You had better be billable. Commissions and markups have largely disappeared from the agency revenue mix. That leaves fees, billable hours, and increasingly, value-based and flat-fee arrangements as the primary sources of agency income. Regardless of which model your agency uses, the underlying discipline is the same: know your costs, protect your margins, and make sure every hour of work the agency produces is accounted for and priced correctly.
For agencies still billing by the hour, or using time tracking to inform flat-fee estimates, internalizing and acting on the following information should dramatically improve your agency's profits this year and beyond.
The 1600-Hour Standard
Most agency people should bill at least 1600 hours per year, or 80 percent of a 2,000-hour year. That number reflects the potential billable hours remaining after deducting vacations and holidays. A few agency positions are exempt from this general rule: controllers, payroll staff, traffic managers, and receptionists, among others. Even those roles should look for every opportunity to bill hours to clients where possible. Where direct billing is not possible, make sure those salaries are counted as part of overhead when calculating hourly rates.
A note on time tracking: some agencies have moved away from daily time sheets in favor of flat-fee or value-based billing. That can work well for agencies with mature estimating discipline and strong client trust. The guidance in this article applies to those agencies too. Even if you are not billing by the hour, knowing how long things actually take is the only reliable foundation for pricing flat fees accurately and protecting margins over time. The tool may change. The discipline does not.
Hourly Rates Matter
Every hour billed needs to be profitable to the agency. The calculation for figuring hourly rates is straightforward:
(Person's Salary) divided by (Number of Billable Hours, i.e., 1600) times Overhead Factor
The overhead factor is calculated by taking all overhead expenses, excluding direct billable salaries, and multiplying them by the profit margin the agency is targeting for the year. Move the decimal point one place to the right, round off the number, and you have your agency's overhead factor. Second Wind's financial resources include detailed guidance on calculating both hourly rates and overhead factors correctly.
Pro Bono Has Limits
Pro bono work is worthwhile. It also has a cost. Set sensible limits: no more than five percent of total time worked, which works out to no more than 100 hours per year per person. One effective approach is to choose one meaningful agency-wide pro bono project per year and devote all those hours to that single client. Spreading pro bono time across multiple organizations makes it harder to track, harder to limit, and harder to explain when it starts affecting margins.
Discipline in the Details
Require that people submit their time on a daily basis. Building this discipline into the workflow keeps agency records accurate and up to date. Very few people remember exactly what they worked on a week ago. Daily time entry solves that problem before it starts.
Issue purchase orders against all outside vendor purchases and pre-price every one of them. No blank checks for vendors. This keeps records clean and projections accurate. After receiving vendor invoices, match them against the pre-priced purchase orders. Question any invoice that comes in more than ten percent above the pre-priced amount.
Require that all miscellaneous expense vouchers are submitted immediately, with receipts attached. Meals, tolls, and other out-of-pocket expenses should be posted to the job without delay. Unbilled receipts discovered after an invoice has already gone to the client are money left on the table.
The Payoff
Simply by following these practices consistently, an agency could be up to 30 percent more profitable at year-end. That kind of improvement does not require a new business win or a rate increase. It requires discipline applied to the work already being done.
