Billable Hours vs. Non-Billable Hours: How to Get Paid for Both

On the surface, the answer is pretty simple: charge enough for your billable hours to cover the cost of all of your non-billable activities. You can, of course, use a billing rates calculator to figure out what to charge for your work. But without first looking into how many hours you currently spend on both billable and non-billable activities, you’re missing out on opportunities to increase the value of both types of work.

To make sure you get the most out of all your work hours, we’ll take a look at the difference between billable and non-billable hours, why you should start tracking both types of work if you aren’t already, and how tracking all of your time can help you increase profit margins.

Billable vs. Non-Billable Hours: What’s the Difference?

First, let’s define what billable and non-billable work even means.

Billable hours are the hours of work you can bill directly to a specific client. Working on a client’s projects, communicating with them, and revising your work for them could all be considered billable activities.

Non-billable hours, on the other hand, are often spent on activities that benefit your organization at large, not just one specific client. Holding brainstorming meetings not related to client projects, working on your own company’s marketing and advertising projects, and employee training are all typically considered to be non-billable activities.

Why You Should Track Billable and Non-Billable Hours

When you only get paid for your billable time, you might wonder why you should even track non-billable hours at all.

Ultimately, tracking all your employees’ time helps you see the full picture of how time is spent within your organization. Without knowing where all of your team’s time goes, you miss out on critical data that can help you make improvements and changes to your processes.

At the end of the day, we need to change our mindset about non-billable time.

Instead of thinking of non-billable hours as time you can’t get paid for, you should think of it as an investment in your organization’s future. You won’t get paid directly for it, but the non-billable effort you put in now will help you increase profits and grow your business over time.

9 Ways Tracking Non-Billable Hours Can Increase Your Profits

To help illustrate how important tracking all your hours is, we reached out to industry experts for their advice. Below are nine ways you can increase your profit margins when you track billable and non-billable time.

1
You’ll Understand True Costs to Set Profitable Billing Rates

If you want to get paid for billable and non-billable hours, you need to start charging enough to cover both types of work. And to do that, you need to understand how much time you spend on each type of activity.

Karriem Kanston, founder of Kanston Development, a management consulting firm that assists small businesses with strategic growth, says, “Many times organizations are just looking at the time employees spend working on a project for a client. They forget about the costs and time it takes to prepare for client meetings, work, and deliverables.” When this happens, Kanston says, clients are often left wondering why, after doing all this client work, they can’t make a profit. “The reason,” he says, “is that your billable hour cost is $50 dollars an hour, and you’re charging that $50 an hour to your client. You are only breaking even.”

Tracking both billable and non-billable time helps you understand the true costs of your client work. Brian Dechesare, founder of finance career platform Breaking Into Wall Street and former investment banker, breaks down the math behind your non-billable time: “If you measure a billable hour at $200, it looks lucrative. If it took you 15 hours of preparation to earn that $200, you’ve made just over $13 per hour.”

Without understanding how much non-billable work you have to do before you can even start working on billable activities, you can’t understand the real value of your time. When you base your billable rates only on billable time, you cut into your organization’s profit margins and devalue the non-billable hours of preparation it took to gain a client or hire talented employees.

2
You Can Identify Less Profitable Clients

Tracking all of your time can also help you understand which clients tend to require more non-billable hours from your team. This could present itself in a number of ways.

Causes of Non-billable Time

• Extensive contract negotiations.
• Out-of-scope requests (for retainer-based work).
• A need for excessive hand-holding.

Bryce Welker, CPA and CEO of CPA Exam Guy, points out that client work is “the sum total of your billable and non-billable work that constitutes the cost of a project.” His advice to companies is to consider your opportunity cost — in addition to the monetary and labor costs — of taking on needy clients. If you’re constantly stuck in non-billable meetings, conference calls, or revisions with one client, that’s time you can’t spend on more profitable projects.

Of course, client relations matter, and different clients will require different levels of management. But if a client actively prevents you from doing your work in an efficient way, or consistently demands additional hours for which you cannot bill them, it’s time to make a change.

You can raise rates, renegotiate contracts, or reduce hours, but it’s critical that you and your client are on the same page. This is not only because giving away hours and over-servicing clients costs your organization a great deal. It’s also because as a for-hire organization, word of mouth is everything, and you don’t want to put yourself in a position where the client is giving you bad reviews.

3
You’ll Improve Inefficient Processes

In addition to billing your work at the appropriate rate and letting unprofitable clients go, you can also reduce the amount of non-billable work your team does overall. When you understand how much time you spend on various non-billable activities, you can identify areas where you could work more efficiently.

