Posted by: LYF | December 2, 2008

Billable Hours

Billable hours make me uncomfortable.  They make me uncomfortable because they give an illusory legitimacy to fees charged by most professionals.  At best, billable hours give a ballpark estimate of what a final bill could be.  But I can understand why we use them.  They create a very simple link between the work performed and what we charge.  It’s just that they put incentives in place that can negatively impact the work you’re trying to do.

Misquoting

This happens often.  You quote a client a fee, you begin your work and all of a sudden a million unpredictable things pop up.  In this scenario two things can happen.  One, you go over-budget. eat the time or bill the client for the extra work.  Two, you work up to the quote.  The later is really dangerous and I’ve heard it happens.  In the second case you stop once you’ve hit the quote regardless of the level of work you’ve done.  It’s a risky move.

Performance

Incorporating billable hours into performance reviews is dangerous.  Juniors can get screwed really hard if they haven’t been monitoring their hours carefully.  All I can say is look at last year’s bill, divide it by your rate and that’s approximately how long you should be working on the file this year.  If you go over this estimate, you better have a good reason.

Profit Margin

Here’s the thing that confuse me the most.  Profit per file should be fees, less the the prorated salaries of the employees doing the work.  But, under a billable hours system profit margin is the difference between the final fee and billable hours.  So you can have a negative “profit” margin – i.e. go over budget – while still making a profit from the firms perspective.

There are a lot of things in the business world that I have yet to figure out.  I still can’t make sense of billable hours.  It seems we use them only because we always have.

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Responses

  1. [...] Source [...]

  2. This probably tops as one of the major downsides to working in a public accounting firm and one of the major areas I struggled with.

    Profitability wins and you’re pretty much judged based on it…regardless of whether partners are open about it or not.

    It’s a fine line b/c partners at my firm tell us to charge everything, but if you’re over budget often then you’re done for.

    It kills me because if lots of people eat their time, then this snowballs and budgets become unreasonable.

    I freaked out about hours and budgets all the time during my co-op semesters. We used to bitch and moan about our chargeability during lunch for 4 months and it felt amazing going back to school because I didn’t have to worry about how long it was taking to finish tasks.

  3. Yeah billable hours can create a lot of stress. The only way around the problem is to just stay late and charge fewer hours. So staying at work for 10 hours, but charging 7. But that sucks hard.

  4. Never ever ever ever ever eat time like that. It’s Wrong.

    Easier said than done, perhaps. But you should have a protocol in place for situations like that – identifying the “extra time”. Your timesheet should always reflect the work you did, otherwise you’re dealing with unethical employers. And you’re also screwing over whoever is expected to hit an insane target next year.

    I have more to say on this topic – I’ll write up a post. :)

    Before I run off and do that, also remember that while “chargeable” and “billable” is used interchangeably by some firms, the former is generally used to describe time by staff, and the latter is used to describe time billed to clients.

    You may charge time which won’t be billed. That’s a business decision.

    You won’t decide which time will be billed until you’re in a higher ranked position though.

  5. [...] A young accountant can be forgiven for following into the following trap: [...]

  6. Part one response. :)

    http://www.krupo.ca/archive/2008/12/06/profit-margins-how-they-work-for-accountants-and-others.aspx


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