One of the most confusing aspects of contract staffing for some recruiters is determining the rates, particularly the bill rate that they will charge to the client company. But determining contract bill rates is not as difficult as recruiters may think. In fact, once you understand the formula, it can be quite simple.
First, let’s look at what makes up the hourly bill rate:
Hourly Pay Rate + Tax Burden + G&A (Back-Office) + Recruiter Share =
Hourly Bill Rate
Many recruiters find the easiest way to determine the bill rate is to follow a simple three-step process:
- Get a bill rate range from the client. If you have a range, you will know if you are in the ballpark as you work through the rest of this process.
- Determine contractor pay rate. The largest single component of the bill rate is what the contractor will be paid on an hourly basis (aka pay rate). Therefore, the pay rate is a logical starting point when it comes to actually calculating a proposed bill rate. There are a few ways to figure out what the pay rate should be. An experienced contractor can often tell you what they want to make per hour, and you can determine whether that is reasonable based on their education, experience, skill set, etc. If they are new to contracting, figure out how much someone in a similar position would make annually on a salary basis. This could be from your own experience in the niche, the candidate’s current or previous salaries, or from research (try sites such as the Bureau of Labor Statistics or www.salary.com). Once you have the salary, you will want to convert it to an hourly pay rate by dividing it by 2,080 (the average number of working hours per year). Keep in mind there are a number of things aside from education, experience, and skills that can affect the hourly pay rate:
- Assignment length – Short-term contracts generally demand higher pay rates to attract quality candidates.
- Conversion potential - The pay rate can also be closer to a direct salary if the position is likely to convert to direct.
- Benefits – They pay rate can be lower if quality benefits (health, dental, vision, and life insurance, 401k, etc.) are available.
- How long the worker was unemployed – A longer unemployed period generally translates into a lower pay rate.
- Apply a multiplier (mark-up). Once you have the hourly pay rate, you can use an average multiplier to calculate the company’s bill rate. The average multiplier has traditionally been between 1.51 and 1.67 and was at 1.60 for March 2014. But there are a number of factors that can affect the multiplier. Location is a good example. The multiplier is much higher for New York City than a city in a state such as Michigan. Hard-to-find positions and in-demand positions, such as healthcare, also draw a higher multiplier. Once you have determined the mark-up, you simply multiply it by the pay rate to come up with the proposed bill rate. EXAMPLE: $45.67/hr pay rate x 1.60 = $73.07/hr bill rate
The margin between the pay rate and the bill rate covers the tax burden, G&A, and the recruiter share. Let’s take a closer look at these three factors:
- Tax Burden – Contractors are generally placed as W-2 employees of the recruiting/staffing firm or of a contract staffing back-office utilized by the firm. There is a tax burden for every W-2 employee that includes state and federal taxes, Workers’ Compensation, etc. These costs vary by state and job classification.
- G&A - This stands for General and Administrative costs assumed by the firm or back-office. The costs are tied to the legal, financial, and administrative duties associated with contract placements.
- Recruiter profit – The remainder of the margin after the tax burden and G&A is recruiter profit. Obviously, the wider the margin between the contractor pay rate and the company bill rate, the more profit there will be. Top Echelon Contracting actually provides a customized Quote to each recruiter to make the negotiation process easier. The Quote includes a matrix that provides an $11 pay rate spread and a $20 bill rate spread. At each point in the matrix, you can see how much your recruiter income will be.
There is definitely money in contract staffing, and once you learn the basics of rate negotiations, you’ve got the hardest part handled. You already know how to find candidates and match them to job orders, so the rest is easy!