Understanding Billable Hours: The Agency Guide to Optimized Billable Utilization

Are you getting the most out of your billable hours, or are you missing out on potential profit with inefficient processes?

Managing your time well is the bread and butter of any client-facing business. This is especially true for professional services agencies, such as consultancies, PR, and law firms. Having a full understanding of your agency resources means that you can gauge your overall profitability and revenue, as well as find out which of your projects are the most lucrative. 

This is why we’re bringing you a comprehensive guide to two of the most important agency resources: your employees and their time. We’ll explore this topic through advice from industry professionals and recent trends in order to help you reconsider your daily agency operations.

We’ll also provide answers to two important questions: How to best track your billable hours? And once you’ve got the correct data, how can you maximize them?

When talking about billable hours, the most important thing to determine is the difference between billable vs non-billable hours.

Billable hours are pivotal in professions that focus on delivering various tasks for clients, such as consulting, PR, digital marketing, architecture, and law. The law industry takes a very particular approach, with stringent annual target billable hour ranges per employee, usually between 1700 and 2300 billable hours (JD Advising).

Agencies in other industries will more likely target other metrics of success, such as the utilization rate (or billability), which shows the percentage between non-billable and billable hours. To put it plainly, it’s an indicator of your overall productivity.

In general, the ideal utilization rate varies from industry to industry, but a good rule of thumb is to maintain an average utilization rate of between 70-80%. Achieving this rate signifies that “teammates are allocated to enough work, and are getting some time to work on themselves professionally, i.e. take time to explore and research” (Bold Newsletter). If your rates are above this standard, this means that you’re likely on a course to employee burnout.

Find out more about the agency utilization rate:

Additionally, a common way to check your agency’s performance is to use the so-called Times Three Model:

Now that we’ve covered some of the basics, let’s move on to the crux of the issue. What’s the importance of tracking billable hours for agencies?

Billable hours management is closely connected to revenue generation and business sustainability. If you have a poor grasp on how much time your team is spending on tasks that progress projects, versus fixing avoidable mistakes or searching for relevant information, you’ll likely end up under or over-billing a project. Both can have significant consequences for your business and client relationships.

Some of the main perks of efficient billable hours management are:

To be able to benefit from all of this, you must be able to maintain a delicate balance between ensuring clients are billed fairly, and your workers are not close to burning out. The use of specialized time tracking and management tools has become very significant in enabling healthy agency ops, by helping allocate resources, maintain transparency, and simplify administrative work.

Some especially useful examples are all-in-one agency management solutions, that support your project, financial, and resource management software in one. More on this later, when we discuss how you can track and maximize your billable hours.

A simple way to determine whether your hours are billable is to consider the following main questions:
 

Some examples of tasks that would fall under the billable category as described above are client correspondence, such as attending meetings or sending emails, project planning and research done after the contract is signed, and all other specific project-related tasks. 

To give a practical example, in a law firm, billable hours might include researching a case, drafting legal documents, or client representation. For consulting agencies, it would be actively advising the client and developing strategies. For creative agencies, managing creative projects would entail brainstorming concepts, creating and implementing designs, and more.

We can also discern between two main types of billable hours, such as direct hours spent on specific tasks that have a visible impact on the final project deliverables, and indirect hours that include research and other project-supporting activities.

Now that we’ve covered some basics on billable hours, it’s time to address one common misconception. Although maximizing your billable hours output can have a positive impact on your profitability, this doesn’t mean that you can achieve this by cutting down non-billable hours to zero.

When talking about non-billable hours, we can distinguish between two common types of agency costs:

As you can see, not all non-billable hours are the same. Consider them not only as necessary upkeep to keep your agency’s baseline functioning but also as an investment into your future. For example, non-billable work such as employee education, investing in outreach, and client prospecting, are all critical activities for your agency’s continued success. 

