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How to Calculate Your Billable Hourly Rate [GUIDE]

Autorin: Madalina Roman

17. Mai 2023

Every service that you perform – as a freelancer or working through a company – has a defined price. As you use your knowledge to offer professional advice or strategy, you also spend your time researching to achieve the best possible outcome.

Along with that, there’s a budget and a price attached that needs to be defined so that the communication is transparent.

Throughout this article, you’ll learn what’s a billable rate, how to calculate a billable hourly rate and optimize it. You’ll also comprehend why it matters for your job and why time tracking is so important to help you calculate your billable hourly rate.

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What’s a billable rate?

A billable rate stands for the price that you charge your potential customers for services and/or professional advice.

How to calculate a billable hourly rate

According to this survey, there are more than 20% of billable hours are not accounted for, and more than $50.000 lost per employer across the UK, USA, and Australia. With these insights, you must put into perspective the significance of the calculation of your billable hourly rate.

With this in mind, it’s important to learn how to calculate billable hourly rates through this formula:

Billable rate = Total Revenues / Total Billable hours

To understand this formula, you mostly need to divide the revenue generated by the total number of billable hours that you used to invest in any given project.

Beispiel:

To put it on a practical example, imagine if your revenue was a total of $70.000 in a month, and you have 700 billable hours to account for. Your billable hourly rate is $100.

If there was a fixed and lower billable hourly rate proposed by the company/client, you have to take accountability for the gap that was generated. You have proposed a healthy range between $80 and $100; there’s a predictability element that the client will appreciate greatly.

This calculation of the billable hourly rate is extremely important to increase and develop your income as well as your billable hours.

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You should always have a planned, accurate, and estimated billable hourly rate because you need to detail every single hour that you devote to a project.

You might feel confused or a little over your head when you find yourself surrounded by different fees from different projects and clients. But in a nutshell, you must face it like this: the total amount of work you put on for each project must be divided by the total number of work hours.

In the end, you’ll have the final number of your billable rate.

Sometimes, professionals just estimate their billable hourly rate and overlook the power of costs and unforeseeable challenges that might have a strong and effective impact.

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When that happens, it’s a loss situation because the estimation can be way off, and there’s no turning back because it’s already established with the client.

To avoid this common mistake, check out these steps to help you be extremely accurate in the calculation of your hourly billing rate:

Estimate the billable hours that you work on certain projects;
Define which is your annual salary so that you know how much you’re supposed to receive;
Expect obstacles and costs out of your control on your expenses during each project;
Set up a range where you can contemplate your profit margin.

Read: What are the differences between revenue and profit?

Reasons why your hourly rate matters

Some professionals quickly overlook the power of a good and established hourly rate. There are some consequences that some might quickly regret after the deed is done.

The truth is that once you’ve settled with the client, there’s no change in your favor.

So before you make a rash decision, find out why the necessity of an hourly rate. Here are several reasons why it matters deeply:

It’s flexible

The number of hours spent on a project is the one you’ll be charging to your clients, no more, no less.

In that way, you’re able to make your hours to dedicate yourself to a project, and your clients can adjust the budget according to your availability.

It’s transparent

Since you have a detailed report on your hours spent on a project, you are being honest about your workload. It’ll be known what costs and difficulties were involved, so there’s a fair character to the billable hours.

It’s motivational

Since you’re working on an hourly rate method, you’ll be able to feel more focused and productive on the finalization of the project at hand. Productivity and quality of work are key to its completion.

It’s an investment

This personalized job that you take on, whether on a project or giving professional advice as a consultant, is all about nurturing.

You work with clients very intimately while spending time getting to know them. To guarantee quality work over a potential expense, an hourly rate is the safest for the investment.

Read: How consultants are compensated

It’s trustworthy

You’re able to build a relationship with your clients that will surpass the hourly rates that you’ve proposed for a project.

If the client’s happy with the work you’ve delivered, make sure that you know you’re highly valuable.

It’s good for your balance between professional and personal life

Since you’re able to control your hours and workload, you’ll have a more meaningful grasp of everything that’s going on in your life.

You won’t have the 9 to 5 routine, but you’ll gather time for some elements of your life that are important to you and that you couldn’t take on before.

It gives the chance to find new projects

Since you’re transparent with your clients about the costs and your efficiency towards the project’s challenges, you might open new opportunities.

