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.
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.
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.
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.