Source: How to Calculate Overhead Costs for an Agency

That isn’t to say that it’s bad to want to optimize the time spent on non-billable hours. Certain administrative tasks in particular can be greatly simplified by using project management tools.  More robust agency tools, such as Productive, can also streamline hiring efforts with forecasting capabilities.

In the following section, we’ll consider some of the main challenges that make tracking billable hours complicated, and offer potential solutions to tackle them.

As previously mentioned, by managing your billable hours, you’re directly impacting your agency’s bottom line. It goes without saying that if you can deliver more billable hours to your client in shorter periods of time, you’ll be able to take on more client projects and scale your business faster. However, this is not always simple to pull off, especially if you’re managing multiple projects simultaneously.

The three main challenges for agencies that appear in the process of managing billable hours are inefficient resource management, unrealistic client expectations, and inadequate change management.

According to data by Forbes, of the HR leaders at organizations larger than 2,500 employees, 15% of them say burnout causes 50% or more of their annual turnover. If you don’t have timely data that shows your resource capacity across multiple projects, you might end up assigning more work to teammates who are already overutilized.

This will likely cause them to make more errors and spend non-billable hours fixing them, or in the worst case scenario, push them into leaving the company. As the cost of hiring a new employee is typically 1.25 to 1.4 times the salary (SAB), this is something you should try to avoid at all costs. 

An example software feature that can help you resolve this challenge is Productive’s color-coded heatmaps. After booking your employee’s time, with just a glance, you can easily check whether hours need to be reallocated and where. This approach contributes significantly to sustaining your company’s overall health and profitability while making sure that your team’s well-being isn’t being affected.

Keep in mind that one big part of ensuring successful project delivery is managing client expectations, both from the start and during the project execution phase. If you’re unable to set a realistic deadline, this can also have the same adverse effect described above, by causing periods of intense crunch to meet expectations. 

If you want the client to understand the value you provide, you first need to have a strong grip on it yourself. For this to be possible, you need to be aware of what your team is capable of, both in terms of their current capacity (whether they’re tied up working on specific tasks or not), their composition (skill levels, seniority, particular affinity), and their actual efficiency (by comparing estimates with actuals).

An example of how you can streamline the negotiations phase is Productive’s Forecasted billable utilization report.

Using Productive’s agency report templates, you can create a report that showcases this key agency metric for a set period of time. With custom fields, you can split your resources up by any metrics you prefer, such as team, skill, seniority, and more. This provides valuable insights into how your agency will be performing in the future, helping you create thorough plans when taking on new client projects. 

To learn more about Productive’s project reporting capabilities and billable hours templates, click here.

Finally, another big challenge of tracking hours is the frequently tumultuous nature of projects. Your employees might go on unexpected sick leave, or you might want to add new features or requests from the client side to your current scope. If you don’t have a way to track the impact of these changes on the budget and deadline, you won’t be able to provide clients with updates in time, which will likely impact their overall satisfaction.

The CEO of Clear Launch, a software development agency, described what their processes looked like before switching to Productive, the all-in-one-agency management software:

Read the entire story: Clear Launch Has More Predictability and Consistency With Productive

Consider all of this in junction with the importance of reputation for professional services agencies: according to a survey by BoardEx, 94% of corporate respondents said that track record is very important or critical when working with unknown advisors.

One thing is clear: Using software solutions with real-time workload management and reporting capabilities is a great way to address these challenges. Therefore, we’ll explore how you can use billable hours tracking software to manage and track your resources in the following section of the guide.

Whether you’re calculating your hours manually in Excel, with our free billable hours calculator or using a budgeting tool with advanced capabilities, the steps are roughly the same. It’s the execution and expected results where these two methods differ the most.

We can distinguish four main steps to managing your agency’s hours and client billing:

The first thing you need to do is set up the cost rate for your resources. The number will vary depending on the industry, and the skillset and seniority level of each specific employee. A rule of thumb is to make sure that you’re including non-billable hours or what your agency is spending, or else you won’t be able to make a profit. 

