Price for Nonbillable Time and Overhead

Nonbillable time and overhead affect a service business in different ways. Nonbillable time reduces the hours available to sell; overhead consumes money that revenue must cover. Adding both to a rate model can be appropriate, but only when the same cost is not included twice. Start with an annual capacity schedule and an annual expense budget, then identify how owner labor or compensation is represented in each.

Build the annual recovery requirement

Assume a hypothetical solo business plans $72,000 of annual owner compensation before personal taxes and $18,000 of business cash overhead. The revenue requirement for this limited coverage model is $90,000, before any additional profit target. Of 1,800 planned working hours, 600 are reserved for sales, administration, training, and internal maintenance. That leaves 1,200 hours available to bill. The coverage rate is $90,000 divided by 1,200, or $75 per billable hour.

Identify the overhead portion

Spreading the $18,000 cash overhead over 1,200 billable hours assigns $15 overhead recovery to each billed hour. The remaining $60 per billed hour funds the $72,000 compensation target. Dividing the full $90,000 by all 1,800 working hours would give $50, but billing only 1,200 hours at that price produces $60,000. The $30,000 shortfall results from using hours that cannot all be sold as the pricing denominator.

Avoid charging owner time twice

In this example, the annual compensation target already covers the owner across both billable and nonbillable work. Adding another 600 hours of owner administration at an arbitrary wage to the numerator would double-count compensation unless the model is deliberately changing its scope. By contrast, paying an external bookkeeper is an additional cash expense if it is not already in the $18,000 overhead. Show that expense explicitly and adjust the time forecast separately.

Evaluate delegation with both sides visible

Suppose outsourcing an administrative task costs $3,000 annually and releases 100 hours. If 60 of those hours can actually be sold, billable capacity rises to 1,260 hours and the requirement rises to $93,000. The revised coverage rate is about $73.81. This is a conditional model, not a promise of savings. If no released hours are sold, the same outsourcing increases the required rate to $77.50 on the original 1,200 billable hours.

Use the model to plan a sustainable workload

Track recurring nonbillable commitments and distinguish work that supports future demand from avoidable rework. Review software, workspace, professional services, and equipment assumptions in the expense budget without inventing market averages. If billable hours fall to zero, a required hourly recovery rate has no finite value. A mathematically sufficient rate may still be commercially unacceptable, so pair the calculation with an explicit sales and scope plan rather than treating it as evidence that clients will purchase the capacity.

Method references: OpenStax: break-even and contribution analysis; SBA: manage your business finances. Accessed October 22, 2026. All dollar figures are hypothetical worked examples.