There is a natural tendency to focus on billable hours or ‘actual project work’ since it is necessary (and sufficient) to bill clients and get paid. In this article, we will explain why tracking the other side of the equation is just as valuable.
In order to grow, the business must bill more hours, and defend or increase the hourly rate. But achieving these things is largely possible due to non-billable activities, such as business development, training, and recruitment.
Billable and non-billable time are, therefore, two sides of the same coin when it comes to ensuring business success.
What is non-billable time?
Distinguishing between the hours that you can and cannot bill to clients is simple in most cases.
An internal meeting to discuss the upcoming office Christmas party is clearly a non-billable activity, whereas time spent preparing a report for an important project milestone is obviously billable.
Rule of thumb to determine ‘billability’
In cases where it is not obvious, and some thought is required, it is possible to apply common sense by looking at the matter from two perspectives:
The client: Would a client be shocked if they saw that a given activity had been charged for?
Your team: Does the given activity bring us closer to achieving the client’s objective?
Agree your rates
One can group non-billable work into three clusters: Running the Firm, Growing the Firm, and Client Management. Here are some examples of common activities in each cluster:
Running the Firm
Office management (restocking the fridge/stationery cupboard)
Bookkeeping
Internal meetings
Internal compliance activities
Growing the Firm
Strategy and Market research
Recruitment & Training
Networking and conference appearances
Meetings with / Pitches to new targets
Client Management
Client appreciation events
Client meals, entertainment
Expense management
What if it’s ambiguous?
There are some activities where the rule of thumb doesn’t work. Naturally, these corner cases are typically in the ‘Client Management’ category, and so on the borderline between client work and overhead activity.
Here are some further explanations:
Meeting with clients about future jobs
Ordinarily, such discussions would be classified as ‘business development’ and hence non-billable. But if they take place within the context of a billable meeting, it is less clear if this definition applies.Work that is outside the project scope
If a task is not part of the written scope, it is possible to argue that it should not be charged for. This problem is more likely to arise with fixed fee projects, where an explicit surcharge would be necessary to reflect the added work.Progress updates
This is not a problem if progress updates are explicitly part of the project plan and priced in. However, unscheduled updates (e.g. in response to an out-of-the-blue client phone call) can inhabit a grey area.Internal meetings where the client is discussed
An internal round-the-table discussion on “what everyone is working on” could turn into an extended problem-solving session regarding a specific client case. This could be seen as unscheduled project work, as it is, to all intents and purposes, of billable value.Waiting for the client
Suppose a client keeps the case team waiting on the Zoom call or summons them to a location but doesn’t show up? Although the client does not receive value, they are essentially ‘spending’ the team’s time, and arguably should be billed for it.Travel to the client
If a team member is sacrificing a non-trivial amount of time in traveling to a physical location in the line of duty, should this be seen as billable, or simply part of the cost of doing business?Revision and corrections
A revision that a client requests (e.g. re-run the financial projections with different assumptions) is different from time spent fixing a financial model containing multiple material errors, but some clients might argue that neither should be billable.Work completed before the contract is signed
If a team member is sacrificing a non-trivial amount of time in traveling to a physical location in the line of duty, should this be seen as billable, or simply part of the cost of doing business?
The above list is not exhaustive, but should serve to illustrate the importance of anticipating such cases and making explicit provisions in the project proposal and contract. This means that any debate happens before the fact, and not in the heat of the moment.
For example, a client may disagree that travel time should be billed at a full rate, and propose a compromise that travel time is billed at 50%. This would mean that the contractor is not left completely out of pocket, and more importantly, that relationship is not jeopardized later on with an argument over the bill.
Why detailed tracking of non-billable time is helpful
While distinguishing between billable and nonbillable time clearly has value, it may not be obvious why detailed tracking of non-billable hours is important. There are many ways in which it can not only help projects run smoother, but also benefit the business overall.
#1 Optimize your revenues
Manage project economics
As we saw above, ‘Client Management’ is a category that covers tasks that are done for the client but cannot be billed as part of the project work.
Some things should never be invoiced (imagine sending a client a bill for taking them out to a football game). But others - such as impromptu progress updates given at the client’s request - are de facto project work, and furthermore outside the control of the project manager.
In such a situation, thorough time-tracking makes the following helpful analysis possible:
The project manager in this instance could conclude:
The hourly rate appears to be a healthy $150 per hour, but the additional 25 hours of non-billable work dilutes this rate to $120.
‘Inbound calls’ and ‘Revisions’ account for the majority of this non-billable time and are higher than one would expect for similar clients.
Admin of 5 hours is in line with past data for projects of 100 hours in length, and cannot reasonably be reduced.
If there is a good business reason for maintaining the status quo, the contractor could include a “non-billable time” section on the invoice, showing the additional 25 hours while making it clear that the client is not being charged for them.
If on the other hand, the project manager feels the status quo is not sustainable, the next step could be to:
Encourage the team to manage the client more effectively. This would be appropriate if the client is mainly engaging in chitchat and not subjects related to the work itself.
Renegotiate the contract to encompass “Inbound Calls” as part of the billable work and place a limit on the number of revisions.
If the client is enjoying a discount to the standard rate, this could be adjusted to offset the additional effort.
If none of the above work, this could indicate a mismatch between the client and the contractor, and may suggest the need to rethink the relationship altogether.
By understanding what is going on outside the official billable activity, it is possible to protect the economics of the project while ensuring the client gets what they need.
