Time tracking: Decoding the billable hours calculator
Some people love their jobs so much that they would happily do them for free. Unfortunately, rent and other expenses require an income. Whether working for a client or as an employee, many workers charge according to the time they spend working, a concept known as billable hours.
Contractors and businesses utilize numerous methods to track and record billable hours, such as pen and paper or digital spreadsheets. However, the most convenient method is a billable hours calculator. This software application records the time spent on each project or task, calculates money owed, and generates client invoices using a time-saving automated system. And time is money, right?
Time tracking software reliably logs work hours, improving billing accuracy. It also helps maximize your revenue and maintain an efficient workflow.
Understanding billable hours
Billable hours aren’t only for lawyers and attorneys at white-shoe law firms. All labor is valuable, and employees deserve fair compensation for their work. That’s where time tracking and billing methods come in.
Billable hours are the time an employee or contractor spends on activities related to a customer’s project or product. In exchange, the client agrees to pay an hourly rate to compensate the worker. Generally, any activity related to the product or project that drives value for the customer is considered billable.
How to calculate billable hours
There are several ways to calculate billable hours:
Timesheets
Timesheet entry is the most basic method of tracking working hours. Employees record start and end times for each task on a spreadsheet or using pen and paper. At the end of a predefined period, they deliver the document to accounting to calculate billable hours, invoice the client, and distribute wages.
2. Project-based
Companies that simultaneously work with multiple initiatives use a project-based billing rate established at the outset of work and codified into the contract. Employees track the time spent on each project and multiply those hours by the hourly rate to determine the amount the company should invoice.
3. Activity-based
Another option to calculate billable hours is to categorize specific tasks and activities as either billable or non-billable. Companies will only invoice clients for billable hours.
4. Digital tracking
A digital time tracking or product management tool provides an alternative to manual billable hour tracking. These software tools log hours at the click of a button. They can also automatically log hours within a digital worksheet, calculate the total time spent, and communicate that information to the accounting team, freeing employees to focus on tasks that drive value.
Billable hours chart example
Some people use a billing increment chart to quickly calculate charges based on portions of hours worked. The most accurate format is to break an hour into six-minute increments or 1/10th of an hour.
TIME INCREMENT | MINUTES |
0.1 | 1–6 minutes |
0.2 | 7–12 minutes |
0.3 | 13–18 minutes |
0.4 | 19–24 minutes |
0.5 | 25–30 minutes |
0.6 | 31–36 minutes |
0.7 | 37–42 minutes |
0.8 | 43–48 minutes |
0.9 | 49–54 minutes |
1.0 | 55–60 minutes |
According to the chart, if you worked for 20 minutes at an hourly rate of $125/hour, you would invoice for the following amount:
Billable increment ✕ Rate = Total
0.4 ✕ $125 = $50.00
Challenges when tracking billable hours
Like any process, time tracking has issues leaders must address and overcome. Here are some of the most common time tracking roadblocks:
Time entry errors
People make mistakes, which means manual timekeeping methods are prone to human error. Worklog mistakes result in billing inaccuracies that overcharge or undercharge the client.
2. Lack of visibility
Without a real-time tracking tool, employers can’t monitor employee activities, ensure they’re working, or attribute hours to the correct client or project. This can also lead to inaccurate billing.
3. Effective time allocation
Anyone who’s worked on multiple tasks or projects understands time management challenges. Scheduling is difficult without dedicated time tracking software, leading to overtime hours, increased costs, and burnout.
4. Reporting issues
Analyzing team performance and productivity without a real-time tracking system is labor-intensive, time-consuming, and imprecise. Companies can only track billable hours, employee performance, and profitability based on what employees choose or remember to record.
Difference between billable and non-billable hours
Businesses must understand what clients are paying for to accurately charge them for services rendered. Only then can they give employees instructions regarding which activities are considered billable.
Billable hours
Billable hours include any work on a predetermined set of activities that drive value for the client or company. Generally, the employment agreement or third-party contract defines invoiceable tasks and their pay rates. Typically, these activities include the following:
Project planning
Research
Resource allocation
Tasks necessary for project outcomes
Revisions requested by the client
Non-billable hours
In any project, certain tasks don’t count toward billable hours, either because they don’t contribute to the outcome or are routine employer responsibilities. Here are some of the most common:
Employee onboarding and training
Generating client proposals
Staff meetings and communications
Unscheduled phone calls
Administrative tasks
Customer entertainment
Companies should track non-billable hours alongside billable hours. A log of time spent on activities that don’t drive revenue or value can uncover improvements and efficiencies that increase profitability.
The importance of a reliable tracking system
A tool to track your hours can streamline time management and accounting activities in the following ways:
Maintaining accurate invoicing records
A time tracking tool that records billable hours improves invoicing by:
Showing clients and employers how much they pay employees or freelancers for their work
Ensuring employees get paid for working hours while generating accountability for inactive time
Automating the calculation and invoicing process so the client or business can monitor real-time labor costs
Demonstrating productivity to clients by pairing outcomes with a log of working hours
2. Determining the value of non-billable hours
With visibility into the workday, managers can see how team members spend their hours. If a task takes too long or leaders notice periods of inactivity, they can take steps to minimize unproductive time.
3. Optimizing processes
With insight into billable and non-billable hours, management can:
Focus on tasks that maximize ROI and profitability
Create accurate quotes for future clients
Adjust the company’s hourly rates and fees according to data – not guesswork
Prepare accurate quarterly or yearly budgets
Best practices for managing billable hours
Billing best practices allow a firm to invoice clients efficiently and effectively. Here are some general guidelines:
Prioritize client experience: Clarify billing practices and policies from the beginning of the customer relationship. Clearly communicate the process to manage expectations regarding client billing and payment.
Be accurate: Use a time calculator with break-tracking functionality to ensure team members don’t add unproductive hours to their records. Encourage employees to stop the timer when not working and track hours in real time so they’re less likely to miss out on billable hours.
Separate charges by task: Invoices should break down costs by task to provide clients with accurate and accountable billing. This practice is more transparent than charging for generalized blocks of time.
Include details: Include task descriptions to help clients understand the value of your services.
Be honest: Padding hours will damage the client’s trust. Instead of rounding up, use six-minute increments like those outlined in the billing chart to keep invoices as accurate as possible.
Enhance billable hours tracking with Tempo
Whether you’re a lawyer working on a big case or a graphic designer logging work hours for a special project, the right software solution makes time tracking and invoicing easier.
Tempo’s Financial Manager for Timesheets has time tracking and team integrations that streamline the reporting process. It provides granular insight into billable hours across teams, projects, and resources. With heightened accuracy, the estimation process becomes more effective, improving resource allocation and profitability.
Don’t operate in the dark. Find out how Tempo can bolster your business intelligence, one app at a time.
