Tracking Profitability: How to Track Billable Hours in Professional Services
As much as 16% of billable work goes unbilled in law firms (Clio).
The reasons for this are varied, from faulty estimations to seeking to impress clients. Whatever it may be, understanding how to track billable hours efficiently is the key to sustainable agency growth.
Whether you’re working in a law firm, creative agency, consultancy, or software development company, this is true for all client-oriented businesses.
This article will explore the best ways to maximize profit and manage billable time. Additionally, we’ll cover the software solutions that help you streamline this process and insights on training employees to utilize them effectively.
- Accurate tracking of billable hours is crucial for maximizing profitability in professional services.
- Different types of work may require different tracking techniques, so choosing the best method based on your industry, agency, and project specifics is important.
- To improve your agency’s performance and financials, consider three main factors: setting appropriate client rates, defining the contract terms in detail, and implementing the right software solution.
- A billable hours tracker can ensure accurate data, improve client transparency, and streamline daily agency operations.
How to Track Billable Hours: Overview of Methods
There are two main methods for tracking billable hours: Manual logging and automatic tracking.
Manually logging: Includes creating a billable hours chart in a spreadsheet. Employees manually record their billable and non-billable hours, categorized by different projects or clients. This might include noting the start and end times of tasks or using 6-minute billable increments, as it’s often done in the legal profession. Manual logging can be both time-consuming and error-prone, as it requires constant updating and upkeep to ensure accuracy.
Automatic tracking: Automatic tracking is enabled by various time tracking apps or comprehensive agency management software, such as Productive. These tools commonly have integrated timers that record time spent on tasks in real time and categorize it into projects accordingly. Specific tools also integrate time tracking with budgeting and billing, meaning you can automatically build invoices for tracked amounts. This method might be more expensive, as it involves investing in technology, but it produces more accurate data and streamlines repetitive tasks.
What Is the Best Method for Tracking Billable Hours for My Specific Type of Work?
The best way to track hours across services depends on the context of your industry, business, project, and even specific teams.
For example, companies with complex workflows that organize their resources with capacity planning might want to take advantage of automatically generated timesheets. This is a feature supported by Productive — by scheduling your bookings, you can have these hours transferred into time logs to simplify the process for your entire team.
Smaller agencies that don’t require extensive resource management might prefer leaving time tracking up to their employees. Here, two approaches might also be used: using the timer or logging time retroactively.
For example, the timer might be useful when agencies want to keep track of time spent on internal meetings, researching, or brainstorming, such as in creative agencies or consultancies. Otherwise, logging retroactively might be more suitable for team members who frequently switch between different tasks and don’t want to restart the timer every time.
Some other useful features to consider are simple time approvals and edit requests, as well as customizable locking of entries (after a determined period of time).
We’re also very pleased with the time approvals feature. Since we do a lot of retainer work, we have to provide weekly reports to our clients. In the past we had errors due to late time entries or adjusted time entries without project manager’s approval. Having this kind of check is really helpful and removes the risk of such errors.
Ultimately, how each agency chooses to manage its time depends on its needs and the capabilities of its chosen software.
How Can I Accurately Track Billable Hours Without Overcharging or Undercharging My Clients?
There are three main steps to ensuring that you’re billing your clients fairly while maintaining sustainable agency practices:
- Defining your cost rate: When defining your cost rates, you need to ensure that you can cover the costs of running your business, i.e., your non-billable work. Small agencies, in particular, might be tempted to underprice their work to get more clients, but this can be a double-edged sword. For one, it can lead clients to believe that you’re offering services of a lower quality, and it sets a bad precedent for the future. Benchmarking is especially valuable for this, so follow industry reports and data. For example, Promethean Research reports that in 2022 the standard hourly rate for digital agencies was in the $175-199 range, so consider pricing your services accordingly.
- Setting down client terms: Another frequent roadblock is unrealistic client expectations, often perpetuated by agencies. For example, for website project management, it’s especially important to define how much post-development support you’ll be offering and what this maintenance includes. Putting client terms into writing beforehand can solve many difficulties down the line. Even if it seems pedantic, consider various cases and details and discuss them transparently before heading into project execution.
- Investing in a billable tracker solution: According to research, only 56% of service buyers believe they have an honest and transparent relationship with their agencies (Havas). Software solutions that accurately record and deliver billable hour sheets to clients can significantly streamline communications and improve your client relationships. For example, with Productive, you can invite clients to your projects, allowing them to view their budgets and estimated time on tasks. These features, including time tracking and invoicing, can all support successful project delivery.
