It's important to understand billable vs non-billable work, because time that's not billed is time for which the company does not receive revenue.
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Many companies, as well as independent consultants and contractors, operate at an hourly rate. You negotiate a rate, track the time spent on the project, and bill it to the client.
On the surface, this process sounds pretty straightforward. However, in reality, organizations often struggle to come up with an effective system of time tracking to optimize their earnings.
On average, employees spend just over 4 hours of their day on productive tasks. The rest of the time is often wasted on the so-called 'non-billable' administrative tasks. Sometimes, these are unavoidable tasks, and equally critical for your business's operations. But you cannot bill clients for them.
It's important to understand the difference between billable and non-billable work, because time that's not billed is time for which the firm does not receive revenue and does not cover its expenses.
So, here's our breakdown.
Billable work embraces all tasks that are directly related to the client's project. It includes every unit of work that you can put on your invoice to the client.
In other words, billable work consists only of those tasks that are to be compensated; this determines how you will get paid for the time you spent on the project. These are usually tasks that are outlined in a contract between you and your client.
The terms billable hours, billable work, or billable tasks all describe a task that can be charged to a client. Billable work is one of the main sources of income for service based companies like consultancies, agencies, law firms, and accounting agencies, and usually the main metric used to judge the performance of employees.
To avoid confusion, it's best to define what is billable and what is not before you begin to work on a project. In general, the following tasks are considered billable work:
Billable work is also typically broken down into three categories:
Time-based billing is by far the most common form of billable work. An employee will track their time, and then charge a client an hourly rate for their time.
However, not all billable work falls under time-based billing. For example, if you're working with a client on a new web design project, you can offer them a fixed price for your services. This means that you won't be tracking hours - instead, you'll simply bill them one fixed amount at the end of the project.
In short, if you’re not directly charging a client for the work or it’s not customer-facing, it’s most likely non-billable work.
However, some non-billable work can be related to billable tasks - for example, if you spend two hours reviewing your email inbox before starting a billable engagement with a new client, those two hours would be recorded as non-billable time for the day.
Even though non-billable work is not requested by a client, it is an important component in keeping your business running smoothly. For example, employee development and training will contribute to the quality of different tasks, but can rarely be assigned to a single client's project. Social activities may be important for team morale, but you cannot charge clients for these work hours.
Likewise, networking and business development are non-billable, but they are essential to keeping a healthy pipeline of new work coming into the business.
While these activities cannot be billed to the client and fall under the category of non-billable work, you need to pay your employees for the time and effort they put in. The following are a few examples of non-billable tasks:
Some of the tasks mentioned above are crucial for business success. Nonetheless, it is important to keep track of how many hours you and your team spend on these non-billable activities, as having too much non-billable time will eat into your profits.
To sum up, let’s look at the core differences between billable and non-billable work as well as what those mean for your team and business overall.
Here is a final look at billable and non-billable tasks side by side for you to compare:
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As mentioned, your teams need to log their time, no matter if it is billable or non-billable.
In fact, having all of it registered helps you gain the transparency needed to understand what’s happening in every corner of the business, where you can make improvements, etc. It helps you see where employee effort is going and how that converts into revenue for the business.
With resource management software like Runn, your people can easily track their work and let you know where you need to invoice the client.
It will depend on the nature and scope of the project, but first of all you have to negotiate with your client what tasks are billable and which ones won't make it to the invoice.
As the next step, don't forget to communicate this to your team members. Make sure everyone assigned to the project understands what is billable work and what is not.
Now, when you're working on a project, how do you know how many hours to bill your client for? With time tracking set up, you can calculate billable hours as well as track any non billable time.
Traditionally businesses used spreadsheets to register and track time. However, this process is inefficient and cumbersome. It requires employees to enter the working hours manually, which ultimately increases your non-billable hours, and is likely to result in less accurate data.
Read on ➡️ Runn vs. Spreadsheets: What's Best for Resource Management?
Instead, use time tracking software. Ask your team to use the software even when they are engaged in small project-related tasks like answering phone calls or replying to clients' emails. At the end of the project, calculate the total billable hours.
When you start tracking billable time, you can also measure your billable utilization rate - to understand how much revenue-generating work your teams are carrying out.
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New to time tracking? ⏱️ Read why your business needs it here.
Keeping track of your non-billable time allows you to compare the number of hours you spent on billable and non-billable work. If your non-billable hours are disproportionately high, you will want to make improvements and change processes for next time.
Track billable hours as well as non-billable time to get the full picture. By tracking time not spent directly on a client's projects, you can understand how much a project costs you and whether a project is profitable or not.
You can discern the productivity of each employee by comparing their billable and non-billable time. If you see an employee has unreasonably high non-billable hours, you can intervene and take necessary steps to help them improve their performance.
If you do not take the non-billable hours into account when you are planning projects, chances are you will end up setting an impractical deadline or underpricing the work involved - leaving you with a thinner profit margin once all the non billable work has been accounted for.
Tracking each non-billable hour will therefore help you plan your future projects better. You will know exactly how much time you need to complete the project and what the total cost will be.
What’s more, non-billable hours can hurt your business. In some industries, the non-billed hours outweigh the total billable hours. For example, in law firms, members of the legal profession often spend more time on non-billable work than billable tasks. This is affordable for a law firm when the per hour rate of the legal professionals is high. But it doesn't work that way in most industries. They must balance non-billable time to make a reasonable profit margin.
This is why it is so important to track and (where possible) reduce non-billable time.
Here’s what Andy Brown, author of The Emotional Overdraft, a book on how to run a successful business, said about non-billable work and profitability:
Key to profitability is to reduce non-billable time spent on a client – over-servicing, over-delivering, poor scoping etc…It stands to reason that in people-based businesses, your people are your only resource – their time, and how they spend it, directly impacts your bottom line. The spot you’re losing pure profit are those hours spent doing non-billable work for clients… Once you start measuring where your team's time is being spent, the first thing to do is to understand why the non-billable hours are happening.”
Here are some steps that you can take to restrict non-billable time.
Avoid distraction and make use of the time efficiently. Taking regular breaks is important and can increase productivity overall. However, tracking employee time can help you make sure you and your team are not delaying tasks unnecessarily.
You can limit the total hours you spend on administrative duties by utilizing automated solutions. Look at the non-billable times and identify the most time-consuming projects. Find software that is easy to use.
For example, the invoicing process often adds non-billable time. Automated invoices will do the job more quickly and save you some time - more hours for your staff to spend on billable work!
More billable hours will help you balance the overall cost of a project. Make sure you and your team count every minute you spend on a project. It may be a little overwhelming at the beginning, but it will come easily once you make it a habit.
Your project profitability depends on how many billable hours you log. However, the non-billable tasks are important for your business, and you can't eliminate them. You need to make sure that you are aware of non-billable expenses before a project begins. While planning the budget, make sure to include both billable and non-billable time.
Use Runn's resource scheduling software to monitor your billable and non-billable hours along with project progress. Book a demo with us today!
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