more billability can generate more revenue than the ones with fewer billable hours. This analysis is crucial for making informed decisions regarding which type of projects can be more profitable for you to prioritize over those that aren’t very value-generating. You can then either do away with these or reconsider their hourly rates.

Also, consider the following:

• Retaining clients with long-term projects to ensure a steady flow in billability for the long haul.
• Nurturing client relationships to secure more projects in the future and ensure long-term billability.

Negotiate for the Travel Related to the Project

If the project you’re undertaking requires traveling, then consider negotiating with the clients to consider travel time and other activities done during the business trip in billable time.

Why Should You Automate Billable & Non-billable Hours Tracking?

Tracking billable time manually is prone to errors, leading to missed billable time and inaccurate billing. By automating the time-tracking process, you can ensure that every minute is recorded precisely so you can bill clients accurately. Filling up timesheets to track the number of billable hours consumes a good deal of time. However, by automating the timekeeping process, you can free up resources from these tedious tasks so they can focus on billable work more.

Also, automated time-tracking systems provide granular details about how you or your employees have spent these hours for project work via detailed reports, offering transparency and ensuring clients are billed fairly for the work done.

To automate the tracking of billable and non-billable hours, you can use any efficient time-tracking tool such as Deltek | Replicon, which tracks billable hours and project status in real time to ensure timely and accurate project billing. It also helps capture billing details at hourly, daily, or monthly rates to meet the agreement requirements. Its analytical dashboards and configurative reports help you stay on top of business metrics like billing, WIP, utilization, margins, etc. This data enables you to make informed decisions to improve profitability.

Bottom Line

Tracking both types of work hours helps you uncover employee utilization rates, get insights into overall profitability, and understand the true business costs. However, tracking these hours manually using spreadsheets or paper-based timesheets has limitations. It may lead to missed billable hours, erroneous time entries, and inaccurate client billing. This is where automating the time-tracking process can work wonders.

For that you can leverage time-tracking software that helps you track billable and non-billable hours for multiple projects, tasks, and clients and helps create invoices using approved hours and expenses.