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Billable Hours: Understanding How Law Firms Bill

Smokeball

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Smokeball

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March 6, 2024

billable hours law firm

The billable hour is like the golden calf for many law firms and attorneys — all worship it, but many don’t understand what it means or how law firms really a bill. Billable hours are important because the success and profitability of a law firm often come down to them. But law firm billable hours requirements are often cited when discussing associate burnout and work-life balance. For firms with fewer attorneys, meeting small law firm billable hours are even more critical.

In this brief article, you will learn about a billable hour, how law firms track time and bill their clients, and the impact of billable hours on lawyers and clients.

What are billable hours?

Billable hours are the lawyer hours that clients pay for directly. There are tasks that a lawyer does that are just part of the work needed to work at a law firm, and then there are tasks that are directly related to the client’s case. Dedicated time spent on tasks directly related to a client’s case can be billed for the most part to the client. These are the hours (and the type of time) that law firms want to maximize so that they can run a profitable business.

Associate attorneys and partners are given billable hours requirements that will make the law firm profitable. In some cases, reaching these requirements may be extremely difficult and require long days at work, weekends at work, and skipped vacations.

Why is tracking billable hours important for law firms?

Lawyers aren’t directly paid according to their billable hours. However, the success of a law firm is directly related to billable hours. To ensure profitability, many law firms require associates to meet a minimum target number of billable hours for the year, and bonuses are often awarded based on billable hours. And despite the fact that a lawyer’s base salary isn’t impacted by billable hours, lawyers whose billable hours don’t meet a certain threshold may find themselves facing layoffs when law firms look to reduce staff.

In the case of partners, equity partners are heavily dependent on having enough billable hours in a law firm to get paid a decent salary. Equity partners are paid a base salary but the vast majority of their compensation may come from their equity share in the law firm. Once a law firm has paid all of its overhead and expenses, the profit/equity leftover is shared amongst the equity partners. If lawyer hours in the law firm didn’t include enough billable hours, equity partners could face a serious decline in their compensation.

Requirements for law firm billable hours

When maximizing the number of billable hours an attorney has, it becomes necessary to increase the number of lawyer work hours worked overall. This means that some lawyers are working anywhere from 70 to 80 hours per week every week just to meet their billable hour minimums which can range between 1700 and 2300 hours a year. If an attorney worked 40 hours a week for 52 weeks of the year (NO weeks off) – they would work 2,080 hours a year. Because time is spent on other tasks, lawyers end up working far more than 40 hours a week, just to meet their requirements. They may feel immense pressure to skip vacations and not take sick days in order to satisfy requirements.

When new lawyers and law students ask and do the math on “How many billable hours in a year will I be expected to work?”, they quickly realize that it’s a lot of hours. It can seem very difficult to track that time, especially when almost every minute at work must be productive and profitable.

It’s important to note that while the majority of traditional law firms focus on billable hours, public interest law firms don’t bill their hours to a “client” and small law firms outside of large cities may not have such a high billable hour requirement for their associates. Average billable hours a law firm may bill may vary based on many factors, including region, attorney salary, and yes, how lawyers’ time is tracked. Automation increases the effectiveness of time tracking, the number of hours billed, and ultimately, profitability.

Lawyer lifestyle and billable hours

We saw in one Yale Law School report that there is a vast divide between actual hours and billable hours. When law firms are making their billable hours targets, they need to consider their profitability, but they also need to consider the practicality of demanding that lawyers work incredibly long hours as a standard instead of an exception.

Since paid time off can obviously not be billed to a client, lawyers are under pressure to meet billable hour targets (requirements). No human being can work non-stop, not even talented and driven super lawyers who are passionate about practicing law and want to move up in their law firm. Law firms must take into account:

  • Lawyer Downtime
  • Vacation Time
  • Personal/Sick Days
  • Family Emergencies
  • Important Non-Billable Time
  • Sustainability

Law firms can also use an attorney billable hours chart to see if there are any inefficiencies in the way associates are spending their time. Of course, there are limits to how much time any associate can squeeze out of a workday, especially when other tasks must be completed, like required firm meetings, conferences, and continuing legal education (CLE). If a law firm is tracking their lawyers’ time and maximizing their lawyers’ billable hours and they are still unable to turn a profit, they may need to examine other sources of their financial trouble such as a too low fee or too high cost of overhead.

Examining law firm time: billable vs. non-billable hours

Let’s take a closer look at the different ways that time is used in a law firm.

  • Billable Hours: As mentioned above, billable hours a law firm charges is the time spent on a particular client’s case or legal matter which can then be billed directly to that client. This is also the time that most law firms spend a lot of energy measuring and tracking.
  • Non-Billable Hours: While this is the time that cannot be charged back to a client, it is still essential to spend this time on important tasks. Lawyer work hours that are on-billable might be filled with tasks such as professional development, attending firm meetings, responding to e-mails, and participating in networking events. While there is no requirement for spending time on non-billable hours, every minute spent on non-billable hours eats into the available time to complete billable hours. 

