Billable Hours: Comprehensive Guide On How To Calculate Right

Entering a search on 'billable hour jobs', Indeed delivers 3380 instant mentions. It comes as no surprise given the fact that industries operating on billable hours range widely.

Overall,  billable hours are an essential metric in industries where time quantification is directly related to company profitability, and it is important to know how much time employees specifically spend working for catering to client needs. To name a few, the billable-based businesses include:

• Advertising and PR service
• IT consulting
• Legal professionals services
• Creatives' service (writing, design, etc.)
• Data crunching/research service
• Administrative assistance
• Accountancy service.

Basically, estimate depends on the type of project and professional evaluation of what the most efficient workflow will look like.

Getting the accurate information on billable hours seems like a no-brainer: all you need is to calculate work time and multiply it by an hourly rate.

This great equation though does not work that simple. There are way too many factors entering the project to give an answer applicable across any domain.  In particular, calculations get more complicated:

• when businesses vary rates for different clients
• when employees perform paid work on different rates
• when billable hours must be linked to additional payments (bonuses, recurring payments, etc.).

Great examples of calculators for employee billable hours can be found here (with the option of downloading the Excel based calculator), here (alongside different types of hour rate online calculators), here (PDF file with detailed explanations and samples), and, for lawyers, here and a video tutorial here .

For simplifying the procedure and calculating without fail, there are tips you can follow.  

Self-check Questions to Ask

When it boils down to numbers, start with words. To be more precise, with questions aimed at 'balancing' work value and efforts of performance.

How easy is it for clients to get transparent account of what you bill for? How well is the process of calculating optimized? Are issues associated with human error and data safety addressed properly? Is your business balancing billable and non-billable hours well?

These are just a few of the questions that must be answered if you depend on billable-based work as a determining factor of your overall success. It will help   avoid overbilling the clients or inflate the billable hours but at the same time ensure payment with regards to effort bandwidth and level of performer's expertise. With the list of the well-directed questions in mind, it is easier to work on  calculations for fair charge.

General Guidelines for Billable Hours  

Calculating billable hours, businesses base them on two components formula: clients' billing is to cover the employee’s salary and associated business expenses.

Structuring employee or contractor work time starts with a clear definition of what makes billable hours in the specific industry and fixing it in a documented policy. To build it effectively, it is advisable to take the following steps:

• set your billable targets
• align them with time and resources utilization goals
• track work hours in real time  
• revise time tracked data regularly
• define the room for improvement
• conduct reevaluation of time estimates  
• repeat the 'updated' cycle.  

To get more insights on defining the business and agency utilization rate, we recommend to read here.

As a side note, some extra or recurring payments can be set additionally to billable hours within the current contract. This simple solution is available if you use the advanced time tracking software:  for instance, in TMetric, all you need to do is to apply setting options for different Work Types.    

Communication: To bill or not to bill

Communication is integral part of most project-based collaboration and includes utilizing time and resources via:

• emails
• video conferencing
• virtual and physical meetings
• regular phone calls.

Businesses and agencies work out on policies of free hours for their clients but, naturally, not acknowledging client communication as a billable service is unwise and in some cases detrimental for business as it may cause employee burnout. Hence, providing value to clients' needs makes communication time a part of billable service to be included within estimated hours for jobs and tasks.

Increase Your Bid

Expanding your activities across the domain of service you charge for is the winning scenario: the more value you add to the business, the more justified your billable rate becomes. However, speaking of external factors reflecting on profitability linked in billable based projects, we cannot ignore non-billable time.

To increase the billable rate, contractors and business owners need to keep the percentage of non-billable hours adequately low: this way, they can bid for higher profits.  To achieve the balance and prevent lack of transparency, application of time tracking software with support of billing functionality works most effectively.

Get Most of Your Time Tracker

Search for a bundled up solution: by choosing the time tracking software with advanced time calculating options, getting paid will guarantee to turn into an enhanced experience bringing fast results as well as facilitating more collaborative relationships by creating transparency and accountability.

Probably, the greatest benefit of time tracking can be attributed to time tracker capability of categorizing work time with precision. In particular, automated time tracking enables businesses to distinguish at a glance among:

• Billable hours directly related to project engagement
• Administrative routine
• Time referring to Time Off Module (vacation, sick leave, etc.).

Implementing a time tracker with billing capacities also benefits billing-based performance in terms of maximizing productivity and storing data for further analysis by HR department and, aside from facilitation of calculations, getting the working mechanism for compensation and promotion offers.  

Checkpoint

• Billable hours are the important metric across a variety of industries that embody the idea of trading an expert's time for money (consultancy and services).
• To achieve the utilization goals, businesses often use rate system to provide productivity-based billing.
• Value-based billing is also important in regard to establishing HR company policies for compensations and promotions.
• To increase competitiveness of billable rates, businesses need to keep tracking billable hours vs non-billable in the regular and optimized way.
• Automated time tracking software provides advanced functionality for accurate calculations of billable hours actually spent rather than reported.  
• If you balance billable and non-billable hours right, it translates into the increased profitability.