Components of Contract Staffing

Direct (perm) placement recruiters are in a great position to make a lot of money and meet all their clients’ needs by incorporating contract staffing into their business model. One major reason for this is that during the past 10+ years, companies have changed their staffing philosophy dramatically. Companies are now supplementing their “core” staff with contractors. Reports state that between 70% and 80% of companies use contractors.

Lifelong employment at a single company has become a thing of the past. An employee doesn’t spend 30+ years at one company anymore and fade off into retirement with a new gold watch. In fact, many analysts believe that people working at several companies is no longer a résumé “red flag.” They think such a varied career is beneficial be-cause the employees actually have broader knowledge and more skill sets. Many employees become contractors because of this ability to learn more things by working at more companies.

Where Are the Opportunities?

Almost all areas of staffing are using contractors. Contract staffing is not just for the old-time information technology “job shoppers” or “independents.” Here is a breakdown of placement disciplines for contract opportunities in 2006:

– 30% – Healthcare
– 20% – Information Technology
– 14% – Engineering
– 13% – Business Professionals
– 8% – Accounting & Finance
– 6% – Legal, HR & Recruiting

Recent survey results show that companies of all sizes use contract staffing. It’s not just for the extremes – large companies or small companies.

– 33.3% – Large companies
– 28.6% – Medium-sized companies
– 33.3% – Small-sized companies
– 4.8% – Unsure of size

How Does the Money Work?

Direct (perm) placement recruiting can often be a roller coaster ride, with many ups and downs in cash flow. But contract staffing is completely different. Contract staffing provides a steady cash flow because contractors get paid for every hour that they work; as a result, so do you (the recruiter). In addition, most clients pay invoices on a weekly basis, which means that’s how often the recruiter should receive his/her share of the recruiter income (profit) on each invoice.

Don Fredrick of Executech, Inc., in Ann Arbor, Michigan, will tell you that contract staffing is very easy and profitable. For his very first contract placement, he placed a software engineer at his client for a 10-month assignment. During those 10 months, Don earned $20,275.16. That equals a steady income of $2,027.52 per month. Everyone would sleep better knowing that kind of money was coming in each month, regardless of how many direct (perm) placements they made.

Ideally, you will have at least a handful of contractors on the job. The money you make by having several contractors adds up nicely. For example, if you have 10 contractors working on assignments, and you are earning an average of $7.51 per hour for each one, that’s $75.10 per hour of recruiter income/ profit. If those contractors continued working for nine months (1,560 hours), that’s $117,156 that you would be putting in your pocket, not including overtime.

Many recruiters experience the same type of consistent cash flow that Don Fredrick did when he made his first contract placement. Add a couple more con-tract placements into the mix, and the checks will continue to arrive on a steady basis. Plus, look at the flexibility that contract staffing offers a recruiter. Want to take a day off work and not even look at your telephone? Go right ahead, play golf, go to the movies, take a trip – the contractors you placed will continue to make money for you.

What Are the Average Markups and Percentages?

In the majority of cases, the bill rate is determined by a multiplier (or markup). Recruiters typically use the multiplier as a guide for marking up the pay rate. Top Echelon Contracting has been tracking multipliers for technical and professional contract placements throughout the United States for 12 years. A markup of 1.51 has been the lowest yearly average, and 1.67 has been the highest yearly average. The current average multiplier is 1.60.

The multiplier is the bill rate divided by the pay rate. Here is an example using the average multiplier of 1.60. Take an engineer earning $95,000 per year and divide $95,000 by 2,080 work hours per year. That equals an hourly pay rate of $45.67. Take that $45.67 per hour and multiply it by the 1.60 multiplier and you get $73.07. Thus, the hourly bill rate would be $73.07.

Based on the above example, if the contractor was an engineer working in Ohio, the recruiter share would be $13.86 per hour for every regular hour the contractor works and $20.97 for overtime hours.

How Does a Direct (Perm) Recruiter Get Started in Contract Staffing?

That is probably the number one question. The answer can be broken down into four simple components, and as a recruiter, you are already familiar with three of the four components.

1. Recruiting
2. “Back Office”
3. Clients
4. Candidates

1. Recruiting Component

The first step is to realize that you are good at being a recruiter, so it doesn’t matter if you are recruiting for a direct (perm) hire or a contract placement. The basic fundamentals are the same. You are good at finding candidates, dealing with those candidates, selling to clients, and negotiating with everybody.

2. “Back Office” Component

The second step is to find a contract staffing service provider (“back office”) to handle all of the administrative, financial, and legal tasks or decide that you want to handle the “back office” tasks yourself. The “back office” provider should become the legal employer of the candidate and handle some specific tasks, including things like new-hire employment paperwork, benefits, 401(k), general liability coverage, legal contracts, timesheets, invoicing, payroll processing, bond-ing, day-to-day administrative functions, etc. Also, the con-tractor needs a W-2 at the end of the year. The only exception to issuing a W-2 would be the small percentage of contractors who meet the strict IRS guidelines for 1099 independent contractor classification. To help determine if your candidate/contractor meets the requirements, you can go to www.IRS.gov and look up Form SS-8, titled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”

– How are the financial issues handled? If you use a con-tract staffing service provider for your “back office” tasks, they should handle all of the financial issues, including payroll funding and processing, federal and state taxes, workers’ compensation, unemployment taxes, invoicing, and collections. They should also handle expenses and per diem if the contractors qualify for these perks under IRS guidelines. Recruiters who decide to be their own “back office” will have to address these things and probably get a line of credit to fund the weekly payroll.