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What Tools or Software Can I Use to Track Billable Hours?
One of the most difficult steps of the implementation process tends to come right at the beginning – in fact, according to G2, 36% of buyers state that research is the most time-consuming aspect.
Here are some must-have billable hours features for professional service firms:
- Real-Time Tracking: Tracking time as tasks are performed using an integrated timer. This provides more accurate insights into billable vs non-billable hours.
- Detailed Time Logs: Tools should allow you to associate your logs with particular services, projects, and tasks. This helps provide transparency and justify billable hours to clients.
- Mobile Accessibility: For project managers and teams that are often on the move, a mobile app can help them stay on top of their tracking and organizing.
- Rate cards: The capability to set different billing rates and rules to accommodate various client arrangements.
- Client invoicing: Time tracking tools should also provide invoicing features to support your firm’s cashflow and streamline the billing process.
- Alerts and reminders: Automatic notifications can help your team stay on top of their tracking. Consider a tool that lets you customize how often you want to receive alerts and on which platforms.
- Reporting and Analytics: Finally, your time tracking tool should have advanced reporting features to help analyze billable hours, productivity, and client profitability.
An example of software that offers all of the features listed above is Productive, the all-in-one agency management tool. This software is designed to support agencies of all shapes and sizes to streamline their agency operations, from time tracking to financial management. The biggest upside to using Productive is that you can keep all of your project information on one platform, as well as save time and money by switching to a unified solution instead of using various separate tools.
If I had to choose the main benefit of switching to Productive, it would be having visibility of everything in one place: from sales through resources, projects to delivery, plus the time logging and profitability figures in one place—being able to track the end-to-end lifecycle of a project.
How Can I Integrate Billable Hour Tracking into My Existing Workflow?
Consider following these steps to simplify your implementation of billable hours tracking:
1. Evaluate Your Current Workflow: Look at your current processes and make an effort to understand how to best fit in time tracking. Assuming that you already have some form of this process implemented, consider how changes could impact your team’s workflows. Make sure to get stakeholder buy-in, including management and production staff, to make the transition smoother. Fostering an understanding of the full benefits of time tracking goes a long way to ensuring successful implementation.
2. Choose the Right Time Tracking Tool: By fostering an understanding of your project teams and business needs, you’ll be better positioned to choose a time tracking solution that aligns with your ultimate goals. Make sure to research the vendor and the software they’re providing thoroughly. Here, third-party reviews from reputable websites such as G2 and Capterra can be helpful. Remember that the most popular solutions might not always be the best pick for your agency.
3. Regularly Review and Adjust: Consider assigning a software champion to become the point of contact between you and the vendor and monitor implementation progress. Organize training for your team and encourage feedback. This is also the best time to think about integrating your tool with other management solutions that you might be using. Once implementation is finished, keep an open mind towards adjusting your processes to get the most out of your solution.
Akcelo, a worldwide brand experience agency, optimized their time tracking with Productive:
It’s always hard to get time sheets filled out, but it’s been a really good experience in Productive. I think people have loved the calendar integration feature where you can time track in calendars. It’s pretty straightforward to do so I think that’s made our lives a bit easier.
How Can I Create Detailed Reports of My Billable Hours?
Reports can be created manually by using data gathered from spreadsheets. However, this is greatly simplified by using software with advanced reporting capabilities.
These tools can extract data from platform activities and generate reports in real-time. Taking Productive as an example, the software offers more than 50 agency-focused templates that can be customized with specific agency parameters through custom fields. You can turn these reports into visualizations with just one click and create dashboards that you can share with specific project stakeholders.
Another great tool that comes with using software such as Productive is the ability to build, attach, and forward your timesheets to clients with your invoices. All of this ensures that your data is more accurate and easier to collect and analyze.
We can pull up data really quickly now, tailor it to our needs, and create all kinds of reports in a fraction of time compared to before.
How Can I Use Billable Hour Tracking to Improve My Profitability?
Tracking your billable data uncovers insights into one of the key agency metrics: the agency utilization rate.
This metric shows the ratio between billable hours spent versus all available working hours per employee, department, or agency. A high billable rate means your team spends most of its time on billable activities. However, this is not always a good thing, as many forms of non-billable work are crucial to your agency’s continued success, such as client prospecting or R&D.
