How to Bill for Professional Services Projects
Professional services organizations face a number of challenges — from poor resource allocation to inefficient workflows and processes. Wrike’s 2019 “Professional Services Work Benchmark” report revealed that 17% of firms surveyed identified “confusing billing or activity tracking” as the number one reason for customer churn.
Billing is an important undertaking for any business. It’s how companies get paid for the work they do on behalf of their customers and clients. But it’s not always a straightforward or even simple process. Billing can be inefficient and time-consuming.
Over a third of respondents in the same Wrike survey said it took them two to three hours a week to track billable hours, while 10% said it took them four hours or more per week.
Not every professional services company will bill clients in the exact same way. For instance, a marketing firm will likely have a different billing structure in place than a legal services organization or an architecture firm. This is because of the differences in the nature of their work.
The right billing structure, methods of time tracking, and payment terms can help companies avoid customer churn, as can good professional services billing software. The right method of time tracking is also important because it helps ensure that firms do not leave money on the table by underreporting billable work.
An efficient software solution should streamline time tracking and introduce automation for repetitive or time-consuming tasks.
In this section, we’ll cover different billing models, tracking billable hours, invoicing clients, and how Wrike can help make billing for professional services a more streamlined and efficient process.
Choosing a Billing Model
Billing for professional services is not a “one size fits all” endeavor. What works for an IT firm may not work for an accounting firm, which is why it is important to choose a billing model that suits the nature of the work being carried out.
Some examples of popular billing models include:
- Fixed price/project-based
Fixed price billing is perhaps the most straightforward way to bill a client. It is billing based on an agreed-upon fee. If the parties involved agree that the total cost of the project will be $2,000, then that is the amount that will be paid upon completion. This is ideal for projects with very few fluctuating costs.
- Daily or hourly rate
As its name suggests, an hourly rate can be billed to a client based on the time spent carrying out the requested work or consulting services. These are called billable hours. A daily rate is similar in nature, however, instead of being paid for hourly work, a consultant in this scenario is paid a fixed day rate.
- Milestone billing
Milestone billing is a model that triggers payment once certain project milestones have been reached. It distributes the fee amount across the project life cycle instead of receiving payment after the outcome is delivered.
- Time and materials contract
A time and materials contract may best serve businesses and clients whose expenses are subject to a number of variables like supply and equipment costs. A time and materials contract would cover the cost of materials and other overhead, plus the cost of labor.
Fixed pricing vs. time and materials contracts
Fixed pricing and time and materials contracts are two very different methods of billing. A fixed pricing structure is ideal for organizations that carry out work that is not subject to the changing price of materials or labor. Meanwhile, a time and materials contract allows contractors and the like to recoup expenses associated with carrying out the project or task when the outcome and exact costs are not immediately clear.
For example, an accounting firm may charge a fixed price of $200 to prepare your taxes each year. This business is not subject to the fluctuating costs of materials or other variables. On the other hand, a contractor building out the extension in your home has many costs to consider — a great deal of which are not known from the outset. Time and materials contracts should be carefully negotiated to establish labor costs, material markups, and what counts as billable and non-billable work.
A client may even ask for a “not-to-exceed” clause that places a cap on what the contractor can charge. This discourages drawn-out projects because it places a ceiling on the costs that can be recouped.
What is a retainer fee?
A retainer fee is an amount of money paid upfront to “retain” the services of consultants, lawyers, etc. A retainer often represents an estimate of work to be carried out (i.e. hourly rate x hours estimated for project/case completion).
A client may also pay a monthly ongoing retainer fee if they are in need of services for a longer period of time than a one-off project or case. In this instance, the consultant benefits because it generates a steady stream of reliable income.
Billable vs Non-Billable Hours
Billing clients for the work you do on their behalf may seem fairly straightforward, but it can have its own complications. Inefficient time tracking can mean your organization misses out on charging for billable activity. In fact, 15% of eligible consulting work is not actually billed to clients, according to a study conducted by the London School of Economics.
You may also find that there is a gray area between what is considered billable and non-billable work. In short, billable work is work that advances and addresses the needs of the project or initiative.
What are billable hours vs. non-billable hours?
Billable hours are the hours of work that can be charged to a client. Typically, this is work that is necessary for the completion of a project.
Non-billable work includes anything that may benefit an employee or organization, but not the eventual outcome of a project. Generally speaking, employee training and pursuing new business opportunities cannot be considered billable work. Neither does time spent entertaining a client or preparing an invoice for them.
Billable activities can include research, design work, project-related administrative work (generating and filing paperwork on behalf of a client, etc.), and other duties crucial to project completion. This billable work
needs to be tracked and can be done with software solutions like Wrike. Wrike’s Task Timer automatically records how much time is spent on a particular activity. Time logs can also be manually input and viewed in Wrike’s Timelog View.
Gaining better insight into what counts as a billable vs. a non-billable task can help organizations understand what employees are spending their time doing. For instance, if you notice employees are spending a great deal of time on non-project related admin, you may consider automating parts of their workflow.
How to calculate billable hours
The first step in calculating billable hours is establishing what can be classified as billable and non-billable work. Once you know that, you can use time tracking software to determine the amount of time spent on this work.
Billable hours can be calculated by adding up the amount of time spent on billable activities. Once you determine the number of billable hours chargeable to a client, you can multiply the hours by a rate. For instance, a consultant’s rate may be $75 an hour. If they spend 5 hours working on project-related activities, they can then send an invoice to the client for $375.
A business may also charge higher rates for certain projects and for work done by certain employees, so it is imperative to remain organized and keep a record of who is working on what tasks.
Invoicing Clients for Projects
An invoice is a document that details the nature and the cost of a service provided. This document tells the purchaser what, when, and how much to pay for a service.
A typical invoice should include a business name, date, description of services, unique invoice number, and payment method. An invoice may also include payment terms that can stipulate things like a 30 day payment period and late fee.
It is important for the document to have an accurate date, invoice number, and description before they are passed on to the client. Errors in an invoice may sometimes result in late payment, which can be a pain point for contractors, freelancers, and consultants.
Typical payment terms for contractors
Ensuring on-time payment can be a stressful process for contractors and professional services firms. Let’s say you’ve agreed on contract terms and delivered on the project, but now you’re stuck waiting for payment from a client who is dragging their feet.
Building in payment terms can help address some of these tendencies toward late payments.
Typical payment terms for contractors can include:
- 7, 21, or 30-day payment deadline
- Late fee on top of project fee
- 50% payment required upfront
- Discount for early payment
Whether these payment terms successfully encourage clients to pay on time is unclear. In 2016, the percentage of companies in China who paid on time was a mere 26%, while companies who paid 30-90 days after an invoice was issued was 15.5%.
Keeping track of accurate billable hours and using a fee structure that works for your business are a couple of ways contractors and professional services teams can ensure an effective pricing and invoice process — and Wrike can help every step along the way.