Billable Hours in Consulting: How it Works

What are Billable Hours & its Importance in Consulting

Last updated on May 3, 2023

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Organizations turn to consultants for assistance in the areas such as venturing out for new business, solving critical problems, introducing new operating procedures, or acquiring niche skills. Consultants are subject matter experts who provide business advice or even operate alongside the organizations’ workforce, depending on clients’ requirements. Moreover, they can work with higher efficiency than the organization’s employees because of the following reasons;

  • Possessing more experience
  • Unaffected by office politics
  • Exposure to industry best practices and innovation
  • Advantage of working for multiple clients
  • And many more

These qualities make consultants a better choice for organizations but their billable time comes at a huge price tag. The chargeable hours of consultants cost more than those of the employees of that firm. Then why do organizations have to hire consultants despite their expensive billable hours? It is because the organization needs external support to achieve its business objectives, which otherwise isn’t possible with its existing workforce.

This article will help you understand the definition, advantages, and disadvantages of billable hours in consulting. Let’s dive deep:

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1. What are billable hours?

Billable hours is the time spent by employees working on a project or task that can be billed to the client. These hours are typically tracked and are invoiced to the client regularly, usually at a pre-agreed rate. Billable hours are a crucial metric for consulting firms to measure their productivity and revenue. They represent the time consultants spend working directly on client projects, as opposed to non-billable activities such as business development, training, or administrative tasks.

What is the billable time?

Billable time is an alternate term used to describe billable hours. It specifies the time spent to achieve the desired result.

2. How does consulting billing work?

There are two billing methods in management consultancy, i.e., billable hour method or fixed-rate billing.

In a fixed-rate contract, the client pays the consultant a predetermined price to complete the task within the time constraints.

For the billable hours model, the consultant bills the client hourly, or the client has to pay for the billable work. Generally, management consultant companies charge their clients at the end of every month or after achieving a particular milestone.

How do billable hours work?

While hiring a consultant and signing the contract, both client and the consulting firm agree upon considering what percentage of hours should be billable.

To state a billable hour example, suppose the contract of a ten-hour project states that 80% of the total working hours will be considered billable. In this case, the client will pay the consultant for eight hours even if they have spent ten chargeable hours.

Billable hours can be of any percentage value e.g. 80%, 90%, or even 100%. In 100% billable hours, the client pays a consultant for every hour they spend on the project.

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3. How to track billable hours using a billable hour chart?

A billable hour chart is a template many consultants use to calculate the time spent on a specific task or project for billing purposes. Please note that depending on the profession, the structure of a billable hour chart may differ.

Enlisted below are the steps to create a billable time chart:

  • Create a chart with columns such as date, task description, start time, end time, and total hours.
  • Next, record your time. When you start working on a task, note the start time in your chart’s “start time” column. When you finish working on the assignment, note the end time in the “end time” column. Finally, calculate the total hours spent on the task by subtracting the start time from the end time.
  • Fill in the “date” column with the date you worked on the task. In the “task description” column, describe the job that you worked on.
  • Then, calculate billable hours by multiplying the total hours by your hourly rate to calculate the billable hours for each task. For example, if you charged $50 per hour and worked on a task for 2 hours, the billable hours for that task would be $100.
  • Review your billable hour chart regularly to track your progress and ensure you’re staying within your budgeted time.

To help you understand it better, let’s consider the following example of attorney billable hours example-

 

Date Task Description Start Time End Time Total Hours Billable Hours
04-01-23 Client Meeting 10:00 AM 11:30 AM 1.5 $375.00
04-01-23 Legal Research 9:00 AM 12:00 PM 3.0 $750.00
04-01-23 Drafting Contracts 2:00 PM 5:00 PM 3.0 $750.00
04-01-23 Court Appearance 1:00 PM 3:00 PM 2.0 $500.00

 

In this billable hour template, the attorney tracks the task date, the task description, start and end times, total hours, and billable hours. For instance, on April 1st, the lawyer had a 1.5-hour client meeting and charged $250 per hour, resulting in $375 billable hours. Similarly, on April 2nd, the lawyer spent 3 hours on legal research and charged $250 per hour, resulting in $750 billable hours.

In conclusion, this attorney billable hours chart can help the consultant keep track of the time spent on each task, calculate the billable amount, and ensure that they are billing clients accurately for the work completed.

