Billable Hours

Billable hours are the hours of work that can be charged to a client at an agreed rate. Everything else a professional does in a working day, from internal meetings to invoicing to learning the new software, is non-billable.

The term belongs to professional services: law, accounting, consulting, agencies, engineering and any business that sells time. For those businesses billable hours are revenue, the ratio of billable to total hours is the profit margin in disguise, and how accurately they are recorded is the difference between what was earned and what gets paid.

What counts and what does not

The boundary is set by the engagement letter, not by the person doing the work. Two firms can treat the same hour of travel differently and both be right. What a firm cannot do is bill an hour the client was not told could be billed, which is why the letter needs to name travel, research and administrative time explicitly.

Utilization and realization

Two ratios turn billable hours into management information.

Utilization rate is billable hours divided by total hours available, expressed as a percentage. Someone who bills 30 hours in a 40-hour week has a utilization of 75 percent. It measures how much of the paid capacity is being sold.

Realization rate is the amount actually collected divided by the amount billable at standard rates. If 30 hours at 200 an hour is 6,000 of billable value and the client is invoiced 5,000 after write-downs and pays 4,500, realization is 75 percent. It measures how much of the sold time is turned into cash.

The two move independently, and a firm that watches only utilization will push hours up while realization falls, because tired people write more hours that get written off. The first ratio needs an accurate timesheet; the second needs the billing and collections data alongside it. Our guide to reporting capacity to leadership covers how to present both without inviting the wrong conclusion.

Tracking rules that decide whether the hours get paid

• Increments. Law and accounting mostly bill in six-minute units, a tenth of an hour, so that 0.1 is six minutes and 1.5 is ninety. Agencies and consultancies often use fifteen minutes. The unit is a term of the engagement and should be stated in it. Our timesheet conversion chart gives the minutes for every tenth and quarter.
• Record contemporaneously. Hours reconstructed on Friday from memory are both lower and less defensible than hours recorded as they happen. Every hour that is not written down at the time is lost at a fairly predictable rate.
• Narrative with every entry. "Research" is written off; "research on limitation period for the counterclaim, 0.8" is paid. The description is what the client reads when deciding whether to query the bill.
• One client code per entry. Split entries are how the same hour gets billed twice, which is the finding that ends relationships.
• Non-billable time gets recorded too. Otherwise utilization is calculated against a denominator nobody knows. It is also where the case for hiring or for cutting internal meetings comes from.

A timesheet template handles this for a small practice. Above a handful of fee earners, the comparison in our manual versus automatic tracking guide applies, and the case for capture that runs in the background is strongest exactly here, because every unrecorded six minutes has a price on it.

Targets, and what they do to behavior

Most professional services firms set an annual billable target per fee earner, and the target drives more behavior than any policy. Three effects are worth naming.

Inflation. Rounding up, generous narratives and billing for thinking time all rise as the target approaches. The realization rate is where this shows up, six months later.

Hoarding. Work that should be delegated is kept, because delegating it gives the hours to someone else. Junior utilization falls while senior hours rise and the client pays senior rates for junior work.

Hours as presence. A high target makes visible time the currency, and the pattern described in our presenteeism entry follows. Firms that publish utilization league tables get more hours and less of everything else.

The correction is not to abandon targets but to report realization next to utilization and to treat the pair as the measure. Hours that are billed and paid are the business; hours that are billed and written off are a cost wearing a revenue label.

Key points

• Billable hours are the hours that can be charged to a client at an agreed rate. The engagement letter, not the fee earner, sets the boundary.
• Utilization is billable hours over total hours. Realization is cash collected over billable value at standard rates. Watch both or one will be gamed.
• Law and accounting bill in six-minute tenths; agencies often use quarters. State the unit in the engagement.
• Record as you go with a narrative and one client code per entry. Reconstructed hours are lower and get written off.
• Record non-billable time as well, or utilization has no denominator and the case for hiring has no evidence.
• Targets drive inflation, hoarding and presence. Reporting realization alongside utilization is the correction.