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What is time tracking and how does it increase the margin of service business?
  •     •   9 min read

What is time tracking and how does it increase the margin of service business?

Ser­vice com­pa­nies in the ear­ly stages of devel­op­ment often oper­ate chaot­i­cal­ly and with­out prop­er resource con­trol. This typ­i­cal­ly man­i­fests in the absence of sys­tem­at­ic process­es and time track­ing. In this mate­r­i­al, we will explain how to imple­ment a sys­tem­at­ic approach to the oper­a­tions of a ser­vice busi­ness and resource account­ing from scratch using a fic­tion­al dig­i­tal agency as an example.

Ini­tial­ly, all the agen­cy’s work was dis­cussed in work chats. Client projects could lack a clear struc­ture. Coor­di­na­tion and mak­ing adjust­ments took a lot of time, and addi­tion­al changes from the client were not doc­u­ment­ed. Even­tu­al­ly, the own­er real­ized that a task track­er was nec­es­sary for the effi­cient oper­a­tion of the team, where all projects and tasks would be stored. There­fore, the com­pa­ny imple­ment­ed Work­sec­tion to cen­tral­ize work processes.

Ben­e­fits of Imple­ment­ing a Task Tracker

  • Stan­dard­iza­tion. The man­ag­er cre­ates and con­fig­ures stan­dard projects in the sys­tem once, which are then used lat­er and save time.
  • Data Cen­tral­iza­tion. No more need to con­stant­ly mon­i­tor the task sta­tus in team chats. All infor­ma­tion about the com­pa­ny’s work is stored in one place. It shows who did what and what they are cur­rent­ly work­ing on.
  • Trans­paren­cy in client inter­ac­tions. Involv­ing clients in projects increas­es their loy­al­ty and sim­pli­fies the approval process.
The tran­si­tion to a team task track­er solved the agen­cy’s prob­lem with work orga­ni­za­tion, but the issue of resource account­ing remained unresolved.

Why Time Track­ing is Necessary

1️⃣Pri­or­i­tiz­ing Clients

When you man­age client projects, dif­fer­ent clients require dif­fer­ent amounts of atten­tion and time — the main resource of the agency. Time track­ing helps to under­stand the actu­al num­ber of hours you invest in projects and helps eval­u­ate their profitability.

For exam­ple, Com­pa­ny A is the largest client of the dig­i­tal agency. How­ev­er, Com­pa­ny A also takes a lot of time for addi­tion­al revi­sions and micro­man­age­ment. As a result, instead of the 80 hours sold to the client, the team spends 120 hours on the project, but these addi­tion­al +40 hours remain undoc­u­ment­ed. Thus, even at first glance, a ​“prof­itable client” may actu­al­ly incur loss­es for the agency.

2️⃣Team Time Control

In ser­vice com­pa­nies, every hour of employ­ees’ work affects the prof­itabil­i­ty of the busi­ness. After all, 70 – 80% of expens­es are salaries of the team.

While there is a con­stant influx of clients, espe­cial­ly with sub­scrip­tions and reg­u­lar pay­ments, low project mar­gins may not be obvi­ous. How­ev­er, when orders decrease, for exam­ple, due to a slow­down in mar­ket­ing or sales, prob­lems become appar­ent. Employ­ee pay­ments remain sta­ble, while new income is insuf­fi­cient to cov­er losses.

Aware­ness of the Need for Time Tracking

Under­stand­ing how much time and on what the team spends allows for more effi­cient resource allo­ca­tion. This helps cal­cu­late the cor­rect inter­nal rate, and by adding the tar­get mar­gin, sell the agen­cy’s time on favor­able terms.

