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?
Let’s start with a quick overview of what billable hours are, and what they mean for different industries.
What Exactly Are Billable Hours?
When talking about billable hours, the most important thing to determine is the difference between billable vs non-billable hours.
- Billable hours: Refers to all activities that are taken in order to make progress on client projects. This work will be paid for by the client at the end of the billing cycle.
- Non-billable hours: Encompass work not directly connected to the project, but various administrative tasks and general agency upkeep, such as prospecting new clients or business planning. This work is included in internal expenses or overhead.
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, 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:
In order for a company to be profitable, a worker must cover the cost of his annual salary, times three. This is popularly called one salary for you, one salary for the company (overhead), and one salary for the boss (profit).
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?
What Are the Benefits of Tracking Billable Hours?
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:
- Increased client trust and overall satisfaction
- Maximized profitability and efficiency
- Improved employee work-life balance
- Key insights for strategic business growth
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 tools, that support your project, financial, and resource management in one. More on this later, when we discuss how you can track and maximize your billable hours.
The Different Types of Billable Hours
A simple way to determine whether your hours are billable is to consider the following main questions:
- Who benefits from the task, the client or the agency?
- Does working on or completing the task move the project closer to completion?
- Is the scope of the work you’re doing contained in the client contract?
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, this 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.
The Meaning of Billable Hours vs Non-Billable Hours
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:
- Fixed agency overhead: paying for office facilities and equipment, business insurance, salaries of non-billable employees, and professional services
- Variable agency overhead: hardware repairs, employee benefits such as vacation, marketing investments, training, travel expenditures, hiring, prospecting
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 in 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.
Keep in mind that overhead isn’t a bad word, it’s inevitable. Non-billable hours can be profitable. More than looking for ways to save on overhead costs, it’s crucial to identify how certain expenses play a role in your agency’s future. Also, being able to check your agency’s pulse at any time will help you forecast profitability and keep variable costs from inflating beyond reasonable levels.
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:
Head of Operations
We have team X, whose Scheduled/Available ratio is 110% when looking into the upcoming quarter. This means that we’ll need an extra 10% of our current capacity to be able to do the work we have scheduled. Then we translate those percentages into the numbers of full time employees we actually need and signal this to HR so that they can start with the hiring process.
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.
The Challenges of Tracking Billable Hours
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 working in a large agency with complex workflows and multiple ongoing projects.
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.
#1: Resource 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.
#2: Client Expectations
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.
#3: Project Changes
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:
One big side effect was just not having the data for our client to know their true project status. Setting good customer expectations is huge in our business. It was never possible to give someone a comprehensive project update that said:
“We’re 50% through your budget and we’re 50% through with your project, so we’re on track.”
Instead, we would know one or the other, but trying to marry the two was just so time-intensive that it wouldn’t get done. So, you’d get to the end of a project, and then there would be surprises in terms of the budget—which ultimately leads to unhappy clients.
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.
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How to Accurately Track Billable Hours
Whether you’re calculating your hours manually in Excel, 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:
1. Determining Your Cost Rate
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.
Related: Best Software for Consultants: The Ultimate Guide to Tools & Features
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:
Price is often a proxy for quality, and when you put yourself at the low end, it signals that you’re unsure of your value — or the value just isn’t there. Either can be alarming for prospective clients.
Source: Harvard Business Review
2. Setting up Your Billing Cycle
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 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:
The aim here is for your agency to get paid as soon as possible, so setting payment terms with your clients upfront will save your agency the hassle of chasing unpaid invoices and ensure your clients know what they can expect.
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.
3. Tracking Your Time
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:
We go through our team and see our workload for the next week or even for the next month, or for the next three months, and then we can schedule our people accordingly. Before we had a lot of Excel sheets, or people were doing this in PowerPoint or Word. They were not in one place and data wasn’t extractable from one place.
4. Creating Your Client Invoice
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.
Between the recurring templates that I use and standard line item options, doing the invoicing for 30-40 clients each month in Productive takes me a couple of hours tops.
- Generating invoices automatically by pulling in non-invoiced tracked hours
- Customizing your invoices so they fit your agency’s brand
- Building timesheets and attaching them directly to your invoice
- Invoicing in multiple currencies in the same invoice
- Sending automatic payment reminders
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:
- Send purchase orders to suppliers directly from the platform
- Track your payments
- Keep a close eye on delivery dates
This is how Productive supports structured workflows, while also providing enough flexibility to help agencies of all shapes and sizes simplify their invoicing.
Without a doubt, in the billing area there has been considerable change. I can say that the hours we dedicate have been reduced in a 15-20%.
Top 3 Strategies to Increase Your Billable Hours
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:
- Internal challenges, such as inefficiency or too much managing
- Neglecting key analytics, such as your forecasted billable utilization rate
- Working with non-profitable clients, i.e. “overservicing”
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?
1. Streamline Your Project Processes
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?
- Switching between six main project views to organize project progress
- Viewing automatic status updates that can be customized for frequency and devices
- Creating project and task templates that let you easily kickstart your next project
- Inviting clients to directly view project progress, and even budgets, and leave feedback
- Gathering and creating all relevant project documentation in one place
All-in-one agency management tools, 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:
Vice President of Digital Strategy
4Site Interactive Studios
We used to have a project management tool, a time tracking tool, a support tool, a way we handled opportunities and sales-driven processes. Those were all separate tools that we had, and it wasn’t good. It also meant that all that data was being lost every time we switched between tools, or we had to find a way to normalize the data between them. And now, the fact that it’s all in one, it’s really a game changer.
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.
2. Track Your Key Agency Metrics
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 financial 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 hour trackers 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.
Related: Resource Planning Guide: How To Optimize Your Project Planning
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 see whether you have the capacity to do it within the deadline while keeping a healthy profit margin.
View the webinar below to learn more about utilization and forecasting in crisis times:
3. Consider Time Spent on Each Client
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 across an individual project with tools such as Productive, 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:
- Frequent out-of-scope requests
- Numerous back-and-forth on tasks
- Repeated miscommunication
- Excessive hand-holding
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.
We ended up terminating contracts with two of our oldest clients after only a few months of using Productive. We thought that we were at least at zero with them, or that we had some small earnings, but it turned out that we were losing money because the money they paid us did not cover salaries, fixed overhead per hour, and variable overhead per hour.
Conclusion: Why You Absolutely Should Track Billable Hours
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.
What is an example of billable hours?
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.
How do I calculate billable hours?
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.
What are the best practices for tracking billable time?
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.
How do I bill clients for my time?
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.
What are billable hours vs regular hours?
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.
What is the purpose of billable hours?
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.
Do I get paid for non-billable hours?
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.
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