The ultimate balancing act for project success: Billable and non-billable hours

Achieving the perfect balance between billable and non-billable hours is both an art and a science. Both operations and finance leaders need to understand what makes their organization profitable, and a big piece of that is knowing how many billable and non-billable hours to plan for. If you’d like to prioritize your company’s financial health, have happier clients, and smooth out operations, you’ll want to understand how best to strike this balance.

Billable vs. non-billable hours defined

What are billable hours?

Billable hours is the time spent on tasks and activities that are directly charged to clients. These hours are directly related to client deliverables and are businesses’ primary source of revenue.

Definition of non-billable hours

Any work that doesn’t directly generate revenue or isn’t related to client deliverables is classified as non-billable hours. Non-billable work includes administrative tasks, internal meetings, and training and development.

What are the main differences between billable and non-billable hours?

The differences between billable and non-billable hours can be pared down to the following three factors. As you’ll see, one simply can’t exist without the other.

• Revenue generation: Billable hours directly generate revenue, while non-billable hours indirectly affect revenue. Employees working on a client project can charge for those hours. Those same employees might’ve also spent 20 hours in the past month attending a special training session. Those hours aren’t billable, but the session did help the employees feel more motivated and prepared for client work.
• Client-related vs. internal focus: Billable hours are client-centric while non-billable hours revolve around internal tasks and operations. A designer working on UX for a big client will likely log both billable and non-billable hours. The time she spends creating wireframes, testing, and documenting her proposal is all client-focused and billable. But that work couldn’t be done without the internal tasks like making sure the right tools are in place, coordinating with other departments, and everyday administrative tasks.
• Impact on profitability: Billable hours directly impact profitability and financial performance, while non-billable hours have an indirect impact on profitability. Using the designer example from above, she bills hours on everything related to her client, but the hours she spends preparing herself for that work (think: employee training, tool testing, general research, team building exercises, and administrative upkeep) helps her accomplish her client work. In other words, time spent on non-billable tasks helps facilitate billable hours.

How to manage billable hours with the right questions

Depending on your role and department, you’ll have a unique stake in billable and non-billable hours. Here are a few questions you might want to ask yourself as you analyze your organization’s hours breakdown.

• How many billable hours does my organization need to remain profitable?
• How many non-billable hours should we plan for?
• How can I optimize the balance of billable vs. non-billable hours?
• Are my clients happy with our services?
• Are we losing or retaining clients?
• Which employees are responsible for the most billable hours, and is there any way to maximize that?
• Are any employees working too much overtime?
• Are any employees at risk of burning out?
• How can we limit project scope creep?

Billable hours management spans across various roles and departments, so a holistic approach is best. Strive for a balanced approach that crosses department lines and leaves communication lines open.

Project time tracking tools take the guesswork out of billable vs. non-billable hours

With a project time tracking tool like Beebole, team managers can easily generate a billable vs. non-billable hour breakdown report. With this data in hand, stakeholders can confidently make the moves to maximize profit and increase their team’s productivity.

What is billable utilization?

The utilization rate formula is defined as Billable Utilization % = (Number of Billable Hours / Number of Available Hours) X 100% This formula measures the percentage of available hours that employees spend generating revenue with their work. Click here for more important KPIs that finance controllers should understand.

The greatest challenges of billable hours management

If you think of billable vs non-billable hours management as the foundation of a house, think of everything it can support and help flourish. If you nail your billable hours management, you can likely generate more revenue and maximize profit margins. You’ll also be able to better allocate resources and improve customer satisfaction. But like anything with high-promised returns, billable hours management comes with its challenges.

Managing client expectations with transparency

Clients expect to be charged only for work that directly benefits them. And it’s your job to make sure you communicate that to them. The best way to do this accurately and transparently is to track billable vs. non-billable hours on client projects. With a tool like Beebole you can provide detailed reports on billable hours worked broken down by project, task, and sub-task. Reports like this provide peace of mind to the client who can see at a glance what they’re paying for. Satisfied clients generally translate to higher client retention rates and more billable work. Internally speaking, a project time tracking tool can help keep teams accountable for their work, while also giving project managers and upper management a clear snapshot of workloads and productivity levels.

