Organizations turn to consultants for assistance in 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 hefty 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:
1. What are billable hours in consulting?
Billable hours in consulting firms refer to the time spent on a project or service that is charged to the client at an agreed-upon hourly rate. This concept is prevalent in various service sectors, including IT consultancy, audit and accounting firms, legal advisory organizations, etc. For instance, in a legal firm, attorneys diligently track the hours dedicated to client cases, which are subsequently invoiced as outlined within the agreement.
The primary purpose of billable hours is to enable firms to determine if the consultants are meaningfully engaged in revenue-generating endeavors. Managing billable hours effectively is crucial for consulting firms to utilize consultants productively and enhance the project’s profitability.
A. What is billable time?
Billable time is an alternate term for billable hours that can be used interchangeably. It refers to the duration spent on a particular service or project that can be charged to a client.
For instance, in an AEC firm, if an architect spends 20 hours designing a client’s new office building, those 20 hours are considered billable time. The AEC firm can then bill the client for these hours as part of their project’s cost. This ensures the firm is compensated for the time and expertise devoted to the client’s project.
Calculating billable hours is essential for businesses who charge for their time or services.
Here is a detailed guide for the same:
2. How to calculate billable hours and billable value?
To effectively calculate billable hours and billable value, one can follow the steps given below:
Step 1: At the outset, a consulting firm must determine the hourly rate at which the clients will be charged for the services. This rate should reflect the expertise and the market demand for the skills provided.
Step 2: The professional services firm must keep a detailed record of the time that is spent working on projects/tasks that can be billed to clients.
Step 3: The summation of all the billable hours recorded over a specific period, such as a week, month, year, etc., represents the total billable time spent on client projects.
Step 4: If applicable, PSOs must add any extra fees or taxes to the client’s invoice, which would include expenses incurred during the project that are billed separately.
For example, if Steffi, a software developer, works 150 billable hours in a month at a rate of $25 per hour. Therefore, her billable hours are 150, and her billable rate is $ 25, and her billable value would be calculated as follows:
Billable Value = Billable Hours × Billable Rate
Billable Value = 150 hours × $25/hour
Billable Value = $3,750
So, Steffi’s billable value for the month is $3,750, which represents the amount she can invoice her client for her services.
Now that this is clear, let’s understand the difference between billable and non-billable hours.
3. Billable vs. non-billable hours: What’s the difference?
In consulting firms, distinguishing between billable and non-billable hours is crucial for efficient operations and consistent cash flow.
Below are the ways to determine how they differ.
Billable hours encompass the time spent on projects or tasks integral to seamless business operations, which is charged to clients to receive fair compensation from them. They serve as a primary income source and directly contribute to revenue, client satisfaction, and long-term profitability. Moreover, they are critical to the calculation of billable resource utilization, which is a key metric that allows managers to monitor and assess consultants’ performance.
Billable hours = Total number of work hours – no. of non-billable hours
Some of the common billable tasks include:
- Working directly on client-related projects
- Researching and collecting client-related information
- Brainstorming for client projects
- Responding to client-related emails
- Attending project-relevant meetings
Conversely, non-billable hours are the hours spent on activities that support the overall functioning of the firm but cannot be directly charged to clients. The consultants are compensated for their non-billable work, but the payment typically comes from the PSO that employs them. Additionally, non-billable hours play a crucial role in helping managers assess ways to minimize them and reduce idle time, increasing profitability.
Some of the common non-billable tasks include:
- Attending internal meetings and training sessions
- Regular administrative tasks
- Marketing activities for business development
- Payroll and hiring
- Planning the business goals and objectives
They play a pivotal role in business development, employee development, quality assurance, etc., contributing to business growth, enhancing employee performance, and ensuring high-quality service delivery.
Therefore, tracking them both is indispensable for optimizing business efficiency and achieving clarity regarding the services’ value and purpose within the organization. By managing billable vs. non-billable hours efficiently, consulting firms can deliver high-quality services, uphold client satisfaction, and secure long-term financial sustainability.
So, let’s move on to understand the significance of tracking billable hours for an organization.
4. Why is it important to track billable hours in consulting firms?
Tracking billable hours is essential for a business as it provides valuable data for decision-making, supports effective project management, and contributes to the overall success of consulting firms.
Listed below are some of the reasons why tracking billable hours are essential:
A. Facilitates project profitability analysis
Tracking billable hours against the revenue generated helps consulting firms assess the profitability of different projects or clients. This analysis enables firms to identify high-value clients and projects, as well as those that require adjustments to pricing or scope.
In addition, it provides insights into the financial health of the firm, allowing for accurate forecasting of revenue and budgeting for future projects. Moreover, organizations can identify areas where costs can be minimized, and additional resources may be needed.