Alex Williams, CFO at FindThisBest LLC, says, “Once we started tracking our non-billable hours, we found out that 30% of our time went into unproductive meetings that could’ve been an email. We reduced our meeting time limit down to 15 minutes, and this allowed us to focus on pitching and acquiring new clientele.” He adds, “By reducing our inefficient non-billable hours, we were able to increase our billable hours.”

Outside of reducing time spent in non-billable meetings, you can speed up many of your team’s tedious, manual activities with software.

Automating dull, repetitive tasks is another way to reduce time spent on non-billable hours. According to research firm McKinsey, 45% of the activities people are paid to do — from entry-level workers to those in the C-suite — could be automated with lower-cost technology. Using software and tech to perform those tasks will not only cost less. It will also allow all of your employees to spend more time on higher-level, more profitable tasks.

4
You Can Calculate Reasonable Employee Utilization Targets

It’s one thing to track and understand billable and non-billable time. It’s another to know how much billable time each employee on your team should be working.

Your employee utilization rate is the percent of time that any employee or department is billable. Executives and other members of the leadership team will have a lower utilization rate than a junior-level employee who is grinding out client work every day. Tracking employee time can tell you what the difference between those rates should be.

Every industry is different, but for professional services — where most organizations run on a billable hours model — a good rule of thumb is that your agency’s utilization rate should be around 85%. For IT service providers, though, an 80% organization-wide utilization rate makes your company an industry leader.

Once you know your industry target, you can set appropriate utilization goals for your team. These goals make it much easier to understand employee and manager performance in terms of how effective they are at creating revenue. This, in turn, allows you to coach your team in the right direction: toward more billable hours.

As your utilization rates go up — and your total billable hours increase — there should be a corresponding increase in profitability.

5
You’ll Be Able To Maximize Each Employee’s Contributions

Once you’re tracking time, you know not only how much each of your employees is working, you also know what they’re working on. You can use this information to make sure that each employee’s contribution to the company is maximized.

First, you’ll be able to play to each of your employees’ strengths. You already know that no two employees work at the same speed. However, you won’t know how long it takes each employee to complete various tasks unless you track their time on them. When you track billable and non-billable time, you can understand all of the activities an employee works on in a day and assign them to the type of work they’re best at.

Assigning work in this way is a win-win for your organization, since billable and non-billable tasks will be completed more efficiently. And for employees, it means they can focus on tasks at which they’re either highly skilled or very efficient.

Similarly, no two client engagements are the same. But whether you’re doing a rebrand, consulting on a product launch, or designing a new logo for a client, there are trends over time that indicate how long a project typically takes. And if you know how long a project or job will take (more or less), then you know how much it will cost.

Considering both billable and non-billable time in the scope of your organization’s workload can help you understand the true costs of each employee working on a given project and completing different tasks. Understanding individual billing rates helps you ensure that your projects are actually profitable.

Finally, tracking non-billable time gives you a more accurate picture of upcoming capacity. When managers and project leads understand that they can’t book employees at a 100% utilization rate, they’re less likely to burn out their teams. But as we already discussed, you have to track both billable and non-billable time to calculate a reasonable utilization rate for your staff.

Gaining a more holistic view of how each team member’s time is spent helps you assign the right work to the right employees at the right times. This will help you allocate work in a way that maximizes profitability on each project.

6
You Can Boost Employee Engagement

Tracking non-billable hours will also help you make sure you’re not burning out your employees because it helps you gain a true understanding of their full workdays.

Jillian Plank, CPA and small business advisor at Spring Accounting, points out that “If a project is under-staffed or priced too low because of insufficient time tracking data, employees might get overscheduled. This can lead to employee burnout, missed deadlines, unhappy clients, and an endless cycle of not being able to analyze what went wrong.”

When you don’t understand your employees’ full workloads, you run the risk of employing very dissatisfied people who do subpar work, frustrating your clients and, ultimately, losing business. When you include non-billable activities like prep work or team meetings, you can avoid overloading everyone’s to-do lists, helping employees stay happy and engaged on the job.

Tracking those non-billable hours can also help you decide where you might need to offload or outsource activities that are draining your team. Mariah Althoff, CEO and creative director at graphic design agency MariahAlthoff.com, says that tracking time helps her employees “stay in their zones of genius and take on more clients.” By understanding where her team does their most valuable work — and reducing tasks where they aren’t so productive — Althoff’s says her business has become more profitable, and her team members are “more focused and engaged in the tasks they enjoy most.”