Boosting employee morale and avoiding burnout

If you don’t focus enough on your billable vs. non-billable hours breakdown, you might be putting your entire operation at risk. If you don’t properly manage billable hours, you could run into profit loss, unhappy clients, or mishandled projects. Emphasize billable hours too much, and employees might feel demoralized or burnt out.

Remember that non-billable work is just as valuable as billable, and it’s important to acknowledge that. Try to prioritize employee training, team building activities, and day-to-day tasks needed for smooth operations. By doing this, you can show employees that you value their non-billable work just as much as billable.

Balancing resources for better allocation

Your resource allocation also needs to be balanced. If you really want to prove that you value non-billable work, then allocate resources to those tasks, too. Put employees first by actually making time for non-billable work.

As a team leader, it’s your job to balance billable and non-billable hours. That means you’ll need to juggle upcoming deadlines, projects, and clients, while also making time for non-billable work that supports everyone’s long-term goals.

Budgeting smarter and avoiding project scope creep

Creating an accurate budget is complex. If you underestimate non-billable work, you risk project delays and budget overruns. On the other hand, if you overestimate billable hours, you run the risk of budget inflation, which could turn away potential customers. Project scope creep is another important factor to consider.

A skilled project manager takes potential scope creep into account when resource planning and budgeting for new projects. Projects can shift over time, but if you’re monitoring them properly and keeping tabs on billable vs. non-billable hours, as well as milestone achievements, it’s easier to catch and pivot before running into budget overrun or incomplete projects.

Understanding your labor breakdown with a project time tracking tool

Understanding the labor breakdown within your organization is the first step in being able to better manage billable hours. Perhaps the best way to do that is with a project time tracking tool. You’ll want a tool that allows for seamless project time tracking, integrates with other tools within your stack, and that can easily be customized to fit your exact needs for both tracking and reporting.

Apart from choosing the right tool for your organization, here are a few other things you should take into account:

• How to automate time tracking to streamline the process
• How best to establish clear policies and guidelines related to billable and non-billable activities, and when to prioritize one of the other
• When and how to leverage time tracking data to pull insightful reports to share with the team, plus how to use internally for strategic planning and decision making

Implementing the right business pricing models and profitability

The key to any successful business is its profitability. Understanding how your organization remains profitable should be a driving factor in everything from the people you hire to the clients you take on and the tools that you use. Of course, this is also where prioritizing billable vs. non-billable hours comes into play.

If this seems like a daunting task, it is. Choosing a pricing model will affect which types of clients you work with, the services and output you’re able to provide, and how much emphasis you can really put on billable and non-billable work.

The first thing you should try to understand is the true cost of both billable and non-billable hours within your organization. True costs include direct labor costs, overhead, and the time spent on non-billable activities like administration, training, and internal meetings. Understanding how much time and money your non-billable hours require is the piece of the puzzle that helps you price your services.

Once your true costs are clear, you can work with your finance team to discuss your pricing model options that best align with your organization and the team’s need to balance billable and non-billable hours.

With a solid understanding of how billable and non-billable hours play into project management and success, you can very clearly communicate the value of both types of hours to help manage client expectations while also reducing conflict and misunderstandings. Transparent communication with clients fosters growth and loyalty, two very big players in the profitability game.

Billable hours management: A balancing act you want to master

Balancing your billable and non-billable hours is no small feat, but we hope that if you’ve gotten this far, you see just how important this is.

As you strive for project profitability, the yin and yang of billable vs. non-billable hours is a non-negotiable. Both feed into the overall success of any organization, and one simply can’t exist without the other. By prioritizing transparent project time tracking, cross-departmental communication lines, and a genuine interest and investing in employee well-being, you’ll be well on your way to striking that perfect balance.

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Katie Stearns

Katie is a digital marketer who researches and writes about project management, leadership, and best practices in business operations. She's on a mission to spread the word about the value of accurate and easy project time tracking. Through her interviews, research, and articles, Katie hopes to help professionals on their journey to a happier, more efficient work day.