Both billable and non-billable hours should be treated like a precious resource and tracked and scheduled accordingly.

Pro tip: How to decide between billable vs. non-billable hours?

For many new lawyers and legal professionals, billing clients is unfamiliar. There is often confusion about what can be billed, and what cannot. It may be helpful to create a decisive litmus test to determine if time spent by a lawyer can be billed directly to a client. The following questions may be helpful: 

  • Was the lawyer’s work necessary to complete the project? 
  • Was the time spent for the lawyer’s professional needs or the client’s needs? 
  • Was the time spent on a task that was in the client’s agreement?
  • Was the time spent by the lawyer the result of an avoidable mistake? For example, if a file is inadvertently deleted by the lawyer while moving files on their hard drive, time spent recreating the file may not be billed to the client.

How to calculate billable hours

The legal industry has one thing in common with private jet operators: they typically bill clients in six-minute, 1/10th of an hour, increments. This makes calculating the cost of any activity a simple mathematical equation (rate x time spent = cost). Of course, hourly rates may differ depending on who is working on the matter: partners, associates, paralegals, etc.

Strategic decisions regarding who at a law firm is doing a task can boost profitability, and simultaneously pass savings onto clients. While clerical and administrative tasks like filing documents or making photocopies are generally non-billable, paralegals can bill for the preparation of legal documents, conducting research, and communicating with clients.

Clients are billed in 1/10th-of-an-hour increments. A phone call lasting 1-6 minutes would be billed for .1 hours, while a phone call lasting 7-12 minutes would be billed at .2 hours. The charge is calculated by multiplying the hourly rate by the time spent. For example, a .2-hour phone call billed at $300/hour, would be billed at $60. A half-an-hour spent drafting up a letter, billed at a rate of $150/hour, would be billed at $75.

Sample billable hours chart:

How to maximize your law firm’s billable hours

For law firms that want to make sure that their billable to non-billable time is profitable, maximizing billable time is critical. Here are some ways to maximize billable time in a way that clients understand.

1. Establish a time tracking policy

When lawyers can bill for services, their time is money. Law firms must look at lawyer time this way. Time spent on billable tasks contributes to an attorney’s salary and law firm profit margins, while time spent on non-billable tasks does not, and can cause the pendulum of profitability to swing in the opposite direction. While the firm still has to pay the lawyer, if a client cannot be billed for the time, non-billable hours are actually costing the law firm money. A time tracking policy can ensure time spent on non-billable tasks does not get out of control.

2. Record tasks as you complete them

Legal time tracking software can significantly reduce the amount of time that lawyers spend accounting for their time – so that your attorneys can reduce the gap in billable hours vs actual hours.

3. Track all of your time, not just billable time

It is helpful to understand how non-billable hours are spent. This is recommended not for the purpose of micromanaging anyone, but for improving efficiency. Can a non-billable employee handle certain tasks? Are lawyers being asked to participate in too many non-billable firm activities?

4. Review your missing time once a week

If you review missing time once a month, it is very easy to lose track of time (literally). Many law firms have an accounting or billing person do a review or audit each Monday to track down any missing time from the previous week.

5. Use descriptive language in billing descriptions

When attorney work hours are tracked with legal billing and time tracking software, they should use very descriptive language on each entry so that a non-lawyer – or any outside individual – can understand what work was done on the legal matter. When clients can see the details of the work done on their case, in clear, simple, language, there is less confusion and fewer disputes over billing.

Track your hours automatically and enjoy easy billing with legal practice management software

There’s no need to reinvent the wheel from scratch or use non-intuitive, antiquated, and time-consuming methods. Billing clients can and should be easy. Smokeball is award-winning law practice management software that makes running your practice efficient and easy:

  • Tracking attorney time: With Smokeball, you can accurately and automatically track your time – and your staff’s time, so you don’t ever miss a billable moment. You can track how much time is spent in programs like Word and Outlook, as well as client phone calls through the RingCentral integration. It’s easy to select what is added to bills.
  • Billing your clients: Spend less time preparing, editing, finalizing, and printing invoices. When you automate the legal billing process with Smokeball, you can make easy-to-read and easy-to-send invoices. Your accounting team will love the powerful integrations with LawPay and Quickbooks Online, among others.

In your law practice, there is nothing more valuable than your time. Although many law firms utilize a billable hours chart to calculate hours, this tool is limited and does not directly track time. Legal practice management software is far more effective in tracking all of your time – and then automatically calculating that time for you. Because tracking is done as you go (and on the go), you won’t miss out on opportunities to bill. With just a single click, you can bill your clients for tasks and communications.

Wrapping it up

The billable hour is a critical part of most law firm’s ability to do business. Policies, training, and incentives are often created to improve the utilization of billable hours. It’s important that law firms devise effective strategies for getting the most out of their billable hours while helping both lawyers and their clients understand just how law firms bill.

Ready to see why so many law firms love Smokeball? Contact us to request your free demo today.

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