B. Helps in performance evaluation and incentivizing consultants
By measuring the actual hours spent on each project, firms can assess individual consultant performance based on tangible metrics. This data-driven evaluation allows for fair and objective performance reviews, as well as identification of top performers and areas where additional support or training may be needed.
Additionally, tracking billable hours provides the foundation for compensation and incentive structures. It enables firms to identify and reward consultants based on their productivity and contribution to the firm’s success.
C. Ensures effective revenue generation
Accurately tracking and billing the time resources spent on client projects ensures that they are billing clients for all the services rendered. This allows them to maximize their revenue by capturing and invoicing for every billable hour worked by their consultants.
When billable hours are properly tracked, consulting firms can ensure that they are not missing out on any potential revenue opportunities. They can identify instances where consultants have worked on tasks or provided additional services that may have been overlooked or not accounted for in the initial project scope. By capturing these additional billable hours, consulting firms can increase their revenue streams and optimize their income.
D. Optimizes billable utilization levels of resources
By tracking billable hours, the firm can determine how much time is being spent on each client or project, allowing them to assess whether the allocated resources are being utilized efficiently. This helps the firm identify any potential bottlenecks or areas where additional resources may be required.
It ensures that projects are adequately staffed and completed within the designated timeframes. Without tracking billable hours, consulting firms would lack the necessary data to identify areas for improvement and may struggle to maximize their productivity and profitability.
E. Enables accurate and transparent client billing
Consulting firms typically charge clients based on the time and effort spent on their projects. By diligently tracking billable hours, consultants can provide clients with precise invoices that reflect the actual work performed.
This ensures that clients are charged fairly for the services they receive, fostering trust and maintaining strong relationships. In addition, it helps consulting firms maintain their financial viability and profitability by ensuring they are appropriately compensated for the time and expertise they dedicate to their clients.
In summary, tracking the billable hours helps in effective project management and contributes to the organization’s overall success.
5. How does consulting billing work?
There are two billing methods in management consultancy, i.e., billable hour 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.
A. 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 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%. For example, in100 billable hours, the client pays a consultant for every hour they spend on the project., the client pays a consultant for every hour they spend on the project.
Knowing how consulting billable hours works, let’s understand how to track billable hours with a billable hour chart.
This article explains how a modern resource management solution will assist your business move resources proactively from non-profitable work to profitable work and maximize overall billable utilization.
6. How to track billable hours using a billing 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 best way to track billable hours by creating a billing 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 and end times.
- Fill in the “date” column with the date you worked on the task. Then, 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 would be $100.
- Review your billable hours’ 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|
|04-02-23||Legal Research||9:00 AM||12:00 PM||3.0||$750.00|
|04-03-23||Drafting Contracts||2:00 PM||5:00 PM||3.0||$750.00|
|04-04-23||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.
This is how the chart can help organizations effectively track billable hours. Let’s know the challenges of the billable hour model for managing the consulting business.
7. Why is the billable hour model ineffective for the management of consulting businesses?
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:
A. 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. Often 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.
It is not measurable even if junior staff puts in more effort than experienced hires. 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 in consulting firms leading to a higher attrition rate.
B. Maximize billable hours at the cost of quality
Consulting firms charge clients for billable hours; hence, the more chargeable hours, the higher the cash flow. Therefore, consultants always feel pressured 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 cannot measure performance and must pay for the consulting hours. Eventually, it adversely affects client relationships.
C. Limits teamwork and professional development
Since consulting firms focus on maximizing billing hours and revenue generation, consultants often deviate from the project and their career objectives. As a result, they are not allowed 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 focus only on their billable work. As a result, the consultants ignore and deny the need for teamwork to increase their billable time, jeopardizing the consulting firm’s credibility.
D. Reduces job satisfaction and contributes to high turnover
To achieve the target in the billable hour model, the employees are often made to work long hours. This will eventually cause stress, burnout, and poor work-life balance as the consultants feel the work pressure. Constantly working under such conditions may cause dissatisfaction among the consultants.
Furthermore, when consultants with relevant experience are given opportunities to enhance their utilization rates and juniors with less experience are given fewer options, it leads to disparities in pay and recognition. This can create a sense of inequality leading to job dissatisfaction and high turnover.
These are some of the limitations of the billable hour model. Now, let’s understand some of its benefits to consulting firms.
8. What are the advantages of billing consulting hours?
This section explains the benefits of billing by the hour in the management consulting business.
A. Improves individual employee productivity
Hourly rates encourage consultants to work 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. Instead, they settle for an average quality of work, just sufficient to maintain their relationship with the client. 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 satisfies the clients and improves their firm’s credibility.
B. 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. In addition, they can keep track of non-billable hours and mobilize the consultants to billable or strategic work.
C. 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 quickly narrow down future relevant skills with advancing technology and project techniques. In addition, it increases productivity by restructuring consultants based on in-demand competencies.
