One of the most common questions we hear from recruiters is, “How do I know what to bill a company when they want a contractor?” And we’ve heard this question a lot during the past couple of months from direct hire recruiters who are working on their first contract job order.
The best strategy is to first ask the company to provide a range of hourly bill rates when you are taking the contract job order. The logic behind this strategy ties directly to the experience, education, skill set and availability of the candidate/contractor. The largest single component of the bill rate is how much you are going to have to pay the contractor on an hourly basis. Once you work through the process and have come up with the proposed bill rate to offer the company, you will know you are in the ballpark if you have the range.
Essentially, the hourly bill rate to a company includes the following:
Hourly Pay Rate + Tax Burden + G&A (Back-Office) + Recruiter Share = Hourly Bill Rate
Contractor Pay Rate
Since the starting point is really based on what you have to pay the contractor, it is easy for a recruiter to come up with an hourly pay rate, and then use an average multiplier as a guideline for the hourly bill rate to the company. (We will talk about multipliers in a minute.)
If you are working with an experienced contractor, he/she can often tell you what they want to earn per hour, and you can determine if that is reasonable based on their education, experience, skill set, etc.
If the candidate is relatively new to contract staffing, there is a quick way to come up with an hourly pay rate. Simply take their desired (or previous) annual salary and divide it by 2,080, which is the number of working hours per year. This will give you a starting point for the hourly pay rate.
For example: $95,000/year divided by 2,080/hours = $45.67/hr.
Keep in mind there are a couple of things that can have an impact on the hourly pay rate. For example:
- Length of the assignment: Shorter contract periods can increase the rate.
- Time between assignments: If the contractor is currently unemployed, the pay rate is more negotiable.
- Location compared to home: If the work location is close to home, the rate is more negotiable.
- Status of the company: If it is a great company, the candidate may be willing to take a lower rate to get their foot in the door.
- Opportunity to travel: If a contractor has a desire to travel, and per diem is included, the rate is more negotiable.
- Skill set: If a contractor’s skill set is in high demand, the contractor can push for a higher hourly pay rate.
Once you have an hourly pay rate for the contractor, you can use an average multiplier to calculate the hourly bill rate for the company. The location of the contract assignment can affect what multiplier you use. If you are placing someone in New York the multiplier would be higher than Michigan. Multipliers usually range between 1.5 and 1.8, but they can go much higher for healthcare professionals and hard-to-fill positions.
Our tracking shows that the current average multiplier for technical and professional contract staffing throughout the United States is 1.60. For the past 10 years it has ranged from an average of 1.51 to 1.67. (Excluding healthcare contract placements.)
Note: The multiplier is defined as the quotient of the company bill rate divided by the employee pay rate. A simple example of a 1.5 multiplier would be a scenario where the bill rate is $60 per hour and the pay rate is $40 per hour. The common term for multiplier is also “mark-up.”
Company Bill Rate
Once you have the multiplier, simply multiply it by the contractor’s pay rate to determine the bill rate to the company. For example:
$45.67/hr pay rate x 1.60 = $73.07/hr bill rate
The goal is to get the bill rate as high as you can and the pay rate as low as you can. Then you have the greatest margin between the two, and that translates directly to more recruiter profit. Top Echelon Contracting actually provides each recruiter with a customized “quote” to make the negotiation process easier. The quote has a matrix which includes $20 Bill Rate Spread and a $10 Pay Rate Spread, and at each point of the matrix the recruiter profit is documented.
Tax Burden & G&A
Please remember that there is a tax burden for every W-2 employee. State and federal taxes, workers compensation, benefits, etc., come out of the margin. (The margin is the difference between the bill rate and pay rate.) These costs vary by state and job classification.
Additionally the G&A is the general and administrative costs that are normally handled by the back-office. These costs traditionally cover the legal, financial, and administrative duties tied to contract employees.
In the example above, if you had a programmer who was working in Ohio for a $45.67/hr pay rate and the bill rate was $73.07/hr, the recruiter profit after the tax burden and G&A would be $13.23 per hour. If you calculate that out for an average nine month assignment, that would be $20,599 for one contractor; someone you could place again on another assignment.
There is definitely money in contract staffing, and once you learn the basics of rate negotiations, you’ve got the hardest part of contract staffing handled. You already know how to find candidates to match job orders. So the rest is easy.