4. Why is the billable hour model ineffective for the management consulting business?

Consultant management’s hourly rate method isn’t as effective as other professional services companies such as accounting or law firms. It is because of the following reasons:

Lack of performance transparency

There is no reference to measuring the performance of consultants. The client can only track the number of hours in consulting. However, they cannot measure the value consultant adds to the project. Many times, the junior consultant may not have adequate knowledge and will be learning on the job at the client’s premises. But the person will still be billed at a specific hourly rate.

Even if junior staff puts in more effort than experienced hires, it is not measurable. Their pay scale and billable hours in the appraisal period would still be significantly lower than that of more qualified counterparts. With unequal pay and stressful juggling between several projects, work-life balance is challenging to attain in consulting firms leading to a higher attrition rate.

Maximize billable hours at the cost of quality

Consulting firms charge clients for billable work; hence, the more chargeable hours, the higher the cash flow. Therefore, consultants always feel the pressure to maximize billable time at the cost of quality work.

The situation worsens when an untrained consultant forcibly maximizes the billable time but does not deliver as per the client’s expectation. Unfortunately, the clients have no means of measuring performance and have to pay for the consulting hours. Eventually, it adversely affects client relationships.

Limits teamwork and professional development

Since consulting firms focus on maximizing billable hours and revenue generation, consultants often deviate from the project and their career objectives. They are not given the opportunity to take up projects that can add value to their professional growth and development. Instead, they are assigned to the ones which generate additional cash flow.

While filling individual consultant utilization spreadsheets, most consultants thoroughly focus only on their billable work. The consultants ignore and deny the need for teamwork to increase their billable time, which ultimately jeopardizes the consulting firm’s credibility.

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5. What are the advantages of billing consulting hours?

This section explains the benefits of billing by the hour in the management consulting business.

Improves individual employee productivity

Hourly rates encourage consultants to put in extra hours, especially when the project needs attention. On the other hand, consultants working on fixed rates are not motivated to go the extra mile to achieve perfection. They settle for an average quality of work, just sufficient to maintain their relationship with the client.

Consultants working on billing hours won’t hesitate to work on a critical project that demands long hours. The consultants strive to achieve perfection that not only satisfies the clients but also improves their firm’s credibility.

Forecast project resource cost accurately

Management consulting firms can accurately estimate the project resource costs that help their clients to finalize the overall budget. Consulting firms can lay out the hourly charge-out rates and even calculate the internal cost rates to measure consultation revenue. They can keep track of non-billable hours and mobilize the consultants to billable or strategic work.

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Track the in-demand skills and competencies

The future of a consulting firm rests on the evolving skills and competencies of the consultants. The most convenient way to track the in-demand project skills is to identify a high consulting hours rate in accordance with skills capacity.

Consulting organizations can easily narrow down future relevant skills with advancing technology and project techniques. It increases productivity by restructuring consultants based on in-demand competencies.

Balance the forecasted and actual hourly cost

Billable hours unify planned and actual costs via consultants’ utilization. Comparison between actual and estimated consulting hours allows consultancy firms to set reasonable billable hours for the clients.

Resorting to a robust resource management tool helps them keep track of enterprise-wide consultants’ billable utilization, as entered on timesheets and analyze the utilization against planned or forecasted hours. Using this analysis, managers improve future forecasting and align it to real numbers.

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Assist in important decision-making

Many times, client organizations engage consulting firms to help them select a specific product or decide on a software solution. Since these require significant investment and are related to strategic direction, they are interested in taking a second opinion on their choices. Consulting organizations are in a better position to help out as they have exposure to similar clients and industries.

6. Conclusion

Because of the cost difference, the first choice for any organization is always to use its internal workforce over a consulting resource. However, a lack of the necessary skill sets and tight project deadlines may force them to look for a consulting option. A consultant also cannot get work at a specific client site for a continuous period and gets engaged only when his skills are needed. They need to move around between multiple clients, and their job becomes very stressful. As a result, many consulting organizations face a very high attrition rate.

An organization should hire a consultant once they make sure that their internal workforce cannot undertake the project. The reason behind that inability can be anything like tight deadlines, limited skills and experience, organizational politics, limited creativity, etc. Most importantly, the organization should hire consultants they can entrust with task ownership, project completion, and fair billing practices.

Having said that, organizations can regularly upskill their workforce to adopt evolving technologies and stay relevant down the line. In this manner, they can become self-sufficient instead of paying hefty bills for consulting hours.

7. The Glossary

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