– What about background checks? Another critical step is conducting a background check on a contract candidate once an offer has been extended. Client companies are increasingly insisting that candidates have a complete background check, and quite often a drug screening. Most “back offices” can provide this service, or a recruiter could set up an account with a national background-screening provider if they decide not to outsource the “back office” tasks.

3. Client Component

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The next logical step is to tell all of your existing clients that you can provide them with contractors. You don’t have to build a whole new client base to tap into this new, steady cash flow. The chances are very good that you can start doing contract searches with the same client companies you are working with right now. Statistics show that 90% of contract opportunities come from the same clients as direct (perm) placement opportunities.

– Why do client companies use contractors? Here are some of the advantages:
– Staffing flexibility for projects/deadlines
– Immediate skill set avail-ability
– “Try before they buy”
– Minimize employer (client) liability
– Minimize in-house training
– Eliminate pre-hire costs
– Control budget constraints or hiring freezes
– Avoid negative press tied to layoffs

4. Candidate Component

In conjunction with telling your clients about contract staffing, you should also ask every candidate with whom you speak this question: “Are you willing to work on a contract assignment?” You or your contract staffing service provider (“back office”) should have the ability to offer contractors a wide range of benefits, including health insurance, which is critical in today’s society.

– Why would a candidate work on a contract? Here are just some of the advantages that candidates find with contract staffing:

– Potential for higher earnings
– Flexibility in lifestyle
– Increase their technical and professional knowledge
– Opportunity to travel
– Evaluate a specific company or get their foot in the door
– Control their own career path

– How do you find candidates who are interested in con-tract staffing? It is not hard to do. Actually, you go about it the same way as finding direct (perm) candidates. Here are some common ways to find contract staffing candidates:

– Asking every candidate
– Referrals from other contractors
– Advertising on your own website
– Retirees from the same or similar company

Want Some Advice from Another Direct (Perm) Recruiter?

A blended business model with contract, direct (perm), and temp-to-perm placements is the best way to meet your clients’ staffing needs. It’s also a great way to have money coming in from all directions. In 2006, Philip Bartfield of Bartfield Search, Inc., in Princeton, New Jersey, earned $92,432 in contract staffing through Top Echelon Contracting, as well as $93,499 in split placements.

According to Mark Demaree, president of Top Echelon® Network, Inc., “In 2006, 60% of the overall top-producing net-work recruiters incorporated contract staffing into their business model. In addition to that, the highest award winner for the top-producing agency for more than 10 years has always been a recruiting agency that incorporated contract staffing into their business model.”

Bartfield, an information technology recruiter who also makes direct (non-split) placements, is a strong believer in providing your clients with whatever they need – including contract candidates. He says that you don’t want to miss out on showing a client what you can do by helping them fill any kind of placement. If you can’t help them, they will move on to your competitor. Clients also won’t want to work with you when you call later to see if they have any direct (perm) openings. It comes down to this: If you weren’t able to meet their needs when they first contacted you about placing a contractor, what makes you think they’ll give you a chance now on a direct (perm) position?

“Why would you pass up a chance to make money and win points with your clients? I’ve always felt that if a client has a requirement, it doesn’t really matter whether they need a permanent employee or whether they need a contractor. The process isn’t significantly different, so I’ve promoted an ability to do both,” Bartfield says. “Sometimes I’m working on a permanent position and then something will change and the client will say, ‘At this point, we’ve made the decision to bring this person on board as a contractor. Can you help us with that?’ Contracting usually comes up as a possibility. I’ve been more than happy to service my clients’ requirements, whether it’s permanent placements or contracting.”

How Can You Learn More About Contract Staffing?
Since you are already familiar with the recruiting, client, and candidate components, you may want to spend an hour or two reading about contract staffing and researching “back office” options. Top Echelon Contracting has developed a FREE Contract Training Kit that explains how a direct (perm) placement recruiter can incorporate contract staffing into their business model.

The kit is available at www.TopEchelonContracting.com/recruiters/trainingkit.aspx.

Contract staffing can definitely help direct (perm) recruiters increase their business. It’s a great way for recruiters to meet all of their clients’ needs while boosting their own bottom line. Contractors enjoy their lifestyle flexibility, the opportunity to learn new skills, etc. Contract staffing is a win-win-win situation for all three sides – recruiters, clients, and con-tractors!

Debbie Fledderjohann is president of Top Echelon® Contracting, Inc., a contract staffing service provider founded in 1992 and headquartered in Canton, Ohio. Top Echelon Contracting helps recruiters with contract staffing and handles all of the legal, financial, and administrative details associated with contract staffing. They become the employer and handle the employee paperwork, legal contracts, timesheet collection, payroll processing, payroll fund-ing, tax withholding, benefits, workers’ compensation coverage, invoicing, collections, background checks, etc. Since 1992, Top Echelon Contracting has paid out more than $34.5 million in recruiter profit.

Debbie Fledderjohann is president of Top Echelon Contracting, Inc., the recruiter's back-office solution. The company was founded in 1992 and places technical, professional and healthcare contractors in 49 states. Top Echelon Contracting helps recruiters make contract placements and handles all of the legal, financial, and administrative details. They also become the legal employer and take care of the employee paperwork, legal contracts, time sheet collection, payroll processing, payroll funding, tax withholding, benefits, workers compensation coverage, invoicing, collections, background checks, etc.

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