Time track­ing also answers the fol­low­ing questions:

  1. How much time can the team allo­cate to client projects each month? This effec­tive­ly means what ​“time bank” the com­pa­ny has.
  2. How much time does the team actu­al­ly spend on client projects? To ver­i­fy the align­ment of actu­al fig­ures with those indi­cat­ed in client invoices.
  3. What is the cost per hour of the com­pa­ny’s work? To find out the inter­nal rate that takes into account all agency expens­es and allows oper­at­ing at breakeven.
Thus, time track­ing helps to make the project port­fo­liotrans­par­ent and man­age­able. This way, you under­stand which projects con­sume more resources than they bring in mon­ey. The gath­ered data allows chang­ing the strat­e­gy, jus­ti­fy­ing price increas­es, and refus­ing unfa­vor­able partnerships.

Chal­lenges of Imple­ment­ing Time Tracking


1️⃣ Not all busi­ness­es actu­al­ly need time tracking

First­ly, not all busi­ness­es require time track­ing. The neces­si­ty depends on the type of com­pa­ny. For exam­ple, in cre­ative agen­cies, the busi­ness own­er is more con­cerned with solv­ing the client’s prob­lems than how much time it takes.

How­ev­er, in legal firms, the sit­u­a­tion is dif­fer­ent. When a com­pa­ny has 30 lawyers with an hourly rate of $200, it is impor­tant to under­stand how their time is dis­trib­uted and on which projects it is spent, isn’t it? In this case, typ­i­cal tasks require detailed hour track­ing for bet­ter plan­ning, per­for­mance eval­u­a­tion, and cost optimization.

2️⃣Team Resistance

Imple­ment­ing time track­ing can pro­voke neg­a­tive reac­tions in the team. Man­age­ment under­stands the val­ue of such track­ing, but when it comes to imple­men­ta­tion, team resis­tance is inevitable. Some work­ers may per­ceive it as a form of addi­tion­al con­trol, while oth­ers may see it as unnec­es­sary bureaucracy.

3️⃣Dif­fi­cul­ties of Man­u­al Data Entry

Time track­ing typ­i­cal­ly begins with timesheets in Excel. This means that employ­ees have to work in one pro­gram while man­u­al­ly updat­ing data about spent hours in anoth­er. This approach com­pli­cates an already chal­leng­ing process of imple­ment­ing hourly tracking.

4️⃣Lack of a Respon­si­ble Per­son for Implementation

With­out a respon­si­ble per­son for the imple­men­ta­tion process, the inte­gra­tion quick­ly spi­rals out of con­trol. With­in a week, many start enter­ing hours from mem­o­ry every Fri­day. This reduces accu­ra­cy and over­all track­ing effec­tive­ness. There­fore, ensure that there is some­one who will mon­i­tor adher­ence to the new rules, con­stant­ly mon­i­tor, and report results.

How to Suc­cess­ful­ly Imple­ment Time Tracking


1️⃣ Set Clear Rules and Ensure Communication

Imple­ment­ing time track­ing requires polit­i­cal will from man­age­ment. First, explain the goals of time track­ing to the team. Empha­size that it is aimed at increas­ing project effi­cien­cy, not con­trol­ling the team.

Cre­ate a clear plan with rules for all team mem­bers. For exam­ple, define which types of tasks need to be tracked and how to do it using the cho­sen tool. Pro­vide reg­u­lar feed­back and share infor­ma­tion with the team about the suc­cess of the implementation.

2️⃣Assign a Respon­si­ble Per­son for Implementation

There should be some­one respon­si­ble for imple­ment­ing time track­ing. Their duties should include remind­ing the team about time track­ing and reg­u­lar­ly mon­i­tor­ing the tracked time accord­ing to the plan.

3️⃣Min­i­mize Unnec­es­sary Actions

Time track­ing should occur with­in the same tool where the team logs tasks. Avoid switch­ing between tools so as not to com­pli­cate the process unnecessarily.

Con­sid­er project man­age­ment ser­vices with an inte­grat­ed time track­er, such as Work­sec­tion. Work­sec­tion has a built-in timer that lets you eas­i­ly start track­ing time. If you use oth­er prod­ucts like Asana, Jira, or Trel­lo, you need to set up inte­gra­tions or plu­g­ins like Time­Doc­tor or Hourly.

