Billable Hours vs Actual Hours: Strategies for Balancing Billable Hours
Do you have a complete understanding of your agency’s billable hours vs actual hours?
Research shows that very few agency professionals track key metrics for gauging business health: 43% know their forecasted revenue, 33% track their project gross margin, and only 17% manage their project budget burn rate (SoDa & Productive).
Despite this, tracking your agency’s KPIs is key to supporting sustainability and growth. This article will explore how you can get the most out of your billable hours and utilize your data to make informed business decisions.
- Billable hours are directly tied to revenue generation and agency profitability.
- Accurate tracking of billable and non-billable hours is essential for transparency in billing practices.
- The industry standard for a balanced utilization rate falls within the 70% to 90% range.
- Effective project planning, efficient time management, and billable hours tracker solutions can help optimize your billable hours.
What is the Difference Between Billable Hours vs Actual Hours?
Tracking and managing billable and non-billable hours is crucial for professional service agencies, such as consulting, creative, or software development companies.
- Billable Hours: Hours spent on activities that can be charged to the client. The definition of billable work might vary depending on your industry, but it usually includes client meetings, documentation and research, client-related traveling, and all specific tasks that contribute to project delivery.
- Actual Hours: Encompasses all of an employee’s working hours. This includes time spent on activities not closely linked to client projects, such as team meetings, learning and skill-building, prospecting, and administrative duties such as invoicing.
Tracking your billable and actual hours can tell you a lot about your agency’s performance, profitability, and operational efficiency.
A higher billable-to-actual hours ratio can indicate greater revenue generation, as it means that you can fit in more client work and take on more projects. Additionally, many hours spent on non-billable work can point to inefficiencies in your workflows, such as excessive time spent on administrative tasks. However, a balance between the two is necessary for managing employee workload and preventing burnout.
How Do I Track My Billable Hours vs Non-Billable Hours?
Traditionally, billable and non-billable hours are tracked in spreadsheets. Employees enter the start and end dates of their tasks into a billable hours chart, and their totals are calculated with formulas and used during the billing cycle.
Nowadays, a more effective method is using a billable hours tracker, which automates this process for you.
Productive, the all-in-one agency management tool, is an example of such a solution. It provides the following billable hours management features:
- Automatic timer that can be embedded on your desktop to keep accurate track of your hours
- Easy time log approval with the ability to lock entries for editing after a specific period of time
- Integrated client invoicing that pulls data from your billable hours tracking to speed up the process
- Advanced reporting and analytics that let your manage and forecast your agency utilization rate
Support Your Agency’s Profitability
Optimize your billable hours with Productive’s integrated time tracking and financial management features.
What is a Good Billable Utilization Rate?
When it comes to the utilization rate, industry standards suggest a range between 70 to 90% utilization for production-level staff and 60-80% for account management (Promethean Research). In reality, this percentage averages at about 65% agency-wide utilization, with rates ranging from 33% for director roles, 63% for senior roles, and 75% for junior roles, according to a benchmark from The Wow Company.
Another interesting statistic from the same survey is that agencies that use spreadsheets to manage their projects have an average utilization rate of 66%. This rate can go up to 75% once a software solution is implemented.
Here are some key strategies for maintaining or improving your agency utilization rate:
- Effective Project Management: Good project prioritization and task management can help prevent budget and deadline overruns, which helps you keep your project and business goals on track.
- Balanced Workload Distribution: Balancing your team’s workloads is important, as it means you’re getting the most out of your agency’s resources. Make sure that no employees are overburdened, while others are not utilized.
- Training and Skill Development: Though it might seem counterintuitive at first, investing in non-billable activities such as employee training can add value to your services and fill in potential resource gaps. This brings long-term agency value.
- Forecast Future Trends: As hard as it may be to tap into industry trends, monitoring historical data that concerns both your agency and the market can be essential for stable agency operations. Consider using PSA software to help you forecast and plan future scenarios to build organizational resilience.
To increase billable hours, consider implementing strategies for effective time management to maximize the work you’ve currently taken on. Then, make sure to identify and leverage opportunities for billable work.
One of the most important things about efficient time management is good prioritization. This is especially key for larger agencies managing multiple projects at once. For project managers to be able to identify key tasks, it’s important to maintain a project space that provides full visibility into current project progress and resource allocation.
This also lets employees monitor their progress, enhancing personal accountability, which can directly impact the quality and efficiency of project deliverables. Additionally, with Productive, you can invite clients onto project boards at no extra charge. They can create and comment on tasks, which helps streamline the feedback process and keeps all project stakeholders updated.
