How to Monitor Billable Hours to Manage Project Costs

Businesses in industries like consulting or legal services and individual freelancers often use billable hours to create invoices and properly charge their clients. Businesses and their clients suffer if these billable hours aren’t monitored properly.

Effectively monitoring your billable hours means you provide transparency to your clients as you can create accurate invoices that truly reflect the hours you’ve put into a project. They also help you get an overall view of your workload and time. This article covers the importance of monitoring your billable hours, including actionable tips for ensuring your monitoring efforts contribute to your overall project management. 

Pros and cons of a billable hours system

You may be trying to decide how best to structure pricing and invoicing for your business, especially if you’re scaling your business. Some companies charge a set fee for certain tasks or projects, while others use a billable hours system. If you’re considering the latter, here are some pros and cons to consider.

Pros

1. Get accurate compensation for your work: If a specific project requires a lot of time, a billable hours system means you are getting paid for every hour that project takes.
2. Flexible: Not all projects require the same amount of time. Billable hours systems allow you to easily handle changes to projects that, as a result, require more of your time. 
3. Easy to implement: Time tracking software is often inexpensive and user-friendly and it shows a clear breakdown of hours worked, which is often simpler than trying to estimate a price for a project before you’ve started. 

Cons

1. Long work hours over efficiency: A billable hours system runs the risk of encouraging your team to work longer hours rather than trying to be efficient and productive in a shorter space of time. 
2. Not always tied to value delivered: The number of hours spent on a project doesn’t always equate to the value you’ve delivered to your client. Some tasks may take less time but provide substantial value, while others may take more time without delivering many benefits.
3. Uncertain budgets for clients: Clients like to have a clear idea of how much a project will cost them in total, rather than per hour. Billable hours are sometimes off-putting to clients who want certainty before committing to payment.

Why is monitoring billable hours important?

If you do decide to go for a billable hours system, it’s vital that you monitor these hours effectively. Here’s why. 

• Accurate invoicing

When it comes to client invoicing, accurate billable hours are essential. Monitoring billable hours means you can be transparent with your clients about how much time you spend on individual tasks. This helps build trust and credibility and it improves your client relationships.

• Effective resource allocation

It’s essential to the efficient running of any business that its leaders understand how resources are allocated across different tasks and projects. This allows you to spot areas that might be inefficient as well as ensuring the right number of team members are assigned to each project. 

• Control project costs

Costs overrunning can be a nightmare for you and your team (and an unwanted expense for your clients). If you monitor billable hours as you go, you can be proactive in ensuring you stick to your budget, rather than finding out too late that a project is costing more in time and money than expected. 

• Legal compliance

Certain industries, regions, and countries have legal requirements in place that simply mean you must monitor your billable hours. So don’t fall foul of these regulations and keep accurate records of your time tracking. 

• Better project planning

Once you start monitoring your billable hours, you’ll build up a wealth of historical data about how much time individual tasks or projects took on average. This helps you plan future projects accurately so you can create realistic timelines for your business and your clients. 

7 tips for effective billable hours monitoring

1. Use time-tracking software

Dedicated time-tracking tools and software are essential if you want to effectively monitor your billable hours. It’s not enough to manually track hours and clients will appreciate the professionalism of software-generated billable hours. 

Time-tracking tools can automate the monitoring process and give your employees a centralized tool for tracking their time. Look for time-tracking software that has an intuitive user interface and can be easily integrated with any other tools you’re using, such as customer relationship management (CRM) software.

2. Create clear guidelines for your team

When it comes to monitoring billable hours, consistency is key. Your team needs to have clear guidelines in place about how and when to track hours and how to report these hours. 

Communicate these guidelines to your team and make use of centralized, digital documents that your staff can bookmark if they need to check the rules. Include the guidelines in advice across your company, whether it’s in your call center management tips or your onboarding process.

3. Categorize different activities and tasks

Categorizing billable activities adds a useful layer of granularity to the tracking process. You should have a system in place for classifying different types of tasks and make it easy for your team to implement this.

By categorizing different tasks, you offer even more transparency to your client and provide a more professional-looking invoice. It also makes it easier for yourself when it comes to analyzing your efficiency. You can identify which tasks are the most time-consuming and get an overall picture of how your team divides their time on different projects. 

4. Regularly review and analyze the data

You have lots of data now that you’re tracking your billable hours, don’t let it sit and gather dust. This data is valuable when it comes to future planning and reviewing your team’s efficiency and productivity.

Conduct regular reviews and look out for patterns and trends across different projects. You should also spend time identifying areas where the team consistently exceeds or falls short of estimated hours.

Create a replicable process for these regular reviews so that you can also track improvements over time. You should implement metrics such as key performance indicators (KPIs) for individual performance and average project timelines. 

5. Monitor non-billable hours too

Billable hours may be the main focus of this article, but your non-billable hours offer useful data too. Non-billable activities might include internal meetings or training sessions, but these still contribute to your company’s overall workload. 

When you’re creating a pricing structure or negotiating payment terms with your client, you should take into account non-billable hours too, and consider how your billable hours might absorb these costs. 

Since tracking hours isn’t just about creating client invoices, it’s also about helping you see how you and your team are spending your time, it’s important that all hours are tracked, not just the billable ones. You can use this info to see how your team uses their time and how many relative hours of work you’re able to bill for.

6. Communicate regularly with your clients

Open and transparent communication with your clients is essential. While your clients will appreciate having a clear breakdown of billable hours, it’s your job to explain the data and justify the time spent. Transparency helps you get paid faster by your clients too. 

If there are deviations from the initially estimated billable hours, inform your client promptly. Clearly explain the reasons behind the changes and discuss potential solutions. This shows clients that you’re proactive rather than waiting for hours to rack up and costs to grow. 

7. Use project management software

Lots of the above-suggested tasks can be unified if you invest in project management software, especially software with built-in time-tracking tools. This software can help you get an overview of project timelines and budgets, offering a centralized hub for all your projects. 

You must choose the right project management software for your business needs. Make sure it integrates well with your other tools, like your recruitment management platform or invoice generation software. Look for customizable and scalable software so that it can change with your business. 

Conclusion: Keep your clients happy with an airtight billable hours system

Monitoring your billable hours isn’t just about creating invoices (though it certainly helps). It helps you foster positive relationships with your clients, built on trust. It also helps you improve your overall efficiency and project planning for the future. 

By implementing the above strategies, you can create a solid billable hours monitoring system that can be used across your company. Remember to embrace technology too. From time-tracking tools to project management software, there’s no need to track hours using pen and paper.