D. Balance the forecasted and actual hourly cost
Billable hours unify planned and actual costs via consultants’ utilization. Therefore, comparing 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. Managers use this analysis to improve future forecasting and align it to real numbers.
E. Assist in critical decision-making
Clients often 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 want a second opinion on their choices. Consulting organizations are better positioned to help as they have exposure to similar clients and industries.
These are some benefits of the billable hour model to consulting firms.
Given the benefits of billing hours, the following section elucidates the strategies to optimize billable hours.
9. 6 Effective ways to maximize billable hours
What you do with your billable time determines your current income, but what you do with your non-billable time determines your future. ~ David Maister, an American writer and business educator.
Every professional services firm should aim to increase billable hours and reduce non-billable time for long-term growth and profitability.
Here are six strategies to achieve this critical goal.
A. Clearly distinguish between billable and non-billable tasks
It is crucial to establish a clear distinction between billable and non-billable tasks right from the beginning of client interactions, both in contractual agreements and within the project team. This differentiation helps build a shared understanding between the service provider and the client, reducing the instances of potential disputes.
For example, a client may express discontent during the billing process when a project meeting with them is considered a billable task. However, by explicitly defining the nature of tasks early on, such disagreements can be avoided. This proactive approach not only maximizes billable hours but also ensures a smoother billing process, fostering improved client relationships and maintaining a healthy cash flow.
B. Prioritize activities that contribute to billable work
To optimize billable hours, consulting firms should begin by creating a project plan to identify the high-priority tasks that directly contribute to revenue generation. By prioritizing these tasks, managers can ensure that the team focuses on critical and time-sensitive work, maximizing efficiency.
However, it is important to acknowledge that non-billable work may still be necessary within projects. Therefore, it becomes imperative to regulate routine, non-billable tasks effectively, allowing the team to allocate a significant portion of their time to billable activities. This approach not only boosts team productivity but also increases the billable value generated, ultimately improving the firm’s profitability.
C. Ensure competent resource allocation across all the projects
An organization’s inability to deploy the right-skilled consultants to projects/ tasks can be detrimental. For instance, assigning an under-skilled consultant to a high-priority job often results in project risks such as sub-par deliverable quality, schedule/budget overruns, etc. Consequently, the organization might have to spend extra hours to restore the quality or control overruns, that the client may not approve of. This may lead to uncompensated work hours, reducing overall billable value.
Conversely, deploying a highly skilled resource to BAU or admin tasks instead of booking them to critical and billable tasks can cause billing losses. Thus, allocating the right talent to the most suitable tasks across projects in an organization is essential to optimize resources’ utilization and enhance billability.
D. Track billable and non-billable utilization regularly
To accurately gauge the PSO’s utilization rates, organizations must consistently track both billable and non-billable hours that their consultants log. This is because professionals engaged in routine admin or BAU tasks do not directly contribute to revenue or billability.
Therefore, it is imperative for the manager to monitor consultants’ activities and distinguish between billable and non-billable work. With this insight, they can periodically mobilize consultants from non-billable tasks to billable work wherever feasible. This approach will help increase billable hours and improve resource utilization, ultimately enhancing the organization’s overall billability.
E. Automate or delegate non-billable tasks
Implementing task automation and delegation is integral to enhancing a firm’s billable hours and productivity. By automating routine or repetitive tasks and entrusting non-billable responsibilities to suitably skilled consultants, firms can ensure that their core team is engaged in critical and strategic initiatives.
To complement the automation, firms can outsource non-billable tasks to cost-effective consultants to make sure the niche-skilled talent can focus on high-priority work, optimizing resource utilization. This strategic approach to automation and delegation helps maximize billable hours, leading to improved profitability and increased client satisfaction.
F. Ensure accurate or transparent billing
Service-based firms often struggle to accurately bill clients despite establishing a clear distinction between billable and non-billable work. To address this challenge, it is imperative for firms to maintain a meticulous record of every hour worked, including cost rates and charge-out rates of consultants engaged. Additionally, comprehensive invoices must include a detailed breakdown of billable and non-billable hours.
A well-drafted invoice that helps understand charges payable at a granular level serves as a testimony to the organization’s transparency. It, thus, helps instill confidence in the accuracy of calculated costs, reducing disputes and convincing clients to make timely payments. Thus, the implementation of robust billing processes not only helps prevent revenue leakage but also enhances the service firm’s credibility, fostering strong client relationships.
Because of the cost difference, the first choice for any organization is always to use its internal workforce over a consulting resource. However, lacking the necessary skill sets and tight project deadlines may force them to lose sight of the consulting option. As consultants need to juggle between multiple clients, their job becomes very stressful. As a result, many consulting organizations face high attrition rates.
An organization should hire a consultant to ensure its internal workforce cannot undertake the project. The reason behind that inability can be due to 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.
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