In some professions, people are paid as the task is completed. For example, if you’re a mechanic, you get paid for each car you fix.
In other professions, people are salaried and paid a fixed amount regardless of how much time they spend working. For example, a doctor is typically salaried and doesn’t have to track their hours.
However, there is a third category of worker: those who are paid based on the number of billable hours worked. This system is most common in professional services firms such as law firms, accounting firms, and consulting firms where things work a little bit differently compared to the status quo.
In this article, we’ll discuss what billable hours are, how to calculate them, how to track them, and in which situations they should be used to compensate workers.
Let’s get started!
What Are Billable Hours?
At its core, the billable hour is a simple concept: It’s the number of hours spent working on tasks that can be charged to a client. To go into it a little further, billable hours can be defined as:
The number of hours spent working on tasks that can be charged to a client, where the work is being done by someone who is paid hourly and is not salary.
It’s important to understand what billable hours are not in order to get a clear picture of this billing method. Billable hours are not:
- The number of hours worked in total
- The number of productive hours worked
- The number of hours spent working on tasks that cannot be charged to a client
With that said, let’s move on and discuss an example to illustrate billable hours in further detail:
Consider a situation where you are a lawyer and you are working on a case for a client. The time you spend reading documents, researching the law, and meeting with the client can all be considered billable hours.
On the other hand, the time you spend eating lunch, browsing social media, or chatting with co-workers cannot be considered billable hours since these activities cannot be charged to the client.
This illustrates the concept of billable hours well as they are defined as the hours the client is charged money for, that is spent working directly on the task the client wants completed.
Now that we’ve got a good understanding of what billable hours are, let’s move on and discuss how to calculate them.
How Can You Calculate Billable Hours?
Calculating billable hours is relatively simple and only requires you to keep track of the time you spend working on tasks that can be charged to a client.
To do this, you can use a time tracking software or app. These tools will allow you to start and stop a timer whenever you begin or end working on a task so you can get an accurate picture of how much time you’re spending on billable tasks.
Once you’ve got a good idea of how much time you’re spending on billable tasks, you can begin to calculate your billable hours.
To do this, simply take the number of hours you’ve worked on billable tasks and multiply it by your hourly rate. For example, if you work 40 hours per week and your hourly rate is $50, your weekly billable hours would be $2,000.
It’s important to note that you should only charge for the time you actually spend working on a task. If you take a break to eat lunch or check social media, this time should not be included in your billable hours.
Now that we’ve gone over how to calculate billable hours, let’s move on and discuss how to track them.
How Can You Track Billable Hours?
Assuming you work in a profession where billable hours are common, there are a few different ways to track your hours.
The most important thing is to be as accurate as possible in your Tracking. This means recording all the time you spend working on tasks that can be billed to clients on a timesheet, even if it’s outside of normal work hours.
For example, if you’re a lawyer and you’re working on a case at home in the evening, you should still track those hours as billable.
The second most important thing is to be consistent in your Tracking. This means using the same tracking method every day, so that you can easily compare days and weeks, and see how much progress you’re making.
There are a few different ways to track your hours:
- Use time-tracking software. These will automatically track the amount of time you spend on different tasks, which can be helpful in understanding where your time goes.
- Use a spreadsheet like Google Sheets or Microsoft Excel. This method requires more manual effort, but it can be helpful to have all your data in one place.
- Use a notebook or piece of paper. This is the most low-tech option, but it can work well if you don’t want to use another app or you’re worried about battery life.
No matter which method you choose, the goal is to have a clear record of the hours you’ve worked so that you can easily calculate your billable hours at the end of each day, week, or month.
Should You Use Billable Hours?
There are a few key factors you should consider before using billable hours to compensate your workers.
First and foremost, is your business model conducive to billing by the hour (most business are nowadays)? If not, then it’s probably not worth tracking billable hours because it won’t be an accurate reflection of how much work is actually being done.
For example, if you run a graphic design studio that sells packages of services (such as branding, web design, and print collateral) to clients, it would be difficult to accurately track billable hours because the time spent on each project can vary greatly.
On the other hand, if you run a law firm where attorneys charge by the hour, then tracking billable hours makes a lot of sense because it’s a good indication of how much work is being done for clients.
Another key factor to consider is whether or not your workers are comfortable with the billable hours system.
Some people may feel like they’re being micromanaged if they have to track their hours, while others may find it empowering because it gives them a sense of control over how much money they make.
It’s important to have a candid conversation with your team members to gauge their comfort level with the billable hours system before implementing it.
The last factor to consider is whether or not you have the infrastructure in place to track billable hours.
If you’re a small business with only a handful of employees, tracking billable hours may not be worth your time and energy.
But if you have a large team spread out across different locations, then you might want to invest in software that can help you keep track of everyone’s hours.
Alternatives To Using Billable Hours
First, it’s important to understand that there are alternatives to using billable hours. In some cases, it may make more sense to use a salary or hourly rate instead.
For example, if you have a staff member who is working on tasks that are not directly related to generating revenue for your business (such as administrative work), then it wouldn’t make sense to pay them based on billable hours.
In this situation, it would be more equitable to pay them a salary or hourly rate.
Another alternative to billable hours would be using a project-based rate.
This is where you would agree to pay someone a fixed amount for completing a specific project. This could make sense if you have a one-time project that needs to be completed and you don’t want to worry about tracking billable hours. It’s also a lot simpler to pay in one lump sum compared to tracking hours worked.
The third alternative is paying based on a retainer.
In this situation, you would pay someone a fixed amount every month in exchange for a certain number of hours of work. For example, you might have a contract that stipulates you will pay someone $1,500 per month for 10 hours of work per week.
This type of arrangement can be helpful if you need to guarantee that someone will be available to work on your project for a certain number of hours every week.
This should make it apparent that using billable hours isn’t the only way to pay workers – there are a number of alternatives that can be used if you feel billable hours might not be the right method of compensation for a certain task. Choose the method best suited for you.
We hope this article was helpful in explaining what billable hours are, how you can track them effectively and how to calculate them in the first place.
Billable hours also have their fair share of advantages and disadvantages, so it’s key that you take these into account when deciding what method of compensation to use.
At the end, we went through a number of different ways to compensate workers – it’s important to choose the method that makes the most sense for your business.
Best of luck with your decision!