Billable Hours Best Practices & Increasing Them Without Overworking

“Work smarter, not harder” is a saying overused to oblivion. Coined in the 1930s in the context of industrial engineering, it’s become the mantra of everybody and their mother’s dog.

Manual or intellectual labor, we all want to produce more with less effort. In some cases, this is achieved naturally with experience. As you get better at doing something, it takes you less and less time to complete the same task. So you can produce more while expending fewer resources.

In other cases, technology and automation is the answer to achieving efficiency. Especially seeing how a lot of manual tasks can be easily streamlined with the right tech.

For people in the service industry, the expression “work smarter, not harder” means figuring out a way to get paid more without overservicing clients. This can be achieved in 2 ways:

1. Invoice for more time
2. Raise pricing

As you may have figured by the title of this blog post, we’re here to help you navigate the question of increasing the number of billable hours you can invoice to clients. Specifically, we’re going to look at some best practices and industry averages and work out a way for service providers to increase their billable hours without overworking.

Let’s go.

Defining a billable hour

On the surface, the concept of a billable hour seems clear and straightforward. It’s the time you get paid for after performing services for clients. It’s what goes on the invoice, most often measured in 1-hour units because that’s the premise of the hourly billing model.

On a deeper level, defining a billable hour is a bit of a pickle because of the myriad of definitions used by different service organizations, specifically defining what gets reported as billable time.

We’ve tackled the topic of billability vs utilization earlier on this blog but it bears repeating. Every service provider needs to establish their own guidelines for which tasks are considered revenue-generating. When it comes to deciding what can be put on a client invoice, something as controversial as a 30-min lunch break can make a big difference if you consider a large team over an extended period of time.

That’s why agency profitability experts differentiate between a billable hour and delivery hour. One is used strictly for client billing and the other is used to measure efficiency metrics and plan capacity.

As a service provider, you’re free to come up with your own definition of what constitutes a billable hour and whether or not it’s the same as delivery hour for your organization. Ultimately, it’s the question of self-reporting on how your team’s time is allocated (more on that later).

Billable hours vs profit

Depending on your pricing model, the number of billable hours will translate into a certain share of your revenue, with up to 100% of revenue coming from invoiced hours (if all of your clients are billed by the hourly model).

Of course, we have to differentiate between gross and net profits, i.e. what’s left after deducting the cost of running your service business. Depending on how you define utilization and the billable hour, and how much of the non-delivery time you still consider revenue-generating, your operating profits will vary.

The ultimate question is, how do billable hours relate to profitability? After all, staying profitable is the #1 concern for any service provider.

Even if you don’t use the hourly billing model, grasping the concept of a billable hour is helpful in optimizing your service business for profitability. Ultimately, you deal in people’s time to earn a profit from clients. The more time, i.e. billable hours you can sell to clients, the bigger your revenue. The less actual delivery hours your team can spend doing the work, the more profitable you are.

As laid out in the introduction to this guide, you get paid more for your work by either working more or charging more for the same amount of work. Figuring out the baseline for billable hours and achieving billable efficiency is how you get there.

What’s a realistic number of billable hours?

When it comes to setting a billable hour target, some professions are way ahead of others. For example, lawyers and attorneys, specifically those working in big law, are all too familiar with the billable performance target.

Most law firms set an annual target for billable hours ranging from 800 to 2,000+ hours. It’s standard practice in the legal profession as law firms forecast profits based on how many hours of legal work they’re able to sell to clients. Even if they charge retainers, law firms still measure revenue per lawyer (RPL) or profit per equity partner (PPEP).

Other professionals, e.g. consultants, often charge in increments even smaller than an hour – as small as 6 minutes (which is also typical for lawyers and attorneys). Consulting firm hours are derived from a billable performance target with the same goal of financial planning and profitability management.

Of course, best practices aren’t always realistic targets, especially seeing how wide the range of professional services can be. To get a ballpark estimate of your billable hour target, take your revenue target and divide it by your hourly billable rate.

Of course, a revenue target is not much without a clear understanding of your delivery costs, overhead expenses, and, ultimately, your average cost per hour. To calculate your average cost per hour, you’ll need to divide how much it costs you to keep each employee (salary + benefits) by the number of hours you purchase from them.

You’re much better off calculating a billable hour target based on your cost per hour, with the recommended ratio being 1:3. For example, if your average cost per hour is around $50, your hourly billable rate should be about $150 to ensure profitability.

The more billable hours you can charge for, the higher operational expenses you can sustain while remaining profitable. If you’re unsure about your revenue target and want to calculate a realistic billable hour target based on your average cost per hour, you can use the following formula.

Calculating billable efficiency

Billable efficiency is a measure of how much of all the time you purchased from your team you were able to sell to clients. To calculate your billable efficiency rate, you need to know your total capacity and net profit for a given period of time.

The logic here is similar to calculating a ballpark figure for your billable hour target.

1. You take your net profit and divide it by your hourly rate to figure out the number of billable hours you sold.
2. You divide the hours you sold by your total capacity.

In the end, you get a % of how much of your team’s total time you were paid for in a given time period. This is not the same as your utilization rate as in reality, your team may have worked more or fewer hours than what was charged to clients. Calculating precise utilization is only possible with solid self-reported time data from your team. Otherwise, you’re perpetually acting based on ballpark figures.