Bill more accurately
Following on from the previous point, the ability to scrutinize your non-billable time is likely to uncover “hidden billability” (i.e. genuine billable work that would not cause controversy if billed) that might otherwise fall through the cracks.
A study by Accelo found that around $50,000 is being lost annually per professional worker on answering emails alone. Overall 38% of potential billable revenue is being lost overall thanks to untracked time spent on emails, meetings, and delays in filling in timesheets.
It is only when non-billable time is tracked in detail that this hidden billability can be identified and billed.
#2 Optimize business processes
The ‘Running the Firm’ category of activities consists largely of routine, unexciting tasks such as office management and compliance. It is unsurprising that they receive less attention than higher-profile activities that generate revenue.
But this is illogical if we remember that the business is a holistic entity.
The more efficient a firm’s processes, the more time there will be for billable work, and the more headspace can be devoted to it.
Financial advisor Mark Berg gives the example of a resource at his firm with a billing rate of $300-600 per hour, whose timesheet revealed that she was spending a lot of time on technology.
Assuming 30 hours, outsourcing this work to a tech consultant at $65 per hour would create a net revenue boost of $7-14k per year. And that’s just one change with one resource.
Targeting, prioritizing, and achieving efficiencies like these with automation and outsourcing solutions is highly lucrative, but only possible with a detailed understanding of the nature and extent of the various opportunities.
#3 Unlock your business growth
Of all the advantages, this is potentially the most important.
While your billing practices may be key to your revenues this month, and your processes to your profitability this year, your long-term future depends on the ability to develop and implement your growth strategy and growth initiatives.
This activity - strategic planning, recruiting, training, marketing, and networking - must all be achieved in the narrow window between pure admin and activities relating to existing clients.
You can predict with a decent amount of accuracy based on past data how much time you will have for these initiatives, and how much time you should devote to each. By tracking them, you can also gauge how much you have (or have not) met your targeted allocation of effort.
And because everyone is tracking their time, you can plan not only at the initiative level (e.g. Marketing, Recruitment) but also at the individual level. Each staff member can be judged for their holistic contribution to the business, not just a single headline number such as billability.
The illustrative analysis above reveals that while the firm is on track to meet its target time allocation for Recruitment and Training efforts, Admin has stolen 50 hours from Business Development. This would provoke a discussion as to why, and also how the problem could be solved.
The individual on the right whose time is being analyzed is broadly in line with her Training and Admin objectives, but has been spending too much time on Recruitment at the expense of Business Development. Understanding why would enable a manager to help address the issue, whether it is due to the employee or an outside factor (e.g. a sudden influx of new candidates).
So why doesn’t everyone do it?
There is a reason that many firms track only billable hours with precision. It is easier!
Not only is the process easier (one can simply ignore all non-billable work) but it also carries with it less obligation to constantly analyze and review non-billable categories. Given that these categories are as insightful as billable ones, you more than double your work as an overseer.
As should be clear by now, however, the effort involved in tracking, analyzing, and revising non-billable activity is an investment and not an additional cost, and the potential returns are not only substantial, but also impact every aspect of the business.
Next steps
Define your categories
If you want to realize the above benefits, your first step is to establish a meaningful set of non-billable categories. We recommend the following steps (based on a methodology proposed by Berg & Jackson):
Build a long list: Brainstorm with your team to create a comprehensive list of recurring activities that take place outside the core work of the business.
Group and label: Find the smallest number of high-level categories that connect the various items together (e.g. restocking the stationery cupboard → Office Management).
Prioritize and simplify: Whittle the list down to fewer than eight categories by prioritizing those that are strategically important (i.e. meaningful to track).
Review and refine: Periodically remove, merge and replace categories that have served their purpose in order to reflect the changing dynamics of your business as it grows.
As already pointed out, you are definitely creating more work for yourself when you go down the path of comprehensive time-tracking. The consolation is that you are merely forcing yourself to do work that should be done anyway as part of successful business management.
Find the right balance
You cannot afford to have billable work crowd out non-billable activity, nor vice versa. So where is the ideal balance between the two?
There are some general rules that apply in most businesses. For example, vacation, sick days, and public holidays will normally account for 6-8% of available time. Mandatory admin and overhead activities typically add another 10%, leaving the basic availability of a resource at a little over 1600 hours per year.
If everyone is billing 1600 hours (80% billability), there will be no time to grow the business or develop the staff, nor any capacity for additional client demands. Low billability, however, is dangerous as profit declines steeply in the presence of fixed costs.
Hence, 60-80% is seen as a good range to aim for the firm overall. As the firm grows and develops specialization and management layers, this will vary across resources.
Senior management, being more concerned with non-billable Grow/Manage the Firm activities, as well as Client Management tasks, will obviously have a lower billability target. And of course, support staff may not have a billability target at all.
The beauty of a time-based revenue structure is that it enables you to experiment with different assumptions on billability in Excel at the beginning of the year. You can see whether your billability is too high or too low. And by tracking non-billable time, you can understand why.
Conclusion
Many firms fail to grow because the founders are overwhelmed with the day-to-day admin. We suspect this is because they have fallen into the trap of concentrating on the core work and have hence lost sight of the wood for the trees.
We would go so far as to say that the majority of the value of time-tracking, from a business management perspective, could be lost if no attention is paid to how employees spend their day when they are not generating revenue.
Even if you are skeptical, going through the exercise of creating the categories is an interesting one, and will likely stimulate some helpful discussion about ways to improve efficiency. Why not give it a try?