However, optimizing less productive forms of non-billable work, such as client invoicing or similar administrative tasks, can be greatly useful for your financials. These insights can be revealed once you track your agency’s time.
Additionally, profitability is impacted directly by how your resources are utilized – do you have team members sitting on the bench, or are you assigning seniors to tasks that less expensive employees could handle? Billable hours metrics allow you to optimize your resource allocation, directly impacting your profitability.
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.
In short, by analyzing billable hours data, businesses can make informed decisions on various operational levels, improving efficiency and supporting scalable growth.
How Can I Use Billable Hour Tracking to Set Better Rates for My Services?
By accurately tracking the time spent on client projects, agencies can gain insights into the true costs of providing their services. This data can then be used to set appropriate service rates.
This process involves both using your agency’s data and considering external factors:
- Analyze past billing data to understand the time and cost efficiency of services, and adjust rates based on effective hourly rates and value delivered.
- Research current market rates, compare them with your own, and adjust pricing based on market trends and competitor benchmarks.
- Consider how clients perceive your rates compared to market standards, especially for high-value services.
- Adjust rates to reflect your increased expertise and experience, and stay adaptable to changing industry trends and economic factors.
How Can I Train My Employees to Track Billable Hours Effectively?
Time tracking can be challenging. This can be especially true for creative agencies, where large chunks of the workday are spent coming up with the right solution, with the execution often being simpler in comparison. By setting strict utilization rates, employees might intentionally neglect to log this crucial work, which results in inaccurate estimates and perpetuates unrealistic expectations.
This is why the first step to effective tracking is ensuring that employees feel confident enough to track their real hours. Ensuring that project managers understand their team’s daily workflows is essential to fostering this transparency.
Another piece of advice is to consider implementing daily time tracking by using an integrated timer to produce accurate results:
Difficulties arise where designers reconstruct their hours retrospectively, at the end of the day, week, or even month. One participant said he’d usually ‘go two weeks without doing [his] timesheets and then do it retrospectively’. Another ‘suffered the pain’ of reconstructing a month. Reconstruction was difficult: ‘you’ll work two hours on one project and a couple of hours on that, and at the end of the day it is a little bit of guesswork’.
Source: Measuring and managing creative labour: Value struggles and billable hours in the creative industries
This approach might not suit all agencies and teams, but it’s worth considering. Tools such as Productive that help you access this timer from the desktop can greatly simplify this process.
Finally, whatever way to track billable hours you implement, make sure to regularly check-in with your employees. Offer them proper guidance and address any challenges, whether this concerns your chosen time tracking software or management methods. Have an open mind for adjusting your processes with the aim of supporting your team in producing accurate time tracking data.
Find out more about tracking time with Productive:
Takeaway: Efficiently Tracking Time in Professional Service Agencies
Effective billable hours tracking is crucial to ensuring your agency’s profitability. By implementing effective techniques, such as using reliable time tracking software, professionals can accurately measure the billable hours spent on each project.
This enables better project management and resource allocation, affecting the quality of your deliverables and client relationships. By gathering data on billable hours, agency professionals can also identify areas for improvement and make informed decisions on their processes.
Do consultants bill hourly?
Many consultants bill by the hour, but some may also offer fixed-rate or value-based pricing depending on the project or client preferences.
How do consultants track billable hours?
Consultants track billable hours by using time-tracking software or tools that allow them to record the time spent on different tasks or projects for their clients. They may also use manual methods like spreadsheets or logs.
How do you calculate billable hours?
To calculate billable hours, you record the time spent on billable tasks. The total time is then multiplied by your hourly rate. For partial hours, you can break the time down into increments (such as every 15 minutes or 0.25 hours).
What is the program that tracks billable hours?
A popular billable hours tracker solution is Productive. This all-in-one agency management software includes an integrated timer, automatic timesheets, as well as support with budgeting and client invoicing.
Can Excel track hours?
Yes, Excel can track hours using timesheets where you enter the start and end times for tasks. Formulas can then be used to calculate the total hours worked.
Is there a free time tracker with billable hours?
Some free time trackers that include features for tracking billable hours, such as Clockify and My Hours. These tools are usually more limited compared to more robust tracking and budgeting solutions, such as Productive.
What percentage of hours should be billable?
The percentage of billable hours vs non-billable hours can vary by industry, but the utilization rate standard for professional services is in the 70% to 90% range.
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