Contract Staffing Bill Rates . . . Simplified!
By DEBBIE FLEDDERJOHANN, President of Top Echelon Contracting
When placing a contractor, one of the most important things to do is to determine the rate that will be charged to your client, commonly known as the hourly bill rate. Here’s what goes into the hourly bill rate:
Hourly Pay Rate + Tax Burden + G&A (Back-Office) + Recruiter Share =
Hourly Bill Rate
This tends to be one of the most confusing aspects of the contract placement process for many recruiters. But it actually can be quite simple when you break it down into three easy steps.
- Get a bill rate range. If you can get your client to give you a range of rates they will accept, you will know if you are on track as you work through the rest of this process.
- Determine contractor pay rate. The amount the contractor will be paid on an hourly basis (aka pay rate) is the largest single component of the bill rate, so that is a logical place to start. So how do you go about determining that? Well, if you have an experienced contractor, they can probably tell you what they want to make per hour. You can then adjust that based on their education, experience, skill set, etc. If they have not previously contracted, simply determine how much someone in a similar position would make annually on a salary basis. If the position is in your main niche, you may already know this. If not, you can look at the candidate’s current or previous salaries or get information from websites such as the Bureau of Labor Statistics or www.salary.com. Once you have the salary, convert it to an hourly pay rate by dividing it by 2,080 (the average number of working hours per year). You may then need to adjust it further based on a number of factors:
- Assignment length—If it is a short-term contract, the pay rate may need to be increased to attract quality candidates.
- Conversion potential—You can keep the pay rate closer to a direct salary if the position is likely to convert to direct.
- Benefits—If quality benefits (health, dental, vision, and life insurance, 401k, etc.) will be offered, the pay rate can be lower.
- Period of unemployment—The longer the gap in employment, the lower the pay rate may be.
- Apply a multiplier (mark-up). Once the hourly pay rate has been established, you can apply an average multiplier to arrive at the company’s bill rate. Traditionally, the average multiplier has been between 1.51 and 1.67. This past March, it was at 1.60. But you must look beyond the average because a number of factors can affect the multiplier. Location is a big one. The multiplier is going to be much higher for New York City than in Canton, Ohio. You can also use a higher multiplier for hard-to-find and in-demand positions, such as healthcare. Once you have selected a mark-up, 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.
- 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. Therefore, there is a tax burden for those contractors. That tax burden includes state and federal taxes, Workers’ Compensation, etc. The burden varies by state and job classification.
- G&A (General and Administrative)—These are the costs assumed by the firm or back-office tied to the legal, financial, and administrative duties associated with contract placements.
- Recruiter income—What remains of the margin after the tax burden and G&A is your profit. Obviously, a wider margin between the contractor pay rate and the company bill rate translates into more profit for you. Top Echelon Contracting’s customized quote makes the negotiation process easier because it includes a matrix that provides an $11 pay rate spread and a $20 bill rate spread. As you negotiate different pay and bill rates, you can see how it will affect your recruiter income.
Contract staffing can be very lucrative, so don’t let bill rates scare you away. Assuming you are outsourcing the back-office tasks, the hardest part of contracting is finding candidates and matching them to job orders, and you already know how to do that.
And with this simple, three-step process, you can also calculate bill rates quickly and easily!
(Editor’s note: This article is for informational purposes only. It should NOT be construed as legal or tax advice.)