What Are Billable Hours? Time Tracking Tips To Get You Paid

Billable hours are the amount of time spent working on business projects that can be charged to a client according to an agreed upon billing rate. Businesses, agencies, entrepreneurs and freelancers all frequently use billable hours to charge clients for the services they provide. To charge by billable hour, workers need to track the amount of time they spend on each client’s projects every day.

These topics will help you grasp what billable hours are and why they’re important to small business accounting:

What Is Billable Hours?

How Can I Tell If My Time Is Billable?

How to Track Billable Hours

How to Increase Billable Hours

What Industries Bill by the Hour?

NOTE:FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Is Billable Hours?

In most cases, any time spent working on tasks that are directly related to your client’s project is considered billable hours. While what constitutes client-related tasks may vary from business to business, these are some of the main work obligations that small businesses and freelancers should consider billable:

• Performing actual work toward completing the project
• Project planning
• Developing project timelines
• Conducting research on client matters
• Attending meetings related to a client’s case
• Reading and responding to client work emails
• Revising work submitted to the client, at the client’s request

What Tasks are Non-Billable Hours?

It’s a fact of life for small businesses and freelancers that some of the work you perform unfortunately can’t be billed to clients. Here are some examples of work tasks that shouldn’t count toward your billable hours:

• Developing proposals for new clients
• Pitching new work for client development
• Consultations and team meetings that take place before signing a contract
• Training courses that apply to your business beyond a single client’s project
• Social and team-building events
• Networking events for business development
• Work that is beyond the scope of the project, as outlined in your contract
• Fixing your own avoidable errors
• Invoicing, processing payments and performing other administrative tasks

How Can I Tell If My Time Is Billable?

Sometimes it can be difficult for a company to determine whether the time spent on a specific task is billable to a client. Here are some questions you can ask yourself to help evaluate whether you can bill your client for a certain task:

• Does the time I spend on this task help move the project closer to completion?
• Does the time spent on the task benefit me more than it benefits any one client?
• Is the task I’m working on specifically included in the scope of work outlined in the contract?
• Is the time spent completing the task related to a client request or is it driven by a mistake on my behalf?

How to Track Billable Hours

1. Set Your Hourly Rate

Before you start tracking your billable hours, you first have to determine the hourly rate you’ll charge clients for your work.

To decide on your hourly rate, set a target for the annual salary you’d like to earn. Do some research and make sure your target salary is in line with what other businesses offering similar services earn.

Once you have a salary in mind, divide it by the number of working hours in a year, which is 2,080 hours for a full-time job. Once you have that hourly rate, you may wish to raise it slightly to offset the amount of time you’ll spend working on non-billable tasks, like administrative work and client pitches.

This varies depending on your industry. For example, architects have a number of different ways to bill for their time.

2. Determine an Invoicing Schedule

Once you have your hourly rate set, choose the invoicing schedule you’ll follow as part of your billing process. Among small businesses and freelancers, a monthly billing cycle is most common, with invoices going out on the last day of each month. Once you’ve determined your invoicing schedule, you’ll be able to adjust tracking time to align with your billing cycle.

3. Create a Time Log

Next, you’ll need to create a time log to track your billable hours by client. You can do that manually, by setting up a spreadsheet with separate columns for the client name, a description of the work performed, the date and the time spent working on the project.

Because developing a manual time log can be cumbersome, you can also track your billable hours digitally. If you use a cloud-based accounting solution, you can easily track your billable hours using its time-tracking feature. You’ll simply have to start the digital timer in your accounting software and assign the time to the relevant client.

4. Track Your Billable Hours by Project

Record your billable hours by project, so you know what client you’ll invoice for the work you’re completing. It will also help you track how much time you’re spending on each client’s project per billing cycle. For precise hourly billing, refer to our article on how to create an invoice for hours worked.

5. Calculate Your Total Billable Hours

At the end of each billing cycle or when you complete a client’s project, review your time log and calculate your total billable hours for the project.