4️⃣Revise the Moti­va­tion System

To keep the team inter­est­ed in accu­rate­ly report­ing work­ing hours, it’s worth tran­si­tion­ing from man­dat­ed hour entry (PUSH) to incen­tives (PULL), cre­at­ing a moti­va­tion sys­tem. This can be achieved by tying rate pay­ments to worked hours.

In the ser­vice busi­ness, the indus­try stan­dard is to track 120 hours out of 160 work­ing hours in a month.

The moti­va­tion sys­tem may look like this: 

An employ­ee who com­pletes the norm of 120 hours receives the full rate. For few­er hours, the income decreas­es, and for over­time work, such as 130 hours, a small bonus is pro­vid­ed. The bonus should be mod­er­ate, and the penal­ty for under­per­for­mance should be sig­nif­i­cant.

This is nec­es­sary so that the employ­ee meets the norm but does not over­work and burn out.

5️⃣Build a Habit and Inte­grate Gradually

It is impor­tant to imple­ment the new tool grad­u­al­ly. For the first month, set a rel­a­tive­ly sim­ple goal — to track at least 60 hours out of 120, giv­ing the team time to adapt. The per­son respon­si­ble for imple­men­ta­tion should check hour entries dai­ly for the first weeks.

Ben­e­fits of Imple­ment­ing Time Tracking

Imple­ment­ing time track­ing helps to assess work effi­cien­cy and increase busi­ness profitability:


  1. Accu­rate Cost Eval­u­a­tion of Ser­vices. Data about spent time allow for accu­rate cal­cu­la­tions of ser­vice costs.
  2. Cor­rect Rate for Clients. Thanks to time track­ing, the com­pa­ny can set hourly rates for clients more accurately.
  3. Choos­ing Prof­itable Projects. The gath­ered data helps eval­u­ate which projects bring more prof­it and choose the most advan­ta­geous ones.
  4. Sup­port­ing Team Pro­duc­tiv­i­ty. Time track­ing pre­vents over­load, allow­ing for even dis­tri­b­u­tion of tasks and avoid­ing burnout.
  5. Increas­ing Mar­gin. By ana­lyz­ing time costs and over­heads, resources can be opti­mized and mar­gin increased.

How Prop­er Account­ing Increas­es Margin

Time account­ing helps bet­ter man­age projects and increas­es the agen­cy’s mar­gin. When a busi­ness knows how much time it spends on tasks, it can accu­rate­ly price ser­vices and jus­ti­fy them to clients when necessary.

For exam­ple, if an SMM spe­cial­ist spends more time on exe­cut­ing a project than expect­ed, the com­pa­ny can explain to the client the rea­sons based on the actu­al num­ber of hours worked.

How to Increase the Prof­it Mar­gin of a Ser­vice Busi­ness — watch on YouTube 🎥

Cal­cu­lat­ing Inter­nal and Exter­nal Rates

For the cor­rect cal­cu­la­tion of the rate, it is nec­es­sary to dis­tin­guish between two types of work­ing hours: 
  • Bill­able Hours — time spent work­ing on a client project for which you receive payment.
  • Non-bill­able Hours — inter­nal meet­ings, train­ing, admin­is­tra­tive work that does not direct­ly gen­er­ate profit.

It’s bill­able hours that are the source of prof­it for the com­pa­ny. There­fore, when cal­cu­lat­ing the inter­nal rate, it’s cru­cial to know their exact number. 

  • Inter­nal Rate — is the cost of one hour of agency work con­sid­er­ing employ­ee salaries and overheads.

Over­heads include indi­rect costs such as rent, util­i­ties, mar­ket­ing, admin­is­tra­tive salaries, oper­a­tional expens­es, etc. In sim­ple terms, if your elec­tric­i­ty is turned off and the gen­er­a­tor is out of fuel, you can esti­mate how much the hour of down­time costs your company.


The result­ing inter­nal rate shows how much an hour of work costs the agency. In oth­er words, at this rate, the agency will oper­ate at breakeven.

  • Exter­nal Rate — is the rate that the agency charges the client. It is cal­cu­lat­ed based on the inter­nal rate con­sid­er­ing the desired margin.

