Billable vs Non-billable Hours: Learning To Make Better Estimates
We constantly hear the old saying time is money. Every entrepreneur must know how to create better estimates. Otherwise your $4,000 client project could end up making you $10 per hour because it required more time than you first estimated.
With more experience, you can improve your ability to determine the project's complexity . But what if this is one of your first projects? What if you still give bad estimates after years of freelancing?
In this post, I'm going to cover the difference between billable and non-billable hours and how it can help you to improve your estimates and charge what the project is worth.
Identify stages of your project
As you work on more projects, you start to recognize repetitive tasks. A generic workflow might look like this:
1. Initial Contact
You meet each prospective client and decide if you're a good fit for the job. This stage could include emails, phone calls and meetings.
You evaluate a few things such as budget, chemistry and capability of delivering what the client needs.
2. Information Gathering & Proposal
You already discussed the goals, the target and specific needs. Now it's time to get really into it and do some research, write a quote, sign a contract and get a deposit.
Sometimes the client doesn't approve of your proposal and you won't go further than this stage. This time loss could be minimized if you offer consulting services and charge for giving your expert opinion.
You plan what you have to do next and ask your client for documents and assets they need to send you. This could be their logos, brand assets, web copy, or anything else that's required from them so that you can get the job done.
At this stage, you're usually working alone. You code, you design, you take photos or write. Depending on the project complexity, this may have several phases and it could include client revisions and feedback.
5. Delivery & Feedback
You show your results to your clients and make amendments as requested. Now that the job is finished you'd probably collect the final payment, send an invoice and deliver your work.
This is a post-sale stage. You make sure your client is satisfied. It may be time for talking about a new project, a referral or keeping the relationship alive so they keep you in mind in the future.
Identify your billable tasks
Now that you've identified your work process, the next step is to determine which activities you can bill to your clients.
1. Scheduled calls and meetings
You may want to include on your estimate the time you use to present your work and ask for feedback. Also add the time you spend in a meetings or discussing project details.
2. Research for the client
This can be tricky. Sometimes it is okay to charge for research. In other cases, it isn't appropriate. Do you want to know the difference? If your research is about your client's competition, industry or products, it's usually fair to invoice the research.
3. Your main skill
You have a skill your client needs. This is the reason the client hired you. Obviously, you have to charge for writing sales copy, designing a company logo or coding a website.
How many revisions will you include in your proposal? What would be the extra fee if your client wants more revisions than the original scope? And what will those revisions include?
Identify your non-billable tasks
1. Pitching new clients
You can't charge your clients for asking for work. If you spend a few hours every week looking for new prospective clients, there's really no one who could pay you for that.
2. Writing proposals
Unless the client accepts your proposal, you can't guarantee you'll receive any kind of compensation for your invested time.
3. Learning a new skill
Remember I said you can charge for doing research for your client? If you learn a new skill for the project and you can use that skill for future work, it's uncommon to charge your client for the time you spent learning it.
You may want to tell your client you'll be learning on the job and agree to charge a lesser rate. Find the right balance to make it a win-win situation. You learn a new skill, your client gets results and you get paid for your job.
4. Invoicing & following up payments
This is one of your administrative tasks that you're not supposed to include in your bill.
Of course you could add a fee for late payments, but as a general rule, chasing payments is not a billable task.
5. Sending emails
Including every little detail on an invoice can be seen as a bad practice. After all, your client is paying for results, not for every single task.
However, if the client is very demanding and it takes you longer to complete a project than it normally would, you could increase your project fee next time to cover your costs. Otherwise, you're just giving money away.
Create an estimate
Analyze your current data
If you're tracking your time, you probably know the number of hours you spend on every task.
With that in mind, you can filter your average time spent on billable hours and create a spreadsheet (Paydirt offers a report that shows your billable hours, so you may want to check it out!).
Look at this hypothetical case:
|Month||Hours Worked||Billable (Hrs)||%||Non-Billable (Hrs)||%|
It's time to give a quote to your client based on the information you have.
I'm going to use the minimum amount of billable hours. That way, if you don't meet your average amount of billable hours in a particular month, you'll still be covered.
Desired annual salary: $60,000
Current amount of billable hours (Minimum): 1,080 (90 hours x 12 months)
Annual working hours: 1,920 (8 hours x 20 days x 12 months)
Vacation, sick days and emergencies: 160 hours (8 hours x 20 days off)
Total: 1,760 hours
Billable and non-billable
65% Annual billable hours (Based on minimum): 1,144 (1,760 x 0.65)
35% Annual non-billable hours (Based on maximum): 616 (1,760 x 0.35)
Using the process we discussed at the beginning, calculate the amount of time you'll spend on each stage.
How many hours will you spend gathering information? How many hours will you spend editing your work or going through revisions? Answer these questions before you calculate your project cost.
Hourly rate: $52.45 ($60,000 /1,144 hrs)
Estimated billable hours for this particular project: 35 hours
Project cost: $1,835.75($52.45 x 35 hours)
Add time for unexpected events
With the spreadsheet, you have a educated guess of your next projects. Remember not every project is the same. So always add around 5%-20% more to your initial estimate in case some minor details go wrong.
Our project cost so far is $1,835.75. Let's add a 15% more ($275.36).
$1,835.75 + $275.36 = $2,111.11
This may vary depending on every type of project.
If you're not sure about using percentages, just add extra hours to the project. Using the same example, let's say I add 3 more hours.
$1,835.75 + $157.35 ($52.45 x 3) = $1993.10
How do you create estimates? How do you classify your billable and non-billable hours? Feel free to share your thoughts on the comments section!
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