Taking digital marketing consultants, as an example, in 2021, Promethean Research recommended an hourly charging rate of $175 or more in order to make a profit. Although some agencies might be afraid of overcharging and scaring off clients, especially smaller up-and-coming businesses that are just breaking into the industry, consider the downsides of doing the opposite.

Undercharging your clients will significantly lower your chance of scaling up your agency, which means less hiring, a lack of competitive talent, and down the line, a lack of customers. Additionally, consider the message you’re sending your customers by setting low service prices:

Source: Harvard Business Review

Late invoices are frequently a sore spot for many types of service-providing industries. In fact, according to research, 20% of all invoices in the digital marketing and PR space are paid late (Tide). How can you increase your chances of a steady cash flow?

Our first tip is: While signing a contract with the client, make sure to set clear terms for both the billing and payment periods, meaning the timeframe within which the clients should finalize their part of the project billing process. Billing cycles are usually set up on a monthly basis, with invoices going out on the last day of each month. When it comes to payment periods, make sure to set physical dates instead of using ambiguous terminology, such as “upon receipt” or “in X days”. 

Reducing the number of your accounts receivable days is important for improving your agency’s cash flow, as well as stopping overdue invoices from impacting how accurate your financial forecasting is:

Source: Financial Forecasting and Capacity Management For Agencies

Secondly, make sure to follow up on your invoices to increase the chances of getting paid on time. A survey by QuickBooks shows that almost 50% of SMB owners spend one to four hours chasing late invoices in a week. A great way to automate this process is by using agency management or accounting tools that provide automated invoice payment reminders, such as Productive. 

With Productive, you can set up templates that include full reminder journeys. An example is setting up a template that sends reminders 7 days before the due date, on the invoice’s due date, and 10 days after the due date. You can also set up the subject title, content, and which email it’ll be sent from, so you can use your business or other invoicing-related email addresses.

Your reminders will be stopped automatically once payment in full is logged against an invoice, so you can avoid frustrating clients with unnecessary reminders.

Finally, there’s the question of tracking your time and creating timesheets. When working manually, this would likely entail having each employee manually update an Excel spreadsheet with all their daily activities, including precise time ranges and tasks worked on. Then, a project manager would have to parse this data to check if it’s accurate and up-to-date, and manually calculate total billable hours by multiplying all hours with cost rates.

You don’t need us to tell you that this type of process is extremely repetitive and prone to errors.

To give you an example of how agency and project management tools handle these situations, we’ll use Productive. With Productive, your team can track their hours directly against client-related budgets and associate their time entries with specific tasks.

There are multiple ways to do this: by starting the built-in timer directly from a task or retroactively inputting your hours. Thanks to the Resource Planning feature, project managers can even schedule employee time in advance, thus automatically generating time entries. Cost rates from the platform will also be directly applied to your invoices, ensuring full accuracy.

BICG improved their time tracking and scheduling with Productive:

Finally, once you’ve reached the end of the billing cycle, project management tools such as Productive can generate your invoice in just a few clicks.

With Productive’s Billing, you can save your time and energy by:

Productive also offers integrations with popular invoicing and project budgeting tools such as Xero and Quickbooks, so you don’t have to drop all your established workflows and preferred tools. Simply build your invoice in Productive, and then copy it into your preferred solution.

Additionally, with Productive’s Purchase Orders, you can now get easier job cost management and view your external expenses across your budget:

This is how Productive supports structured workflows, while also providing enough flexibility to help agencies of all shapes and sizes simplify their invoicing.

When looking for reasons why you’re not delivering as many billable hours as you’d hope, there are usually one or more of these three potential issues:

In the following section, we’ll explore three top strategies to help you get the most out of your billable hours, by offering a solution to each of the potential challenges above. We’ll give you our top three tips that answer the main question that agency professionals usually have:

How can you maximize your billable hours without negatively impacting your team’s well-being and the agency’s business initiatives?

