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What Are Billable Hours? Setting Your Billable Rates

Oct 26, 2022 4 min
What are billable hours in accounting

What Are Billable Hours? Setting Your Billable Rates

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Billable hours is a value-based pricing method you use to ensure that every minute spent on a client’s project is accounted for. 

Small businesses in the creative and content industry risk receiving less pay for their services due to little understanding of billable time.

While satisfying clients is the primary goal of your business, getting paid duly fuels the passion and ensures business continuity. 

Billable hours 101: Also known as billable time, is an essential part of project management. It calculates the time spent on tasks that are directly or not so directly related to a client's project.

What are billable hours?

The time spent doing any work related to delivering a product or service for a client is billable. This could include but is not limited to answering calls, replying to emails, and revising documents.

If you engage in any activity directly associated with a client’s project, then it is billable time you should account for based on an initial agreement with the client.

For example, if you are a freelance graphic designer, thinking up ideas for a logo, discussing with clients to understand what is required, and time spent revising designs, are billable activities.

How to set billable rates

Do some research first before going into any meeting with a client over your billable rates. 

You can speak to experts, consult friends, or search on the internet to be in the know of the average rates in your service industry.

Once you know what you’d like to charge the client, measure this against the work you’ll deliver. 

You can work backward to arrive at your billable rate by setting a total cost you’d like to earn and then breaking it down to the least rate/hour. 

Try to be as transparent as possible to your clients.

Nurture teamwork and deliver projects right on time. Create unlimited projects, and associate them with income/expense transactions with a few clicks.

Calculating billable hours

It is essential for project management and helps with an estimated time you are likely to spend on a project.

Below are four steps:

  • List all activities
  • Use a time-log
  • Calculate billable time by the project
  • Calculate your total hours

Listing all activities: You should start by listing every possible action or process involved in delivering the client’s project and drawing out an estimated time for completion.

Use a time log: Time-tracking app can help log every activity of your client’s project. Apps like DesktimeHubstaff, and Clockify can help track the time spent on every project.

Check out: How to invoice billable hours.

Although this isn’t advisable, you can manually keep a time log using 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. 

It would be best to work with a time-tracking app to save yourself a lot of productive business time.

Calculate billable time by the project: It is best to calculate the hours spent on each project if you are working on different projects for the same client. This way, you can quickly know where to optimize rates to match your service delivery.

Calculate your total hours: Review the time log at the end of the client’s project and add the hours spent on each activity.

Time tracking apps can help you extract data such as spent hours per year and billable hours charts. You can also understand the most profitable clients.

What tasks are billable to clients?

While this may vary from business to business, these are everyday tasks small business owners and freelancers should consider billable:

  • Time spent on planning the project
  • Developing the project timelines
  • Time spent implementing the project
  • Call time with the client to clarify project details
  • Conducting research
  • Meetings with the clients over the project
  • Reading and responding to emails relating to the client’s project
  • Revision of work at the client’s request

Let’s satisfy the curiosity about what constitutes non-billable hours.

What are non-billable hours?

These are hours spent on activities that aren’t beneficial to a client’s project. Hence, you can’t bill the client for them. 

Sometimes, entrepreneurs engage in activities that could benefit the client but can’t bill for them unless both parties have an initial agreement.

Examples include:

  • Pitching for a client’s work
  • Time spent on developing a pitch document
  • Developing proposals 
  • Meetings or calls that take place before signing a contract
  • Social meetings with the client
  • Training to acquire skills required to complete client’s work 
  • Performing a task that isn’t outlined in the contract
  • Fixing your avoidable errors
  • Administrative tasks such as invoicing and processing payments

Reasons to track non-billable hours

Tracking non-billable hours can help you with insights into your business performance and clients that are less profitable.

  • You get to understand the cost of completing a project and adjust your rates accordingly.
  • You understand which clients require more non-billable hours and resources from your team. 
  • It helps you improve inefficient processes.
  • You will be able to see your actual value to every client’s project
  • You can quickly evaluate employee input on every project

Final thoughts

Billable hours are beneficial to the freelancer industry. Content writers, graphic designers, business consulters, and lawyers will most likely work with this billing system.

Deciding whether to use the billable time for your clients depends on project activity.

For example, if you are involved in delivering services that are not product-based but creative and consulting-driven, using billable hours would be the way to go.

Frequently Asked Questions

  • What businesses use billable hours?

The method of charges is typical among the following industries – freelancers, law firms, accounting firms, consulting, public relations, and advertising agencies. 

  • When should I use billable hours?

Deciding whether to use the billable time for your clients depends on project activity. It would be the way to go if you are involved in delivering services that are not product-based but creative and consulting-driven.

  • What are billable hours for a consultant?

Track billable hours for each specific engagement. Additionally, each staff member should have an hourly billing rate that reflects their job title and experience level. A professional services firm could have multiple arrangements running with a particular client at any time.