Billable Hours Calculator

What Are Billable Hours?

Billable hours are the hours of work you can charge to a client. Every other hour you or your team spend working, whether in an internal meeting, on a sales call, or fixing a laptop, is non-billable. Any business that sells time, from a solo consultant to a law firm, a marketing agency, or an outsourced support team, lives on the gap between the two: payroll is paid for every hour, but revenue only arrives for the billable ones.

The line between billable and non-billable is set by the agreement with the client, not by how valuable the work was. A strategy session with the client is billable on almost any hourly engagement. Writing the proposal that won the engagement was not, because there was no engagement yet. Redoing work your team got wrong is usually written off. Travel, research, and project management can go either way depending on what the contract says, which is why the first step in calculating billable hours is writing down the rules. The billable hours glossary entry covers the definition in more depth.

Billable and non-billable examples by industry

Non-billable time is not wasted time. Selling, hiring, training, and improving processes all keep the business alive. The goal is to know how much of it there is, so that the billing rate can carry it, rather than to pretend it does not exist. That is why the calculator asks you to mark each entry billable or non-billable instead of only entering client work.

Billing Increments and Rounding

A billing increment is the smallest unit of time you bill. Firms that bill by the hour rarely bill exact minutes; they record time in tenths of an hour (6 minutes), quarter hours (15 minutes), or occasionally half hours. The increment and the rounding method should both be written into the engagement letter or contract, because together they decide how much a short task costs the client.

Round up bills any started increment as a full one: 7 minutes is 0.2 hour in tenths. This is the usual convention in legal billing and the calculator's default. Nearest rounds to the closest increment, so 7 minutes is 0.1 hour, and a 1- or 2-minute entry rounds to zero. Rounding applies to each entry separately, which is why many short entries rounded up can add noticeably to an invoice.

The 6-minute rule: minutes to tenths of an hour

This chart is generated from the same rounding function the calculator uses.

Under nearest rounding, 1 to 2 minutes bills as 0.0 hour, and a 3-minute midpoint rounds up. The increment matters more than it looks: a 12-minute task bills 0.2 hour in tenths but 0.25 hour in quarter hours, 25% more for the same work.

The same three entries under every increment

The worked example above, re-run with each increment and rounding method at $125.00 an hour:

The spread runs from $250.00 to $312.50 for 2.2 hours of actual billable work. Quarter-hour round-up bills 2.5 hours, 0.3 more than the time worked. Across hundreds of entries a month, that difference is real money for you and a real cost for the client, which is why smaller increments are easier to defend when an invoice is questioned.

How to Set a Billable Rate From Cost

A billable rate has to pay for every hour of an employee's time, not only the billed hours, and leave a margin. Three numbers drive it: what an hour of the person's work costs you, how much of that time is billed, and the margin you want.

1. Loaded cost per productive hour. Wages plus employer payroll taxes, benefits, and overhead, divided by the hours actually worked after paid time off and holidays. The employee cost calculator gives this figure: with its defaults, a $20/hour employee costs $29.02 per productive hour.
2. Divide by utilization. If only 70% of productive hours are billed, each billed hour has to carry the cost of the unbilled ones too: $29.02 ÷ 0.70 = $41.45 of cost per billed hour.
3. Divide by (1 − margin). For a 50% margin on the rate, $41.45 ÷ 0.50 = $82.91 an hour. At that rate, half of each billed hour covers cost and half is margin.

Dividing by (1 − margin) is not the same as adding the margin as a markup. Adding 50% to $41.45 gives $62.18, which is only a 33.3% margin on the rate. If overhead is already in the loaded cost, the margin is what is left for profit; if not, the margin also has to cover rent, software, and other shared costs.

Minimum rates at a 50% target margin

Reading across a row shows why utilization matters as much as the rate: the same person costs $37.50 an hour more to price at 60% utilization than at 80% when their cost is $45.00 an hour. Raising utilization by capturing time that is already being worked is often easier than raising rates.

A Note on Billing Ethics for Lawyers

Lawyers in the United States bill under professional conduct rules, not only contract terms. ABA Model Rule 1.5(a), which most states have adopted in some form, says a lawyer “shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses,” and lists the time and labor required as one of the factors in judging whether a fee is reasonable.

ABA Formal Opinion 93-379 applied that rule to hourly billing. It concluded that a lawyer who has agreed to bill on the basis of hours expended does not fulfill her ethical duty if she bills the client for more time than she actually spent, and it gave the example of billing several clients in full for the same hours as unreasonable. Rounding to a disclosed minimum increment is a different matter from billing time that was not worked, but the safest practice is the same for any profession: disclose the increment and rounding method in writing, apply them consistently, and keep time records detailed enough to show what each billed unit covered. Your state bar's rules and opinions are the authority on what applies to you.

Sources

• American Bar Association: Model Rule 1.5, Fees
• Alabama State Bar: Formal Opinion 2005-02 (summarizes and quotes ABA Formal Opinion 93-379 on billing for professional fees)
• 29 CFR 785.48: Use of time clocks (payroll rounding for employees, which is separate from client billing increments)

Payroll is a different calculation: employees must be paid for all hours worked, whatever increment you bill clients in.