Agency operations glossary
Each term gets a direct definition, the formula where there is one, and a worked example with real agency numbers.
Billable hours vs non-billable hours
Billable hours are working hours spent on client deliverables that the agency can charge for under the terms of the engagement. Non-billable hours are all other paid working time, including internal meetings, admin, sales, training and internal marketing, and they are the cost the billable hours have to cover.
Blended rate
A blended rate is a single hourly rate charged for an engagement regardless of which team member does the work, calculated as a weighted average of the individual rates by expected hours. Agencies use it to quote retainers and projects without pricing each role separately.
Capacity planning
Capacity planning is the practice of comparing the hours an agency's team can deliver in a period with the hours its contracts commit it to, then deciding what to sell, hire or decline. It answers whether the agency can take the next retainer without missing deadlines or burning out the team.
Drawdown retainer
A drawdown retainer is a pre-paid balance that a client funds in advance and the agency draws down as hours are worked or deliverables are shipped, at agreed rates. It combines the advance payment of a traditional retainer with the pay-for-what-you-use logic of hourly billing, and it ends the month with a balance rather than an assumption.
Effective hourly rate
Effective hourly rate is the revenue an agency actually collects divided by the hours it actually worked to earn it. It is the realized rate, as opposed to the rate printed on the rate card, and it is the single clearest measure of whether a client, a project or a retainer is priced correctly.
Gross margin (agency)
Gross margin for an agency is fee revenue minus the direct cost of the people who delivered the work, expressed as a percentage of fee revenue. It measures how much of every dollar a client pays is left after paying the team, before rent, software, sales and management overhead.
Net margin
Net margin is the profit an agency keeps after paying all costs, including delivery labor, overhead, owner salaries and taxes, expressed as a percentage of fee revenue. It is the bottom-line measure of whether the agency works as a business rather than as a well-paid job for its founders.
Pass-through costs (media spend)
Pass-through costs are third-party expenses an agency pays on a client's behalf and bills back without earning them, such as ad spend, printing, influencer fees and software licenses. They flow through the agency's invoices and bank account but are not the agency's revenue, so they must be separated from fees before any margin is calculated.
Realization rate
Realization rate is the percentage of billable work, valued at standard rates, that an agency actually invoices to clients. It measures how much of the billable time recorded on timesheets turns into revenue after write-downs, fixed-fee caps and discounts.
Retainer burn rate
Retainer burn rate is the percentage of a retainer's scoped hours or fee value that has been consumed at a given point in the billing period. It tells the account team whether the engagement is on pace, running hot or being under-delivered before the month closes.
Retainer vs project vs hourly billing
Retainer, project and hourly billing are the three ways an agency converts work into invoices: a fixed recurring fee for ongoing service, a fixed price for a defined deliverable, or a rate multiplied by approved hours. Each model puts the risk of estimating wrong on a different party and changes how predictable revenue, margin and administration are.
Revenue recognition for retainers
Revenue recognition for retainers is the accounting rule that a retainer fee is earned evenly across the period the service covers, regardless of when the invoice is issued or paid. A retainer billed in advance sits as deferred revenue on the balance sheet and moves to the income statement as each month of service is delivered.
Scope creep
Scope creep is the gradual addition of work to a client engagement beyond what was agreed, without a corresponding change in fee, hours or deadline. In agencies it is the most common reason a retainer that was priced at a healthy margin ends the year unprofitable.
Servicing gap (over-servicing)
The servicing gap is the difference between the hours an agency delivers on an engagement and the hours the fee was priced to cover. A positive gap is over-servicing, where the agency gives away work; a negative gap is under-servicing, where the client pays for hours it does not receive.
Unbilled work (WIP)
Unbilled work, also called work in progress or WIP, is billable time and expenses that have been delivered to a client but not yet invoiced. It is revenue the agency has earned and is still waiting to bill, and it sits between the timesheet and the invoice.
Utilization rate
Utilization rate is the share of a person's available working hours that is spent on billable client work. It is the primary measure of how much of an agency's paid capacity turns into revenue.