Billable Hours in Consulting
These are work hours that a staff member reports as being chargeable to a client. The concept is not unique to consulting. A variety of professional services firms bill clients by the hour. For example, public accounting and legal services firms also traditionally bill by the hour of staff time. Understanding the concept of billable hours, including its application and its ramifications, is vitally important for those considering careers in these fields.
Billable hours are tracked by specific engagement. Additionally, each member of staff has an hourly billing rate that is reflective of his or her job title and level of experience. Each member of staff is required to keep a detailed time sheet that breaks out his or her work hours by type of activity, client, and engagement. At any given time, a professional services firm may have multiple engagements with a particular client.
Type of Activity
At its most basic, a consulting, accounting, legal services or other professional services firm is likely to have employees allocate their time among several different categories of activity. Three of the most widespread are:
- Billable hours
- Administrative work
- Unassigned time
Depending on the firm, there may be further, more specific, categories, but these are the most common and essential. More detailed discussions of administrative work and unassigned time follow below. But first, an overview of billing rates is necessary.
A typical consulting firm may have a job hierarchy of this sort, 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 his fellow partners.
It is not unusual for the top partner in a given consulting firm to bill at 3 times or more what is charged for the services of a first-year consultant. In any case, on a particular engagement, it is possible that 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 is a default category for time spent that is not associated with a specific client engagement. This category can include 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 implies that the staff member was sitting around waiting to be assigned something to do. Accordingly, reporting any time as unassigned bears a great stigma, and thus generally is to be avoided 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. However, since the time is not billable to clients, and thus produces no revenue, challenges tend to be rare.
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, one's total billings frequently are a prime driver of compensation. For another, showing a large proportion of unbilled time on one's time sheets often is taken as evidence, fairly or not, that one is either is not in demand as a participant in 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 are increasingly skeptical of bills that they feel are inflated.
Also, see our articles on these related topics:
Utilization rate is a metric commonly used to judge the productivity of staff and often is a key factor in decisions regarding compensation and promotion. Meanwhile, as noted above, increasing numbers of clients are equating hourly billing with overcharging relative to the value delivered.