Is The Project Profitable? Non-Billable Hours Can Change That

Every Hour Makes a Difference… To Your Budget

From an employee’s perspective, an hour might be just enough time to finish a meeting. For a company, the same hour is an additional cost that might make or break the business when multiplied by the number of employees. 

Naturally, some meetings are unavoidable. However, when combined with: 

• Internal projects that do not generate any profits at a given moment,
• Administrative and sales processes,
• Marketing activities, 
• Paid breaks (if available in your country),

…such non-billable hours are responsible for the majority of expenses the (otherwise profitable) projects must cover to help the company break even. 

But how can you manage such an elusive workload? 

Time Is Money - Then Measure It 

Every professional service company profits from the time its employees spend on billable projects. Still, their non-billable counterparts often get missing in planning, while they should get as much attention as the time spent on the projects. 

Why? 

The answer is simple: Your organization might not be able to cover its costs if it has too many non-billable hours.

To prevent that from happening, companies must measure their employees' billable capacity. For an average specialist working on a project, this value should be approximately 80-90%, with lower values for senior employees (70-80%) and managers (30-50%). 

However, don’t forget that work in all internal departments, such as sales, marketing, HR, or C-level management, counts as non-billable hours, as they are not directly responsible for generating profits. The same principle applies to specialists who were not assigned to any project for a given period—their employment will also add to additional costs. 

Every Hour Makes a Difference… To Your Budget

By measuring both billable and non-billable hours, professional services companies can: 

• Quickly determine the time spent on each of the non-billable processes,
• Estimate the cost of each non-billable process based on the wages and salaries of employees involved, 
• See which employees are idle and what are the costs of their wages. 

With all that information at hand, you can calculate what the cost of the non-billable tasks is, and how it will impact the overall financial performance of your company.

Of course, non-billable hours are not the only cost that should be accounted for. Any other overhead costs, such as rent, bills, software, hardware, and other external resources, should also be added to the costs to make your profit margins as accurate as possible. 

Fine Print? Take a Closer Look At Your Contracts

Felling the breath of the crisis on their backs, many customers have decided to examine the working hours they pay for more closely. Some discovered that internal activities they deemed unnecessary were also added to their bill - and they were not happy with it. 

One might say, “But meetings, breaks, and internal processes are an essential part of the project,” and rightfully so. In such cases, the problem is not the perception of such costs but the limitations specified in your contract. 

To avoid unexpected costs on both sides of the contract, it should clearly define what types of working hours are included in the workload (for fixed-price projects) or can be added to it (for Time & Material projects). That applies to any activities that customers might deem unnecessary or not caused by his specification of the project, including: 

1. Meetings and workshops, both internal and project-specific. 
2. Debugging caused by errors made in a code written during the same project. 
3. Paid breaks and lunch hours. 
4. Consultations with external specialists. 

Leave Wishful Thinking Out Of The Sales Process

Having specified all of the above information before the project starts, you can now use it to eliminate nearly all uncertainties from your sales processes and offer prices that cover all the costs - not only the work-related expenses. 

To do so: 

1. Use the historical data from similar projects to estimate the workload and cost of a new project accurately. 
2. Sum up all the operational costs, including non-billable hours and other overheads. 
3. Arrive at a price that covers them all and generates a sufficient margin and secure the future of your company.