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Non-billable vs billable hours: what’s the difference?
Let’s start simple - first, any project manager should understand what’s really hidden behind these terms.
What are billable hours?
By definition, billable hours are the hours an employee spends working on customer’s projects. In other words, these are the hours the company can charge the customers for. In the case of an IT company, that mostly includes programming, testing, design and administration.
For example, if 3 employees work on a project for 160 hours a month in a Time and Material project, the customer that ordered the project will get an invoice with a price of 480 billable hours they spend working.
What are non-billable hours?
In short, non-billable hours are all the hours that customers cannot be charged for, because the employees are not working on his project at the time.
In most of the cases, non-billable hours include the time spent in meetings, working on internal projects or simply conducting any operations that were not defined in the project scope.
In IT companies, or service companies in general, non-billable hours also include the work from marketing, sales or other support departments, as they do not participate in the projects as such.
How to calculate billable hours?
Let’s cut straight to the point - if we know what billable hours are, how do we calculate them?
How many billable hours are in a year?
Calculating billable hours in a year is fairly simple. For the equation, we simply need a number of working days in a year, and the length of a working day.
For the sake of simplicity, we will assume that the company we calculate this example for works Monday to Friday, 8 hours a day, for 260 days a year.
260 days x 8 hours = 2080 billable hours in a year.
However, bear in mind that the value may vary depending on the local public holidays and working days for your company. If your business operates on the weekends and holidays too, you may add some working days to the equation.
How many billable hours are in a month?
Let’s consider a similar case - how many billable hours are in a month?
Just like in the previous example, we will calculate the value for a typical company working Monday to Friday for 8 hours a day. This time, however, we will choose a random month for a calculation, as the equation will differ depending on the time period of choice. In our case, we will analyze the billable hours for September 2022.
September 2022 started on Thursday and ended on Friday, and it has exactly 30 days. However, only 22 of them are working days. Therefore, our calculation for September 2022 will look like this:
22 days x 8 hours = 176 billable hours.
This calculation has to be repeated for each month, as their number of working days will inevitably differ.
Calculating billable hours: examples
However, calculating billable hours does not end here. That’s because the number of billable hours is also affected by several other factors, including time offs, public holidays or other duties. Let’s see how they change things in our equations.
How do time offs affect billable hours?
Imagine that Jane, one of your employees, wishes to go on a 5 day vacation in September 2022. How does her absence affect her billable hours?
As we calculated in the previous example, September 2022 has 22 working days. Jane will miss 5 days of work. Therefore, the number of her billable hours will be:
17 days x 8 hours = 136 hours.
Keep in mind that Jane’s decision to take some time off does not affect her peers (unless one of them is going to travel with her, of course!).
How do public holidays affect billable hours?
What if there was a one-day-long public holiday in September?
Well, the situation is even simpler then - we just need to deduct 8 hours from the maximum number of billable hours in September 2022. That results in a following equation:
176 maximum billable hours - 8 hours for a public holiday = 168 billable hours
However, in this case the public holiday affects the capacity of all the employees in the company. Additionally, it also adds up to the absence of those who, just like Jane from the previous example, decided to take some more time off. The 8 hours spent on public holidays will need to be deducted from their billable hours, too.
How do other duties affect billable hours?
Another full-time employee, Brad, is scheduled to work on an internal project for exactly half of his time. How many billable hours does he have left?
Provided that we are calculating his capacity for September 2022 only, the calculation is very simple - we just need to divide the number of all the hours in the month by 2.
176 working hours in September 2022 : 2 = 88 billable hours Brad can spend working on a paid project.
How to monitor billable hours in a project environment?
After analyzing all the examples above, you are probably left with a question: “How do I calculate billable hours for a company that employs, let’s say, 100 or 200 people?”.
The answer to this question is simple: you don’t.
In small companies, managing billable hours may be done on paper or in Excel spreadsheets. However, such a process is not scalable at all. That is why the majority of businesses use an automated time tracking tool for the purpose.
Why are time tracking tools essential for managing billable hours?
Time trackers fill in three gaps which traditional, Excel-based processes are missing. These are:
- productivity,
- the summarision of worked time,
- billing.
First, time trackers show exactly who is working on what, and when. As such, they can help project managers to discover problems before they become more pressing and verify whether specialists are working as planned on the task they were assigned to.
Then, the data from time trackers can be used for broader calculations as the summarision of work time. At the end of a billing cycle, they gather the information on hours as a whole, as well as billable hours, and create a list of costs that can later be used to charge the customer.
Last but not least, time trackers also solve the problems with billing. Software such as Primetric is combined with financials, allowing for instant creation of financial statements, as well as accounting. To add to that, all of these things happen without any human support or calculations - the results of these actions are visible in the system in an instant.
Still, the list of benefits from monitoring billable hours does not end here. We also encourage you to read the articles about:
- tracking employee performance with time tracking tools,
- time management strategies and workflow,
- resource management plan,
- resource management process.
Billable hours vs billing types: how do they mix?
Speaking of finances, let’s now take a look at how billable hours affect the projects with different billing types.
Fixed price projects
Fixed price projects are the easiest to convey into invoices. That is because the number of billable hours in the project is known from the beginning and stated in a contract.
For example, if the project is estimated to last a month and exactly 1080 hours, the invoice at the end of the month will have this exact number on it. The difficulty for the company, in that case, is feeding the people who could work for that long, with the skills required to complete the project.
Time and material projects
Time and material projects are much more dependent on the time tracking. That’s because, just like in the name, their base for charging the customer are the resources used to complete the projects in a given period of time.
For example, let’s assume that a customer outsourced a project to a software development company that decided to charge the customer 150 dollars per hour. The company assigned a team of 5 specialists to the project. They work on it every day, and by the end of the month they have spent 1240 hours working. This number will be multiplied by 150 and written down on the invoice.
What if estimating billable hours goes wrong?
The results of miscalculating the billable hours can unfortunately cause numerous problems both for the manager and his accountant. That’s because such mishaps may be a root of issues such as:
- charging the customer too much money for too many billable hours. Customers usually do not react positively to such issues; some may even consider them a fraud attempt!
- underestimating the number of billable hours. In case of this mistake, Fixed Price projects are suffering most. That’s because their price is based on the estimated number of billable hours required to complete the project. If the estimation is wrong, there might be no profit margin left.
- lack of sufficient resources. Billable hours should also be estimated for particular specializations. When wrong, they may cause some specialists to be overworked, while some resources can be missing altogether.
Control your billable hours with Primetric!
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