How to Calculate Billable Hours for Client Projects

Billable hours are simultaneously the most important metric for services businesses and the most frequently miscalculated. The difference between 65% and 75% billable utilization could mean the difference between profit and loss, yet many companies can't accurately answer the question "how much billable time did we generate last month?" We couldn't answer it accurately at BetterQA until we built systems to correlate logged hours with actual project deliverables.

This guide breaks down the calculation process, common mistakes, and the policies you need to define to make billable hour tracking actually useful for business decisions.

The Basic Formula

At its simplest, calculating billable hours means categorizing all time worked into billable and non-billable buckets:

Billable hours = Time spent on client projects that you can legitimately invoice
Non-billable hours = Everything else (internal meetings, professional development, sales, administration)

Billable utilization = (Billable hours / Total hours worked) × 100

A developer who logged 40 hours last week with 28 hours on client projects and 12 hours on internal work has 70% billable utilization (28/40 = 0.70).

Defining Billable vs Non-Billable Work

The complexity emerges when you try to categorize specific activities. Is time spent in a client status meeting billable? What about responding to client emails? Fixing a bug you introduced last week? Researching technologies needed for an upcoming client project?

Different firms draw these lines differently, but you need clear, written policies. Here's a reasonable framework:

Clearly billable:

• Direct project work (coding, design, analysis)
• Client meetings with agenda related to active projects
• Communication directly related to project deliverables
• Testing and deployment of client work

Clearly non-billable:

• Internal team meetings not related to specific client work
• Professional development and training
• Sales calls and proposal writing
• Administrative tasks (timesheets, expense reports)
• Fixing bugs introduced in current work (before client acceptance)

Context-dependent (define your policy):

• Travel time to client sites (many firms bill 50% of travel time)
• Research and learning specific to upcoming client projects
• Communication about potential future work with existing clients
• Deployment issues caused by client environment (usually billable)

Handling Scope Creep and Extra Work

The biggest threat to accurate billable calculations is untracked scope creep. A project quoted at 100 hours that actually takes 140 hours might show 100 billable hours in your system while 40 hours of real work vanishes into "non-billable" or simply doesn't get tracked at all.

Track all client-related work, even if it exceeds the contract scope. This gives you data for three critical decisions:

• Contract renegotiation: "We estimated 100 hours but actual work required 140. Here's why, and here's the change order."
• Future estimation: "Projects like this consistently run 30% over estimate. We need to adjust our quoting."
• Client profitability: "This client seems profitable based on contracted hours but consistently generates 40% scope creep, making them marginally profitable at best."

Many teams automate this with timesheet software that separates billable from internal time and flags when projects approach their hour budgets.

Rate Setting and Value-Based Pricing

Hourly billable tracking doesn't mean hourly billing. Many successful agencies track time internally but bill on value-based or fixed-fee models. The time tracking serves internal planning and profitability analysis, not client invoicing.

If you do bill hourly, your rate should reflect:

• Direct labor costs (salary + benefits + taxes)
• Overhead allocation (rent, software, administrative staff)
• Target profit margin (typically 20-30% for services businesses)
• Non-billable time burden (if target utilization is 70%, multiply hourly cost by 1.43 to cover non-billable time)

For example: A developer costs you $50/hour in salary and benefits, overhead adds another $20/hour, you target 25% profit margin, and expect 70% billable utilization.

Minimum rate = ($50 + $20) × 1.25 (profit margin) × 1.43 (utilization factor) = $125/hour

Tracking Billable Hours in Practice

Daily time entry with project categorization is the minimum viable approach. People select the project, indicate whether time is billable, and log hours. Weekly review by managers ensures accuracy and catches miscategorizations.

Integration with project management tools improves accuracy. When someone marks a Jira ticket complete, the time logged against that ticket automatically flows to the project timesheet. This reduces manual entry errors and makes time tracking feel like less of an administrative burden.

Reporting and Using the Data

Calculate billable utilization by team, individual, and project type. Look for patterns:

• Individual utilization consistently below 60%? They might need more client work assigned.
• Team utilization above 80%? You probably lack capacity for inevitable spikes and improvements.
• Specific project types consistently less profitable? Adjust pricing or stop taking those projects.

Monthly review of billable vs actual hours by project identifies estimation problems, client profitability issues, and capacity constraints before they become crises.

Conclusion

Accurate billable hour calculation requires clear policies about what counts as billable, consistent daily time tracking, and regular review of the data to catch misclassifications. The result is reliable data for pricing decisions, capacity planning, and profitability analysis.

For services businesses seeking integrated time tracking and billing systems, see how BetterFlow handles billable hour management.