7
You Can More Objectively Evaluate Your Employees’ Contributions

Engaged employees are likely to help improve your company overall. However, the activities they’ll participate in to grow your company over time are likely non-billable.

Eboni Moss, is a CPA and the owner of The Master Resource, LLC, a firm that helps businesses identify resources and opportunities to scale their businesses. She points out that retaining talented employees who are enthusiastic about growing your business requires “tracking, acknowledging, and rewarding the time employees dedicate to making their workplace a better organization.” Without tracking non-billable time, many of those activities go unacknowledged.

“When review time comes around,” Moss says, “leadership will not have a true picture of the contributions an employee is making. This affects compensation, recognition, and promotions.” Employees whose hard (but non-billable) work goes unrewarded will stop using their time to grow and improve your company . They’ll leave your company to work for one that values their efforts, or they’ll disengage, turning in only the work that’s asked of them.

By recognizing the important efforts employees make to benefit your organization, you can attract and retain team members who are always looking for ways to improve.

On the flip side of this issue, you’ll also have objective data that will help you evaluate employees whose performance doesn’t meet expectations. When you’ve set expectations for time devoted to billable work, as well as given employees room for non-billable tasks, you can see whose performance is truly lacking. But without recognizing the value of non-billable hours, you can’t truly know whose work is contributing to the growth of your organization.

8
You’ll Be Able To Show How Much Value You Add to Your Clients’ Work

Although you only charge them for billable tasks, spending time on non-billable activities is actually how you provide value to your clients.

Robert Brandl, founder of Website Tool Tester, points out that “these activities are what makes you stand out from your competition.” If the quality of your work is worth it, clients will pay what you’re asking, even if your rates are sky-high. But to produce quality work, you have to spend significant amounts of time on non-billable tasks:

• Searching for and hiring talented people
• Training those people and expanding their skill sets so they become even more talented
• Documenting and examining your processes so you can improve them over time

You can’t bill your clients for any of this work. But if you can’t prove you’re doing it — or worse, if you’re not doing it at all because you’re on an impossible quest to achieve 100% billability — the work you do will stagnate. Clients will become dissatisfied, and you’ll lose business, all because you neglected non-billable efforts.

While you can’t charge clients directly for non-billable work, Grant Aldrich, founder and CEO of Online Degree, has one piece of advice that might help you — and your customers — understand the value of non-billable time: put it on the invoice (free of charge, of course).

“Clients love to feel like they’re getting something for a better value. Including both billable and non-billable hours helps to build stronger relationships with clients.” When you explain all the work that goes on behind the scenes to your clients, they have a better understanding of everything you do for them — and how time spent on each non-billable task relates to the high-quality work you do for them, all at no extra cost.

And as Aldrich points out: “Who would you rather hire: an agency that does what’s required or one that goes above and beyond?”

9
You’ll Be Able To Lay the Foundation for Future Growth

In the chase for more billable hours, it’s easy to forget that the most direct way to increase profitability is to grow your business. You can do this by building more capacity to take on more clients. Or you can equip your employees with more skills to do higher quality work (that you could charge clients more for).

For most of us, it’s in our non-billable time that we expand our knowledge and professional capacities in a way that lets us either conduct more business or charge more for the business we get.

Non-billable activities that can end up making you more money include:

• Making new contacts.
• Strengthening your team.
• Developing your brand.
• Making sure your proposals are top notch, every time.
• Incorporating new skills or providing employee training for in-demand skills.

So while you’re attempting to minimize non-billable hours, you’ll want to remember that not all non-billable hours are the same. Eliminating an hour of tedious or repetitive work is a good thing. But eliminating an hour an employee could spend developing their skills or that you could spend developing your brand will hurt your company in the long run.

When you track non-billable hours, you’ll be able to determine how many of those hours are dedicated to growing your organization overall.

Non-Billable Hours Can (And Should) Be Profitable

You shouldn’t think of non-billable time as time that wasn’t valuable. In fact, time spent on non-billable activities is probably the most valuable to your company in the long run. But you won’t know the value of your non-billable hours if you don’t track them at all.

Tracking both billable and non-billable time helps you understand the true costs of running your business, assign realistic workloads to employees, and provide more value to your clients.

ClickTime’s time tracking software makes it easy for employees to track time throughout the workday, giving you a full picture of their workloads. Automated reminders and approvals done at the click of a button reduce the amount of time managers will spend sifting through timesheets or tracking down employees with incomplete timesheets. And custom reporting options help you pull the data you need to understand the true value of every employee’s time — whether it’s billable or non-billable.