What are Non-Billable Hours? Definition, Examples & Benefits

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What are Non-Billable Hours?

Non-billable hours are the hours that employees spend doing work activities (service functions) that are important to the business's operation but can't be billed directly to a client.

Non-billable hours have some characteristics as described below:

Non-Chargeable Time: Any time that cannot be billed or used for a client account or revenue-generating project.
Operational Necessity: Their work is crucial for the operations, administration, performance, growth, and fulfillment of the business and must be completed.
Overhead Cost Element: From a financial perspective, the expense associated with paying for non-billable hours will be viewed as an overhead cost for the organization.
Types of Activity: Non-billable hours can include many types of internal work, such as administration, attending internal meetings, professional learning and training, business development, marketing work, and even doing some informal research.

So, while non-billable hours do not generate revenue themselves, tracking them is also very important to ensure their accuracy and relevant information for data-driven financial reporting, strategic planning, and long-term sustainability.

Why are Non-Billable Hours important?

Why non-billable hours are important, in short bullet points:

Profitability Foundation: Unbillable Time is an Overhead. It's important to understand time management, non-billable hours as well. This is a way to know the real project cost and company profitability as a whole.
Better Resource Utilization: By monitoring employee time spent on particular tasks, managers can streamline their processes, look for automation opportunities, and implement resource optimization.
Figuring out Wasted Time: Important non-billable time may signal areas of process inefficiency or lack of discovery of tools that would improve the process.
Total Consideration of Project Costs: Tracking of all project hours, including non-billable hours associated with client tasks, can help understand true project costs and profitability for accomplished tasks.
Avoiding Employee Burnout: By incorporating time for billable work, they can set realistic expectations for workload. That helps with morale and productivity.

Examples of Non-Billable Hours

Internal Team Meetings: Those regular meetings with the team or department to discuss strategies, blockages, or internal processes, while important to coordinating and for the operational functions of the business, are not billable to that client.
Administrative Work: Submitting the timesheet every week, completing expense reports after a business trip, or filing internal documentation; these types of administrative work are important for a functional business but do not generate client revenue, which means they are considered non-billable hours.

These activities, while crucial for supporting client work and the overall functionality of the business, are not billable. The time spent on them is considered non-billable time, as it is not charged to a client.

How do Non-Billable Hours work in the workplace?

Integrating non-billable hours into the workplace is a complex process that includes tracking time, categorizing the time, financial accounting of the time, and examination of non-billable time.

Time Tracking Systems (Manual or Software): Organizations establish either manual or software-based time tracking systems (e.g., Time Champ) to track employee hours for billable vs non-billable work linked to tasks or categories established in the organization.
Categorization: It is critical to establish clear categories for the non-billable time (e.g., Administration and Training) that will allow for analysis at a cheaper rate than comparing all non-billable time combined into one expense account.
Financial Accounting: The non-billable time costs are operational costs (salaries and overhead) associated with being in business and are included in the company’s overhead calculations to formulate billable rates for service delivery to customers.
Reporting & Analysis: Management can retrieve reports that provide greater granularity on the non-billable hours utilized for improving performance, overhead management, utilization rates, and overall new functional processes, resourcing, and investment decisions.

Key Benefits/Risks of Managing Non-Billable Hours

Proactive management of non-billable hours yields significant advantages, while neglecting them poses considerable risks. Here is the table of benefits and risks:

Benefits of Effective Management of Non-Billable Hours:

Accurate Financial Oversight: Provides a clear picture of true operational costs, enabling precise profitability analysis per project or client.
Strategic Budgeting & Forecasting: Allows for more reliable financial planning based on comprehensive time allocation data.
Optimized Resource Deployment: Facilitates better allocation of personnel based on actual time demands, including internal responsibilities.
Process Improvement Identification: Highlights areas with excessive non-billable time, signaling opportunities for streamlining or automation.

Risks of Ineffective Management of Non-Billable Hours:

Eroded Profit Margins: Resulting from the underestimation of overhead costs and consequent underpricing of services.
Inefficient Resource Utilization: Leading to potential overstaffing in some areas and understaffing in critical functions due to a lack of visibility.
Masked Operational Deficiencies: Allowing inefficient internal processes to persist unnoticed, inflating costs over time.
Distorted Performance Evaluation: Unfairly judging employee or team contributions if based solely on billable metrics, potentially demotivating staff.

Non-Billable Hours vs. Billable Hours

Service-based businesses need to understand the difference between the two main types of logged time.

Billable Hours are time spent doing the work for a given identified client or project that is expected to be billed. This time generates direct revenue. Examples of billable hours are client meetings, working on a project, etc.
Non-billable hours are all of the work time where time is logged that cannot be charged to the client. Examples include time spent on internal administration, training, business development, marketing, etc.

How Time Champ helps with Non-Billable Hours

Time Champ is about tracking every minute of the staff's time accurately and is focused on making it as easy as possible for staff to categorize billable vs. non-billable work. Here is how Time Champ works to enable management of non-billable hours:

Accurate Time Capture: Record time correctly. The system helps them log every minute spent on work so they don't make mistakes or rely on memory.
Detailed Categories: Provides a lot of flexibility for companies to assign custom non-billable work categories such as 'Internal Training', 'Sales Pipeline Development', or 'Administrative Support', so organizations can then delve into the data as deeply as necessary.
Accurate Reporting: Get clear reports about the time spent on different tasks. These reports show how much time was spent on billable work (tasks that can be charged for) versus non-billable work (tasks that can't be charged for). This helps them to see how time is being used.
Opportunity to Identify Improvements: Reports help them see where time is being spent on things that don’t directly make money (non-billable hours). This helps to figure out how to improve processes, automate tasks, or manage the team better based on facts.

As a result of Time Champ, organizations can see what happens every hour of the day, manage resources more accurately, and track their decisions about investing in specific non-billable hours by capturing what happens every minute of the day.

Related Terms

Utilization Rate: a key performance indicator that calculates how efficiently a staff member uses their total available hours (40 hours/week).

For example, if the staff member for a month has recorded 48 hours of billable work and there are 160 total available hours for the month, the utilization ratio is = 48/160 = 30%.

Overhead Costs: Overhead costs are the ongoing expenses a business has that aren't directly tied to making a specific product or service. These are things like rent, utilities, and administrative salaries – costs it'd have even if it didn't produce anything.

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Non-Billable Hours