What Is Hourly Billing? Definition, Formula, Pros & Cons, and Best Practices
Discover what hourly billing is, how it works, its advantages and challenges, and how your company can make the most of it.
What Is Hourly Billing?
- Clear definition: a model where the client pays for the actual time worked at an agreed hourly rate.
- Typical cases: consulting, creative/dev agencies, law firms, on-demand (“as needed”) support, ad-hoc tasks.
- Differs from fixed price (payment for the result or defined scope) and retainer (a fixed monthly fee for access or a set quota of hours).
Why Hourly Billing Matters
Transparency & Trust with Clients
Hourly billing builds trust by creating transparency and accountability between the client and the service provider. The client can see exactly how time is spent on a regular basis, often through detailed time logs or reports.
Fair Compensation for Scope Changes
With hourly billing, any changes made to a project’s scope are fairly accounted for. The client pays for the extra time spent instead of depending on a fixed price that may not cover the additional work.
Flexible Engagements for Unclear Requirements
Hourly billing offers flexibility when project requirements change during implementation. Clients can modify priorities and project scope as the work progresses, paying only for the actual hours invested.
Easier Cost Tracking & Profitability by Project
Hourly billing simplifies cost tracking and helps evaluate each project’s profitability. By logging every hour of work, it gives both clients and teams clear insight into how time and resources are used.
Hourly Billing Formula & Examples
- Basic Formula: Invoice Amount = Billable Hours × Hourly Rate.
- Example: 37.5 billable hours × $120 = $4,500.
- Additionally: taxes/discounts/surcharges and expenses are added as separate line items.
Rates: How to Set and Communicate Them
Role-Based Rates
Hourly rates can be set based on each team member’s role and expertise (e.g., Senior Developer — $120/hour, Project Manager — $90/hour, QA Engineer — $70/hour).
Blended Rate
Represents an average hourly rate charged for the combined work of a team, instead of billing different rates for each individual role(e.g., $100/hour).
Premiums & After-Hours
Higher rates (multipliers) may apply for rush projects, weekend work, or holidays to reflect increased urgency or non-standard hours.
Annual Review
An annual review of rates is conducted and communicated once per year through the SOW (Statement of Work) or MSA (Master Service Agreement) to ensure openness and alignment with the market.
Billable vs Non-Billable Hours
- Decide what will be considered as billable (development, design, consulting) and non-billable (pre-sales, internal meetings, learning).
- Realization rate: billed / billable × 100%.
- Write-offs: hours written off to maintain client relationships - how to reflect them in reports.
Timesheets, Approvals, and Policies
Minimum Billable Increment
Time should be tracked in standardized increments, such as 6, 10, or 15 minutes. This ensures consistency across the team and simplifies billing.
Rounding Rules
Time entries may be rounded according to defined rules, for example, always rounding up to the nearest increment or to the closest interval.
Weekly Timesheet Approval
Timesheets are submitted and reviewed in a structured workflow: employee → manager → accounting.
Budget Caps & Alerts
Set thresholds at key points (e.g., 50%, 80%, 100%) to monitor project budgets. Automated alerts notify you when hours or costs approach these limits.
Change Requests
Any deviations from the agreed project scope must be logged as change requests. This ensures transparency and helps in billing clients correctly.
Hourly Billing vs Fixed-Price vs Retainer
- Hourly: +flexibility, +transparency; –less predictable client budget, risk of micromanagement.
- Fixed-price: +predictability; –risk of underestimation, rigid scope, change of orders.
- Retainer: +stable cash flow; –misunderstandings about “unused hours”.
Estimating & Communicating Hours
- Estimation range: best/likely/worst, assumptions, dependencies.
- Weekly updates: hours spent, remaining budget, risks.
- “No surprises” rule: notification about overruns before reaching the threshold.
Invoicing & Collections
Invoice Cadence
Invoices can be issued weekly, monthly, or by project milestones, depending on the agreement with the client. This ensures predictable cash flow and aligns billing with project progress.
Line Items
Invoices should clearly break down hours by role or task and list any extra expenses separately. This ensures transparency and helps clients see precisely how their costs are calculated.
Supporting Reports
Provide supporting documents like timesheet exports, activity summaries, and change logs to give context and validate the billed hours and expenses.
Payment Terms
Specify payment conditions (e.g., NET 7/14/30), any applicable late fees, and arrangements for partial deposits. Clear terms reduce delays and misunderstandings.
Disputes Handling
Define procedures for handling billing disputes, including response SLAs and arbitration processes outlined in the Statement of Work (SOW) to ensure timely and fair resolution.
Legal & Contract Basics (Non-Legal Advice)
- MSA/SOW: description of work, rates, budget limits, increments, rounding rules, invoicing terms, IP/confidentiality.
- Change orders, out-of-scope work - approval procedure.
- Jurisdictions/taxes: note that policies may differ; consult your accountant or legal advisor.
Common Mistakes & How to Avoid Them
- Lack of increment and rounding policy → clearly define it in the SOW.
- Late invoices → establish a fixed cadence and use reminders.
- Unclear write-offs → ensure visibility in reports and discuss during QBRs.
- Over-servicing without approval → set cap alerts and require change requests.
TMetric for Hourly Billing Workflows
- Time Tracking: timer, manual entry, edit history.
- Rates: billable rates at the project/client level; budgets and alerts for overruns.
- Reports: billable/non-billable, by roles/employees/clients; realization; productivity.
- Invoicing: creating invoices based on hours worked, export to PDF/CSV.
- Expenses: manually added to the invoice together with hours.
- Integrations: works alongside your PM and accounting tools (Jira/Asana/QuickBooks and others).
Conclusion
Hourly billing is a pricing model where clients pay for the actual time spent on work at an agreed hourly rate. It is calculated by multiplying the hourly rate by the actual hours worked. This model works best when the project scope is uncertain and flexible (e.g., consulting, creative work, or support services).
To avoid mistakes when using an hourly pricing model, define clear billing rules and time tracking methods, communicate regularly, invoice promptly, and document scope changes for transparency. Use transparent policies, consistent reporting, and timely invoicing to keep hourly billing fair, efficient, and trusted by clients.
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