Let’s take an example. Say, you employ IT teams and sell weeks’ worth of time to clients, resulting in 100% billable efficiency most of the time. Sadly, it doesn’t mean you’ve reached the end of profitability optimization. Your teams’ actual utilization, i.e. how busy they actually are on a daily basis, may be far from 100%.

They could be under- or overworked, but because you don’t know how their time is allocated you can’t set an adequate billable hour target or adjust your hourly rate. You can still use the 1:3 ratio of cost per hour to hourly rate but, as mentioned above, this will only ensure you break even.

On the other hand, if you know exactly how much of your team’s time is delivery hours vs billable hours per project, you can optimize capacity and calculate a billable hour target that ensures profitability without overworking your people.

How to increase billable hours in 3 steps

Finally, we’re going to discuss the tactics to increase billable hours without overservicing clients. For lack of a better word, how to work smarter, not harder.

1. Get serious about tracking time

Like it or not, the only way to achieve consistent profitability as a service business is to keep track of time. This is where the distinction between billable hours and delivery hours is illustrated best.

If a service provider sells 10 hours of work to a client, this is 10 billable hours that fits into the billable hour target. If the team then completes the project in 8 (delivery) hours – fantastic, but you won’t know that without self-reported time data. If the team spends 12 hours completing a project but reports 10 billable hours because they don’t track time, you’re once again in the dark about delivery hours. Not to mention the high risk of burnout.

Time data is your #1 source of insights for delivery vs billable hours. The trick is to figure out a way to get your team to track time well and be honest about it. We at Memtime know the pain of manual time tracking all too well. This is why we came up with a way to track time without tracking time.

Automatic time tracking aka computer activity recording is a 100% private way to passively track employee work time without running timers, stopwatches, or other intrusive tools. Memtime desktop app runs in the background 24/7 and remembers everything you do on your computer (unless you tell it to never record specific websites or apps).

No matter how busy your days get, you can open Memtime at any point during the week and see everything you worked on down to the minute. Nobody else can see your activity timeline as it’s stored offline on your computer only.

A quick glance is enough to remember your day in 1-60 minute intervals and record time on projects. Memtime integrates with your current project software and allows you to create and sync time entries directly into your project software interface, e.g. Jira, Asana, ClickUp, etc.

2. Recover lost billable time

Sometimes, working smarter means simply accurately recording all of your work (and then invoicing clients for it). Remember how lawyers and consultants bill in increments as small as 6 minutes? An email here, a call there, small revisions scattered throughout the day – these can add up to hours of your time that never gets on the invoice.

Consider these real-life cases of teams recovering billable hours with Memtime, i.e. getting paid more without taking on more work.

These are just a few examples of how easy it is to increase billable hours by automating time tracking. Most of us don’t give ourselves enough credit for how much we work seeing how we multitask and get immersed in the process. Nobody has the time to set manual timers but everybody deserves to be compensated fairly for the effort put in.

For the absolute majority of people, Memtime is an eye-opener, whether it’s to realize how often you get distracted or discover you’ve been undercharging clients for years. This is all too common and very easily fixed with automatic time tracking in place.

If you bill once a week or month, you can go back and reconstruct your days minute by minute. It doesn’t matter how much time has passed – Memtime stores your activity data indefinitely on your computer unless you decide to format it. You’ll be able to retroactively recover billable time and invoice with precision.

3. Get strategic about clients and projects

A massive perk of tracking your work hours is how quickly you discover that not all clients, projects, and services are equally profitable for your business. You may notice a pattern of some services taking less time than planned and some clients habitually taking more of your team’s resources than what’s paid for.

If you want to work smarter, not harder, you need to get insight into which clients and services are the most profitable for you, i.e. take the least time to complete and bring the most revenue. To do this, you want to compare your delivery hours to billable hours per project, calculate billable efficiency, and make strategic decisions about which clients you can upsell to and which projects are not worth taking on.

After running a time & cost analysis based on your own project time tracking data, you may decide that you do, in fact, want to serve more clients and increase your billable hour target. If you learn that your team’s actual utilization is low and they have capacity for more projects, taking on more work is not a bad idea because you won’t be overworking them.

Or the opposite could be true. After you recover previously unrecorded billable hours, you will naturally invoice for more billable time without increasing your billable hour target. And your team will feel appreciated and less stressed.

There’s more to counting billable hours than looking at the billable target and coming up with a plausible weekly figure. So much potential lies in properly documenting your workdays, and it doesn’t require nearly as much effort as setting a timer for every task.

Final thoughts

Billable hours is a sensitive topic in the service industry because many business owners, specifically in the agency space, consider it an outdated pricing model and don’t use billable hours in their invoices.

However – and we won’t stop preaching it – everybody can agree that time is the most valuable resource for any service provider and there’s no better way to improve profitability than increase the amount of billable hours while keeping the amount of delivery hours the same or even lowering it.

We hope this article is helpful in establishing a baseline of billable hours for your organization while taking into account your average cost per hour and billable rate. With that in mind, achieving your billable hour target is easier than it seems with the right tools for tracking your work time. You don’t need to work more – you just need to document every minute of your time and be strategic about new clients and projects.

Let Memtime help you effortlessly increase billable hours without overworking your team. Start your risk-free trial today and recover up to 50% more billable time in the first week.