When it comes to finding new opportunities, consider forecasting your utilization rate across specific periods of time. If you’re offering multiple separate services, you can gauge which departments will be underutilized, and prospect specific service buyers. Another important thing is to maintain good relationships with current clients — this can help you land future projects or retainers.
Learn more about utilization and forecasting in crisis times:
How To Determine Which Hours Are Billable?
Determining which activities are billable and what is part of non-billable time needs to be clearly defined during the project initiation process.
Don’t make the mistake of thinking that something is obvious without discussing it first. Taking into example agencies that provide software solutions, a frequent stumbling block is the maintenance phase. Clients might have different (and often unrealistic) expectations of what maintenance and support include — for example, they might request new features that take up unexpected resources to address.
Ultimately, overservicing clients can be just as detrimental as doing less than expected. It can significantly impact your profitability and set unrealistic future expectations. It can also cause dissatisfaction among your team, negatively impacting their other work.
This is why it’s important to:
- Set down the most important terms of the project in writing while ensuring that both sides are clear on the scope of work included in the billable rate.
- Maintain frequent communication with the client about your progress — this helps manage expectations and reduces the chance of later disputes.
- Keep detailed work records, including dates, times, and task descriptions, with accurate and reliable time tracking tools.
How Do I Negotiate Billable Rates with Clients?
To set fair and sustainable hourly rates, it’s first essential to understand your agency’s processes, including expected performance, capabilities, and the value provided to the client.
To achieve this, having historical data on similar projects is crucial:
One of the things we do is we go back into Productive and take a look at similar projects that we’ve done before. A similar proposal from the past might have said “this is going to take us 100 hours”, but the reality might have been 60 or 160 hours. That reality is what’s going to drive the new proposal or the lack of even trying for that business. So if the utilization for that project was 160% and we know we can’t get 160% of the price for the project again for the next client, then there’s no reason to step into that deal. But if the utilization was 60%, and we had a 40% profit margin—then we’re like yeah, let’s do that!
By comparing estimated project performance with actuals, you can make more accurate assumptions and set reliable contract terms with the client. Having these types of insights also increases transparency in the client-agency relationship.
Remember that your cost rates need to be high enough to cover the costs of running your agency, i.e., your overhead. Reference industry benchmarks, be clear about your billing practices, present detailed estimates based on previous project data, and emphasize the value of your services and the expertise you bring to the project.
What Are the Pros and Cons of Using a Billable Hour Model?
When it comes to the hourly price model, advantages include:
- Allows for accurate reporting of time spent on client projects
- Ensures compensation for additional hours worked
- Can be more suitable for projects that are likely to increase in scope
Some notable cons of the billable hours model:
- May lead to less efficient workflows, as there is no incentive to finish work early
- It makes it more challenging to forecast your agency’s financials
- If starting estimates are exceeded, it might lead to client dissatisfaction
According to a survey by Databox, 75% of agencies use the fixed price model as their primary pricing model, with only around 17% using primarily hourly pricing. No matter how you’re billing your clients, consider tracking your hours. It can help you get a deeper understanding of your agency’s operations, as well as improve your client relationships by delivering transparent project progress data.
Takeaway: Managing Your Agency’s Time
Managing your billable and non-billable time is key to driving your agency’s profitability.
Keeping a close track of how your resources are utilized helps you drive productivity and efficiency, leading to optimized project delivery and improved client relationships.
However, maintaining a balance between client and agency work is equally important; this prevents employee burnout and drives operational improvement.
What are billable hours vs actual hours?
Billable hours are the time spent on tasks you can charge clients for, while actual hours include all the work done, billable or not.
What does 100% billable mean?
A 100% billable rate implies that every hour an employee has worked is chargeable to the client, with no non-billable activities included.
What is the difference between utilization and billable hours?
Billable hours refer to time spent on client work, while utilization is the percentage of billable hours divided by all available actual hours.
What are the disadvantages of billable hours?
The disadvantages of focusing too much on billable hours are: employee burnout, undervaluing non-billable tasks, and creating pressure to inflate hours to deliver value to the client.
What counts as non-billable hours?
Non-billable hours refer to time spent on activities that cannot be directly charged to clients, such as administrative tasks, internal meetings, and employee training.
How can I increase my billable hours?
To increase billable hours, prioritize project tasks, improve time management, and automate administrative duties by investing in reliable billable hours management software.
What is an example of a billable hour?
An example of a billable hour could be time spent drafting a document for a client, conducting specific client-requested research, or any direct client work.
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