 According to the Anatomy of Work Index survey, knowledge workers spend as much as 50% of their time on “work about work”, rather than strategic tasks. For managers, this number rises up to as much as 62%. “Work about work” can be described as activities that don’t meaningfully progress projects, such as searching for information, switching between apps, communicating, managing priorities, and looking for project status updates.

According to another survey by HDR, employees are so frustrated with these inefficient processes, that 43% reported that they would consider leaving a job if information was continuously hard to access.

In short, this is your non-billable, non-profitable work, and it is precisely the right target for project management automation. Which features can help you cut down on repetitive tasks?

Taking Productive as an example, some of its most notable task and collaboration capabilities are comprehensive Project Management and Docs. With these two features, you can streamline your standard practices by:

Top PSA software solutions, such as Productive, can bring significant benefits over specialized project management or collaboration tools. Consider that you’ll be getting the same essential capabilities, with added budgeting, resourcing, and reporting support. This means that you’ll be saving significant time on context-switching between platforms. Also, it means that you can potentially save up on your IT overhead.

Consider the perks as outlined by one of Productive’s users:

Working in an architecture firm? We also have a list of architecture management software you can check out.

To sum up, don’t overlook the importance of setting up a good project management process. This includes creating clear workflows for your team, with easy access to relevant documentation and project visibility. It also includes setting up a clear process for client communication and revisions.

All of this can help you speed up the most repetitive of your non-billable tasks. As an added bonus, you’ll be increasing team and client satisfaction as you go.

There are three crucial metrics for managing your agency’s success: your revenue, profit, and utilization rate. As important as they are, research shows that agencies have an overall poor grasp of their key project success metrics. According to SoDa, only 43% of agencies track their forecasted revenue, 33% know their project gross margin, and under 20% track their forecast-to-actual utilization.

However, having real-time insights into the three is essential to making timely business decisions. Even more so, if you’re able to accurately forecast these numbers for future periods, you can ensure that neither you nor the clients are caught off guard. Specialized financial tools, billable hours tracker apps or certain all-in-one software solutions such as Productive, can help you achieve all of the above.

How does this work?

First, you would build your budget, add cost rates, and schedule your resources with Productive’s Resource Planning. Once you’ve built your plan, including vacation time and other types of leave, you can use the budget view to check your budget burn over your project timeline. By checking the profitability view, you can then see your overall profit, as well as your profit margin.

Consider that even if you’re over budget, this doesn’t always signify that your project will still be unprofitable. This largely depends on the cost rates of the resources you’re utilizing. Productive can help you gauge the best course of action in case of budget-impact project changes.

As data by PMI shows that over 50% of projects experience scope creep, this type of reactive resource and financial planning can be crucial to your agency’s success.

When it comes to forecasting, getting future insights into your billable utilization rate is not simply a financial matter. In fact, by viewing the percentage of availability of your resources across certain periods of time, including by skills or seniority, you can also fuel sales efforts. For example, you might want to focus on prospecting clients for underutilized services.

Or, if you’re noticing that certain services are frequently overutilized, you can consider hiring for these specific roles. Another great feature that is provided by Productive is placeholders, which allow you to create various work scenarios. For example, you can set up an entire project before even signing with a client to get ahead of your project planning.

View the webinar below to learn more about utilization and forecasting in crisis times:

Maybe you’ve seen this one before:

If you’re addressing both previous challenges, it’s time to consider whether it might be particular clients that are holding you down. If you’re tracking your billable utilization with agency management software, you can compare it between different clients to determine where you’re delivering fewer billable hours. Then, look into the reasons why.

Is there something that you can improve about your own processes, or do you notice a pattern of:

Consider the extent of consequences this can have on your business. If you tolerate these situations for too long, not only will your profitability take a hit, but you will also be fostering unrealistic expectations for the future. This means that once you do pull back, your client will likely end up being dissatisfied, despite them getting the best possible service beforehand. This also devalues your work and can be a cause of employee stress and burnout.