6. Create a Detailed Invoice

After calculating your total billable hours for the billing cycle, create an invoice to send to your client. Include the following details on your client’s invoice:

• Your business information, including logo, name, address, phone number and email address
• Your client’s contact information
• An itemized list of the services provided
• The billable hours for each service
• The deadline for payment
• Your payment terms
• The total amount due for the invoice, including applicable taxes

If you are a consultant, this guide on how to bill as a consultant will assist you in creating and managing invoices for your services.

How to Increase Billable Hours

Small businesses and freelancers looking to increase their profits will probably want to find ways to raise their billable hours (ethically, of course). These tips can help you maximize your billable hours and earn more money:

1. Set Billable Hours Targets

The more billable hours you work, the more revenue you can generate for your business. As management guru Peter Drucker once said, “What gets measured, gets managed.” So set billable hours targets for yourself and your employees and consider offering bonuses to employees who meet billable hours targets.

How many billable hours should you aim for? It really depends on your industry and your business. According to Yale Law School, for a law firm, the target billable hours is usually between 1,700 and 2,300 hours per year. For accounting firms, the billable hours expectations usually run somewhere between 1,700 and 2,000 hours per year.

In the legal profession and in public accounting, it’s standard practice to require employees to work hours of overtime to get enough billable hours and allocate non-billable time to administrative tasks.

2. Track All Your Billable Hours

It might seem silly in the moment to track a five-minute phone meeting or the two minutes it takes to send a work email. But all those small increments of billable time can add up to a significant number of billable hours over the span of an entire project. Track every minute you spend working on a client’s project to increase your billable hours.

Many companies that calculate billable hours bill in tenths. This helps companies track billable hours as effectively and accurately as possible without losing time spend on time tracking.

For example, in legal services, many law firms bill in six-minute increments because it’s easy to calculate billable hours, and it allows for reasonable billable hour increments without rouding up too much. The Justice Department has an attorney billable hours chart that can help with calculating billable hours based on six-minute increments.

There are multiple ways to track your billable hours. A law firm might use practice management software that includes built-in time-tracking software. Accounting software like FreshBooks also includes time-tracking features.

3. Track in Real Time

To make sure you don’t overlook any of your billable hours, track them in real time. Record your start and end times for each project as they happen, rather than looking back at the end of the day and trying to add up all the billable hours you spent on a client’s project. If you track time as it happens, you won’t overlook any billable time.

4. Record Your Non-Billable Hours

If you’re keeping track all your time, not just your billable hours, you’ll be able to look back at your work day and see where you can become more efficient. If you’re spending time every day on non-billable activities, such as simple administrative tasks, it might make sense to hire an assistant to help with the non-billable work so you can spend more time on important projects. Or, if you’re spending a lot of time invoicing, you may want to invest in accounting software that allows you to automate the invoicing process.

When you track both billable and non-billable hours, you can track your utilization rate, which is the percentage of your total working hours that you spend on work that can be billed to a client.

You calculate utilization by dividing the total hours worked during the year by billable time.

For example, if you work 2,080 hours during the year, and 1,900 of those hours are billable, your utilization rate is 91.3%. Measuring utilization rates can help you benchmark employees performance and increase profitability. If some employees are working more non-billable hours than billable hours, you might have poor cash flow and unhappy clients.

5. Stop Procrastinating

This is probably the most obvious and the most difficult way to increase your billable hours. Stop goofing off during business hours and you may be amazed to see how much your billable hours increase.

Some tips to avoid wasting time on non-billable hours include:

• Install a browser extension that limits the time you spend on time-sucking sites or completely blocks you from accessing them. Social media sites and even news sites are common culprits to target first.
• Clear your workspace of distractions. If you take away the temptation to procrastinate, you’ll encourage yourself to spend more time working.

What Industries Bill by the Hour?

It’s standard practice in many industries to track billable hours and charge clients an hourly rate. Here are some industries that commonly follow the billable hours model:

• Lawyers, law firms and other professional services
• Accountants
• Consultants
• Advertising agencies
• Web developers
• Freelance creatives, including copywriters and graphic designers
• Public relations firms

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