Billable vs non-billable hours – how to charge for work?
April 22, 2022
Companies, agencies, consultants, freelancers, and anyone who works with hourly-billed contracts need to know the difference between billable vs non-billable hours. Thanks to that, you will improve your business productivity and achieve higher profitability. And by applying the best practices of tracking your work you can make the process much easier.
Negotiating rates as a freelancer
The nature of freelance work requires negotiations about money: hourly rates, monthly advance payments, and project-related costs. If these talks are to be profitable for you, you must know what arguments to use – thus, be aware of how much time each task at work takes.
It turns out that even the most efficient employees devote time to tasks that are not billed. They perform activities that do not actually add up to the client’s invoice, although cost their time. It means that a certain amount of work isn’t transferred to profits.
In order to properly prepare an offer for a client, you need to be aware that your work consists of both:
- billable hours – tasks closely related to the project,
- non-billable hours – side tasks that support the above.
In this artcile, we will deepen your knowledge about the difference between billable vs non-billable hours at work. We will also show you some tools that will help charge for your work more accurately.
Billable vs non–billable hours at work
Paid or billable hours are the hours related to project work for a specific client that can be settled directly with him. So every part of the work – from project planning to the final touches – includes billable activities.
Billable tasks – examples:
- communication with the client and meetings (both planned and unplanned)
- revisions and edits
Non-billable hours is time spent on tasks that cannot be directly settled with clients. However, these are also the hours spent on activities beneficial for your entire business, not just one specific customer.
Non-billable tasks – examples:
- internal meetings (e.g. brainstorming unrelated to clients’ projects)
- networking events and acquiring new customers
- marketing and advertising projects of your own company
- administrative tasks (paperwork, invoicing, cashflow tracking)
- staff training
- team integration meetings
Should I track my non-billable hours at work?
If you create the invoices based only on time, you reduce your profit margin and lower the value of non-billable hours spent on preparation and management. So our advice is to valuate your projects’ cost including both types of work.
Benefits of tracking non-billable hours
- understanding the true cost of working with the client;
- identifying customers who require more employees and non-billable hours;
- preventing “distribution” of hours;
- giving up unprofitable customers;
- reducing the amount of unnecessary work;
- setting new, higher fees to cover both types of work.
Importance of both billable and non-billable hours
Some part of a company’s resources (time, money, etc.) are spent on various activities but not settled in invoices for clients. And while these side tasks do not bring a direct profit, they are equally crucial to the entire project’s success. Being aware of these tasks, you can consider changing the pricing system of your products or services.
And when it comes to non-billable hours – rather than thinking about them as unprofitable time, consider them as an investment in your company’s future. Of course, it won’t bring you direct profit, but it will help:
- increase profit in the future and expand your business;
- raise yours or your employees’ competences and save on hiring new ones;
- inspire employees through training and create team-building activities.
McKinsey & Co’s study says that “on average, large IT projects run 45% over budget and 7% over time, while delivering 56% less value than predicted”. These results were consistent across all industries and illustrate the need for more accurate tracking projects. Thanks to time tracking you can estimate the utilization rate for your team or company.
Is it possible to increase the number of paid hours?
By knowing your industry goal, you can set appropriate goals for your business. These goals make it much easier to understand your performance in terms of effectiveness in generating revenue. It allows you to lead your business in the right direction – generating more paid hours and thus – money.
If you want to improve your financial results, you should first determine the utilization rate by tracking the time you spend on billable and non-billable tasks. Then, you can try to reduce the time spent on non-billable tasks and make room for by eliminating unnecessary ones or automating the repetitive ones.
Converting non-billable to billable hours
To make it happen, ask yourself these questions:
- On what tasks do I spend my time at work?
- Are all the tasks necessary for the project’s success?
- Can you automate some tasks as they are easy and repetitive?
- Is the project’s progress in line with the hours spent on it?
Answering above questions can help you determine the actual cost of your project, allocate (or reallocate) your resources, and improve future estimates. As the number of billable hours increases, profitability should increase accordingly.
Automated tools tracking paid and unpaid hours
You cannot rely on estimates when calculating bills for clients. Spreadsheets become unmanageable when working with too much data. Instead, to track billable and non-billable work, you’d better rely on time tracking tools.
TimsheetKiller is an innovative time-tracking software that automatically performs all these activities and calculations and records the time smoothly. With automation that it offers, you can improve billing and invoicing, and track your productivity in real-time. As a result, you will feel that you are not wasting time and can focus on the essence of your work.
Moreover, with each project entered in TimesheetKiller, you can specify whether it is billable or not. It brings great benefits, e.g. it makes you aware of the time-consuming nature of individual tasks and helps you plan your work better in the future.
What more does TimesheetKiller do?
- logs (in the background) all the time spent on every work-related program, website, e-mail, meeting and GPS location;
- allows you to create billable projects and set hourly rates in them;
- automatically creates timesheet based on your worked hours and rates;
- gives you an overview of which customers are generating more income;
- helps to determine what percentage of tasks brings the direct profit.
How to track both paid and unpaid work?
Once you have distinguished between your billable and non-billable hours, think of billable hours as “pure project work” that you can invoice (without putting your client at risk). To track both paid and unpaid work you can:
- set hourly rates for the entire project;
- check how much time you invoiced to the client and how much is left (utilization rate);
- generate detailed time reports.
To create accurate invoices it’s crucial to avoid overcharging your customer or underestimating your work. To provide the transparency for your client – you can export a detailed report of the activities you performed for them and attach it to the invoice.
Billable vs non-billable hours – summary
Unbilled work activities can either increase or harm the company’s and its employees’ morale. It all depends on the hours devoted to each task and how employees perceive their work. Paradoxically, it is in unpaid time that we broaden our knowledge and professional competencies to improve our operations, perform higher quality work and obtain better income. These activities will undoubtedly contribute to the improvement of your company’s delivery level.