To conclude our billable hours guide, managing your billable and non-billable time is crucial across multiple facets of your agency business.

This includes optimizing how you track time in the first place, by using tools with budgeting and forecasting capabilities. Furthermore, it means taking a look at your current processes and working on strategies to get the most out of your resources.

Our key takeaways from the guide would be: to make sure that you’re keeping an eye on your financial health by tracking your most valuable key metrics. Aside from this, automate your most repetitive, administrative tasks to clear up time for more valuable non-billable work, as well as strategic billable tasks. 

To achieve both of these, consider utilizing an all-in-one agency management tool that provides support to all your day-to-day processes. If you’re interested in learning more, book a demo with Productive and start your 14-day free trial today.

The billable hours definition includes time spent on activities that directly progress client project status. In most professional services agencies, this includes all business-related tasks, as well as strategizing and implementation. To give a practical example, in a consultancy, the most frequent billable tasks are meetings and client correspondence, creating presentations and reports, market research and potentially traveling to client sites. Consultant management software can help streamline these tasks, improving efficiency and client service.

Calculating billable hours typically requires a couple of steps. This is determining the hourly rate for your services, depending on your expertise and industry standards. Then, you would need to track time spent on client work. This can be done manually in Excel, or preferably by using time-tracking software such as Productive.

Finally, you would multiply hours worked by your hourly rate to get the billable amount to invoice to your clients. You could use an online billable hours calculator or a specialized tool. All-in-one agency tools can do this automatically, so you can profit from more accurate and efficient billable hours tracking.

How to best track your billable time will depend on your industry and team composition. Usually, to ensure that your teams don’t feel overly micromanaged, it’s a good rule of thumb to use a time-tracking tool that provides them with multiple options. For example, starting an integrated timer directly from a task, or manually inputting hours retroactively. When using a tool, a feature to keep an eye out for is timesheet locking, which prevents editing after a specific amount of time has passed. This can improve your data accuracy.

You can bill your clients by manually drafting an invoice after calculating your billable hours. Preferably, you can use also accounting tools or all-in-one solutions such as Productive to generate your invoice automatically. Productive pulls in your uninvoiced amounts automatically, so you don’t have to double or triple-check your data for manual errors. Additionally, you can immediately attach your relevant timesheet to speed up the payment process. Then, simply send your invoice to the client. With Productive, you can even use automatic reminders to increase the chance of getting timely payments.

The billable hours meaning include hours that are paid for by the client for work on tasks that directly progress a project. This includes client correspondence, project strategizing, and implementation. Regular hours would include the full employee work day, which combines billable with non-billable work. Non-billable work includes various internal tasks, such as administrative work, prospecting, and agency-related meetings. In short, it includes activities that impact an agency’s processes, rather than a client project.  

While billable hours are critical for a company’s profitability, non-billable hours are just as important for your agency’s success. Keeping a healthy balance between both is the key to client satisfaction and effective operational management.

Billable hours are crucial for projects that are priced according to hourly rates, rather than a fixed “upon-delivery” price. They are the primary means of generating revenue by charging clients for specific work done. Without tracking billable hours, agencies would be unable to get fair compensation for project progress. It would also lead to a lack of transparency between the agency and the client, resulting in deteriorating client relationships.

Tracking billable hours also helps measure employee productivity and efficiency by supporting resource allocation and project planning. This is all key to assessing project profitability, one of the key agency success metrics. Essentially, billable hours are the bridge between financial success and efficient service delivery.

Whether you are paid for non-billable hours will depend on your employee status and company policy. Salaried employees usually receive their wages depending on the total number of hours worked in a day, including both billable and non-billable work. However, for freelancers, contractors, or employees in certain industries, non-billable work might not be included in your salary. This means that you would track only time spent on productive client work, and leave out time spent on lunch breaks, looking for information, answering unrelated messages, or similar activities. Understanding your organization’s policy on non-billable hours is crucial for clarity on compensation.