The search for the best possible outcome, along with the perfection of the project, will get your clients hungry for the best.

It guarantees that there’s no abuse from the clients

Sometimes clients behave in a way that we’re not able to foresee to stop it. It can generate payment problems and demanding requests.

The truth is that with a billable hourly rate, you’re able to keep track of everything and present it in detail so that the customer is capable of seeing their misbehavior.

How to optimize billable hourly rate

Now that you’ve realized the importance of the billable hourly rate, it’s equally crucial to understand how it can be optimized throughout your career.

You might have different clients’ projects, and you could also have different rates. However, there are some strategies behind the optimization of the billable hourly rate. Scroll down and discover the various options that you have to optimize it:

Fixed fees

When you have a fixed fee, the accuracy of your workload evaluation becomes amazingly clear. Once you have the price for a specific project, you’ll know what to charge when the next similar project appears in your work routine.

Variable fees

Once you’re in agreement with your client about the expected fees, you must define a range that you could achieve while working on a certain project.

Regulate it according to the expected profit

You might have a defined billable rate, but some projects and clients are so complex and challenging that it just might be justifiable to change your rates.

Evaluate each project and make sure that you express your value to your clients.

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Deliver detailed invoices

Be very detail-oriented when writing up the invoice for your clients.

You must describe every single cost and item that you used while completing the project. In that manner, you’ll be able to justify your rates to your client’s budget.

Don’t diverge too far from the initial estimation

It’s a hard task to deliver a great billable rate range. With that in mind, you must be careful when evaluating the estimated and the final rate.

Think about all of the variables that could impact it and make a thoughtful decision.

Use time-tracking tools

There’s the ultimate optimization technique for your billable hourly rate – time tracking tools. These platforms allow you to keep track of every data that you need.

Once you have everything, you can gather it in your report and invoice to demonstrate the project’s disclosure to the client.

TIP: Read our post, if you want to learn how to calculate labor costs to increase your profitability.

Bill your clients accurately with Timeular

“I have been using Timeular for almost 2 years now. It helped me keep track of my time, the billable hours to customers and gain business” – Fabian G., CTO

How and why time tracking is important for a billable hourly rate

Time tracking consists of monitoring and recording the time spent on certain activities or tasks, usually for billing, project management, or productivity analysis. You can track time using several methods, and a time-tracking app is the most efficient.

Time tracking tools are the stars of any professional who’s trying to calculate billable hourly rates and keep track of them. Through functional features and customizable elements, you’re able to gather every billable hour, describe all the details, and present it in a full report to your clients.

Get to know how and why time tracking could be the ultimate solution for your professional development:

Why

It’s important for the development of your business because it’s related to productivity and revenue;
It demonstrates the exact time spent on a project;
You’ll be able to deliver a transparent invoice with every detail;
Through time tracking, you’ll learn all about the project’s profitability and if it’s worth it to pursue;
You can evaluate your performance, and productivity and have insightful tips on how you can be better;
You’ll optimize your billing rate and consequently increase your revenue;
When you’re looking at the billable hours, you’ll also discover where and how much is every task assigned to each resource.

How

Once you’ve understood why you should invest in a time-tracking tool to help you with billable hours, you should follow these instructions to establish it:

Set up a delivery date for your invoice with the client;
Choose the best online time track tool for you – Timeular is a great choice since it’s customizable to your needs and gives you detailed and shareable reports;
Invest in real-time tracking to keep up with everything you’re doing for the project;
Monitor every project closely and separately;
Make sure that you don’t have non-billable hours to account for;
Gather a list of every billable task that you’re working on;
After following these steps, it’s time to create the invoice that’s destined for your client. It should be completed with every piece of information that happened during these billable hours.

Schlussfolgerung

From this master guide, there’s a great conclusion to take on after reading this article.

A billable hourly rate is one of the most important elements that will dictate your value, as well as proof of your dedication and productivity.

First, it’s important to understand why there’s a need for a billable hourly rate to properly develop a business.

Once you’ve grasped all of the reasons why you should invest in this method, then it’s time to establish them.

With the help of guiding formulas and a time-tracking app such as Timeular, you’ll be 100% prepared to face every challenge that you might encounter while working on different projects with various clients.