Typ­i­cal Mis­takes in Cal­cu­lat­ing the Com­pa­ny’s Exter­nal Rate

Mis­take 1 Not all costs are account­ed for in overheads

Some­times not all expens­es are tak­en into account in over­heads. For­get­ting about soft­ware invoic­es, mar­ket­ing bud­gets, or pay­ments for main­te­nance leads to under­stat­ed over­heads, which in turn decrease both inter­nal and exter­nal rates.

As a result, it seems that you can sell your ser­vices at a low­er price than com­peti­tors with­out los­ing margin. 

Mis­take 2 Not under­stand­ing the actu­al num­ber of bill­able hours

It is impor­tant for the busi­ness to accu­rate­ly cal­cu­late not only over­heads but also to know how many hours the team actu­al­ly spends on client projects. Only after this can the exter­nal rate be cal­cu­lat­ed and invoic­es sent to clients. 

Incor­rect Cal­cu­la­tion of the Exter­nal Rate

Using the exam­ple of a dig­i­tal agency own­er, we will show the con­se­quences of cal­cu­lat­ing the exter­nal rate with­out con­sid­er­ing actu­al hours. This is mere­ly a hypo­thet­i­cal exam­ple. It’s impor­tant to under­stand that data will vary from com­pa­ny to company.

Sup­pose, the own­er assumes that the team of 5 employ­ees works the stan­dard 160 hours per month. The total of salaries and over­heads is $10,000, and the total num­ber of hours is 800 (5 peo­ple × 160 hours = 800 hours). With these fig­ures, we obtain:


How­ev­er, the own­er lacks infor­ma­tion about the actu­al time bank—the num­ber of hours spent on work. Thus, this fig­ure is sig­nif­i­cant­ly low­er than the true inter­nal rate.

For exam­ple, the agency imple­ment­ed time track­ing with a tar­get of 120 tracked hours per month (both bill­able and non-bill­able). This is the indus­try stan­dard to main­tain effi­cien­cy while avoid­ing team burnout from exces­sive pres­sure. As a result, it turned out that the team actu­al­ly spends only 100 hours a month on client projects.

So, the total num­ber of bill­able hours is 500 (5 peo­ple × 100 hours = 500 hours). Only bill­able hours are impor­tant for cal­cu­lat­ing the inter­nal rate, as they gen­er­ate income for the com­pa­ny. Thus, the actu­al inter­nal rate will be:


There­fore, using the incor­rect­ly cal­cu­lat­ed fig­ure of $12.5 instead of the actu­al $20, with a desired mar­gin of 30%, the agency sets a low exter­nal rate.


As you can see, such a rate will not cov­er all the com­pa­ny’s expens­es in our exam­ple, and the busi­ness oper­ates at a loss. There­fore, the dig­i­tal agency need­ed to start record­ing both bill­able and non-bill­able hours to prof­it from the projects implemented.

Depend­ing on your cal­cu­la­tions, the com­pa­ny may oper­ate at breakeven, have low mar­gins, or be unprof­itable alto­geth­er. All indi­ca­tors are indi­vid­ual. Prop­er cal­cu­la­tion of the inter­nal rate allows assess­ing the prof­itabil­i­ty of projects and tak­ing actions to opti­mize them. 

Work­sec­tion — A Com­pass for Increas­ing Profitability

Imple­ment­ing hourly track­ing is chal­leng­ing, but com­pa­nies that take this step gain sig­nif­i­cant­ly more con­trol over their busi­ness. Work­sec­tion is an effec­tive tool for such tasks as it allows to stan­dard­ize work and accu­mu­late data on time spent.

This helps to bet­ter under­stand team pro­duc­tiv­i­ty, eval­u­ate which clients bring prof­it and which do not, and move towards prof­itabil­i­ty and growth.

Fur­ther in the link, using the exam­ple of a dig­i­tal agency, we will show how to set up effec­tive time track­ing in Work­sec­tion and avoid com­mon mistakes.

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