Billable hours represent work hours that a staff member reports as being chargeable to a client. The concept is not unique to consulting, as a variety of professional services firms bill clients by the hour. For example, public accounting and legal services firms also traditionally bill by hours of staff time.
Understanding the concept of billable hours, including its application and its ramifications, makes good sense for those considering careers in these fields.
Tracking Time and Activities
As a consultant, for example, you would track billable hours for each specific engagement. Additionally, each member of staff has an hourly billing rate reflects their job title and level of experience.
Each member of staff must keep a detailed timesheet that breaks out their work hours by type of activity, client, and engagement. At any given time, a professional services firm could have multiple engagements running with a particular client.
At its most basic, a consulting, accounting, legal services or other professional services firm has employees allocate their time among several different categories of activity. Three of the most common internal billing categories include:
- Billable work hours on client engagement
- Administrative work
- Unassigned, vacation or sick time
Depending on the firm, it may have further, more specific categories, but these are the most common and essential.
Client Billing Rates
A typical consulting firm may have a job hierarchy as follows, with hourly billing rates rising steeply from bottom to top:
- Senior Consultant
Moreover, within each rung of the hierarchy, there may be multiple billing rates. Thus, a second-year consultant might be expected to carry a somewhat higher billing rate than a first-year consultant. A senior partner who is recognized as a sort of guru with particular expertise, acumen or notoriety might command a premium rate versus their fellow partners.
It is not unusual for the top partner in a given consulting firm to bill at 3 times or more the hourly rate for the services of a first-year consultant. In any case, on a particular engagement, the client may have negotiated a discount off the standard billing rates, or some sort of cap on the total billings.
Administrative, or admin, work contains a record of time spent that can't be associated with a specific client engagement. This category includes activities such as, but not limited to:
- General office paperwork and filing
- Education and training, including acting as an instructor for in-house classes
- Prospecting for new clients and engagements
- Conducting research related to practice development
As with the reporting of billable hours, members of staff typically are on an honor system with respect to categorizing time as administrative.
This category essentially means "none of the above" and often implies that the staff member was sitting around waiting to be assigned something to do. It could also represent time out of the office due to vacation, illness or other personal leave.
In some cases, reporting time as unassigned bears a great stigma because it produces no profit or other benefits to the firm, so staff generally avoids it at all costs.
As a result, staff members who cannot assign billable hours to any engagement typically will characterize such unstructured time as devoted to administrative work, and thus must be prepared to justify this categorization if challenged.
Implications for Compensation and Promotion
Especially in firms with a strict up or out policy, reporting substandard levels of billable hours can be damaging to one's career progression. For one, each worker's total billings frequently become a prime driver of compensation, especially at higher rank levels.
Firms use a metric called utilization rate to judge the productivity of staff, and it often becomes a critical factor in decisions regarding compensation and promotion.
Additionally, showing a significant proportion of unbilled time on one's timesheets gives the perception, fairly or not, that one is either not in demand as a worker or is not aggressive enough in seeking out billable work. As a result, staff often feel pressured to overstate billable hours, with the inevitable consequence that clients become increasingly skeptical of bills that they think are inflated.