Billable vs. Non-Billable Hours: How to Get Paid for Both
Balancing billable and non-billable hours is a constant challenge for agencies, consultants, and contractors. Clearly, companies and teams want to bill as many hours as possible, but one of the most effective ways to get new clients — and more hours — is to do more of non-billable work: marketing, internal branding, recruiting, etc.
The goal is to generate enough billable hours, and charge enough for them, to cover your non-billable activity.
This, of course, is easier said than done. But we can help! Here are some tips for adding value to your billable and your non-billable hours:
Set Employee Utilization Targets
It's one thing to track and understand billable vs. non-billable time. It's another to know how much billable time each employee on your team should be working. Employee utilization is essentially the percent of time that any employee or department is billable. Yes, 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, but what should the difference be?
Every industry is different, but here's an example of utilization goals for PR agencies.
Once you know your industry target, you can set 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 the number of billable vs. non-billable hours increases, there should be a corresponding increase in profitability.
Know Which Clients Require More Non-Billable Hours
If you’re tracking time — which you should be doing, since that’s how you keep track of billable hours — you’ll also know which clients tend to require more non-billable hours from your team. This could present itself in a number of ways: extensive contract negotiations, out-of-scope requests (for retainer-based work), a need for excessive hand-holding, etc.
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 do not want to put yourself in a position where the client is giving you bad reviews.
Non-Billable Hours Can (and Should!) Still Be Profitable
In the chase for more billable hours, it’s easy to forget that part of increasing profitability is being able to charge more for the work you do. 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 charge more for the business we do get.
Making new contacts, strengthening your team, developing your brand, incorporating new skills, even making sure your proposals are top notch, every time: these are the non-billable activities that end up making you more money.
If you’re not adding more to the palette, you’ll never be able to raise your rates.
When Assigning Jobs to Employees, Think about Value and Hours
Again, if 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.
How much does it typically cost your organization to perform a certain type of work? Of course no two client engagements are exactly the same, but whether you are 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 takes.
If you know how long a project or job will take (more or less), then you know how much it will cost.
For agencies working in a retainer model, the goal is to minimize costs. For hourly billed projects, the goal might be to maximize billings and utilize higher-rate employees when possible.
Either way, it's so important to have an understanding of employee availability: Who is free to work on upcoming projects (including time off), how much do these employees cost the organization, and at what rate can they be billed to the client.
Regardless of what type of business you manage, you’ll inevitably run into slow patches. Clients end up needing slightly less than they expected. Delays arise. Jobs unexpectedly dry up. How can you make sure you’re still billing enough to keep things afloat?
The answer: You overbook. Not a lot. Try 10% to start. Given the vicissitudes* of the market, if you book your team at 110% capacity, you can bet there’ll be enough drop-off that you consistently work at something closer to 100%. This will keep your billable hours at an even level.
It may also mean occasional periods when you’re working more than you want to. But occasional overwork certainly beats not having enough work for your team.
*Nope. I didn't use a thesaurus. Not at all ...