Here’s How To Set Your Contract Staffing Rates

Bigstock - setting ratesOne 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.

Multipliers (Mark-Up)

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.”

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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.

Recruiter Profit

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.

Photo courtesy of BigStockPhotos.com

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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33 Comments on “Here’s How To Set Your Contract Staffing Rates

  1. When discussing your rate with customers – never is “G & A” brought up. They assume your “profit” covers G & A. It is a term I have never even run into during contract negotiation.

    Using a 45.67 pay rate I would estimate the profit at closer to $22 than $13…..so this is quite a large “G and A” cost in this example. Are you including health insurance? Holiday pay? At most that may add a few more $/hr – bringing the profit nearer to 19 or 20/hr.

    Can you clarify what this cost is associated with?

  2. you should hire all employees as independent contractors (1099) part time so you do not have to pay health insurance, or all the other costs. Just general insurance, umbrella policy or bond & workers comp

    1. Yes, but it’s illegal when an employee meets the requirement of being an employee and not an indie contractor.

    2. Says a person with zero integrity or understanding of the value of the very individuals that are running your business and paying your bills.

  3. No smart contractor will never take a 1099.. that’s just stupid..
    Your being ripped off twice.. You don’t get unemployment insurance.
    you don’t get taxes taken care of. Your not funding your SSI.

    1099 makes your paycheck look bigger.. but in reality you’ll being ripped off.

    1. you’re not getting ripped off, you just have to plan for taxes and retirement yourself. I mean heaven forbid people actually handle their lives themselves. You are not getting ripped off twice, you have no clue what you are talking about.

      1. Let’s say you get a contracting rate of
        $50 1099
        $45 W2
        Which check is bigger? If you said 1099 at $50…. your wrong.
        ssi and other taxes have to be covered out of that $50..
        which makes your check..value $40 or less!!!

        Don’t be a sucker.

        1. Anyone with half a brain knows you need to save taxes back. A $45 w2 check is equal to a $60 1099.. anyone who works 1099 knows this.. or anyone who can do math

          1. But I can make $60 to $120 hr.. W2 and still get the agency to deal with my taxes…
            Remember contracting is not a real job…
            You don’t get any befits so make them pay for your time and effort. You get sick, get hurt, want to take a vacation it’s all on you out of your pocket.

          2. sir, you and your brother sound like real douche bags.

            otherwise thank you to all three of you for your input.

          3. Wow.. thanks for the insight dipshit. You don’t get screwed by working 1099. Pull your head out of your ass. Do the math before you accept 1099 contracts. Now continue trolling while you should be working douche

          4. You’re leaving out some really big items. First, if you think you report all 1099 income as salary, you need a new accountant RIGHT NOW. Second, retirement contribution tax law is vastly in favor of 1099. It’s not even in the same league as W2. Third, what’s a deductible expense on W2s is nothing close to 1099s. If you’re charging $120/hr, it’s not even close, you need to be 1099.

      2. 1099 relationship should only be used for freelance or project based work. If you are getting paid via 1099 AND work in their office/during their schedule (AKA under the payer’s control) then that relationship, regardless of any signed documents stating otherwise, is a employee relationship. Is is called worker miss-classification. The IRS can hold that payer liable for your FICO and SS tax (SS-8 Form: https://www.irs.gov/instructions/iss8/ch01.html )

        This miss-classification seems to be big with software, trucking, construction, cab drivers (ever see “the vehicle is leased to driver” notice on cabs) and Sales.

    2. You are wrong.
      You are assuming which is dangerous because it leads to bad advice.

      If a person has a fulltime position and doing freelance or part-time work on the side. A 1099 is much better because you are basically owning a business. This means your expenses are tax-write offs as long as it is for business purposes. In addition you are allowed the same tax breaks as small businesses. (pending).

    3. i would disagree. The savings I make by taking a 1099 is considerable, in tax savings alone, not to mention the benefit of any investments I make on the dollars i put away til tax day.

    4. It’s just a difference in personality types. Either option can be fine, but some prefer the control and some prefer their employer handling the costs and providing the services. You actually can make more and build a stronger business network going corp to corp, but I’ve also made great money W2. Six of one, half dozen if ur not trying to build something more than a job. 🙂

  4. No, I don’t think so. Divide the salary by 2080, and that’s the hourly pay?

    That’s completely wrong. Unless the temp is getting paid vacation, benefits, sick days, education time, times they are between jobs, etc etc., their hourly rate needs to account for the convenience the employer is getting by not providing that, because they’ll be paying for it themselves. That’s why a freelancer needs to figure on perhaps 180-200 working days per year, add in the cost of their benefits they have to pay themselves, then figure their hourly based on that. If you are trying to stiff someone by paying them hourly a full-time salary/2080, you are a creep and a leech.

  5. I just found out from the company I am contracted to that my agency is billing them for an hourly rate that I am not getting. The company was floored as much as I was to find out about this. Is this legal? I live in Metro Atlanta.

    1. legal? yes, very legal. The difference between the rate you’re charging and the agency is charging is the gross profit for the agency. Of course, they still have to add all the other costs, such as healthcare, computer, etc. That’s why they’re in business.

    2. yes its legal. Its not just bout extra money and profit. Temp agencies also cover, Medicare, Unemployment, Insurance and Injuries. So that is not something the company is not paying for that temp agencies take a gamble with. so with that being said after the billing rate the profit margin is rather low. If you don’t have many clients than business is slow and you end up going under.

  6. I have New York Base staffing company. My client has asked me to submit the bill rate. Can anyone help me on preparing it.

        1. Sorry to hear that.
          I’m starting a company and have a lot of Administrative Background.
          I’d think a letter head PDF with the catagorized list of the type of staff you offer with a sub break down of services, such as Administrative:
          Receptionist @ $30.00 p/h
          Book keeper @ $40.00 p/h
          Clerical @ $24.00 p/h
          for example would be sufficient. As long as you exhaust all categories in detail.

          1. Hi I am also starting a staffing company and have questions! How are you doing?

  7. More and more companies are finding that tech recruiters add little value and yet are expensive. If you’re in technology, try to e-mail someone directly at a company. By-pass recruiters and HR; they don’t understand what you do anyways.

  8. Can anyone give an real life example of a per diem split percentage calculation. I am guessing that it’s a calculation based on a days pay and the gov’t per diem rate per day. I have heard about a 55/45 split example but don’the know how it is determined, calculated or even what it really means. I can’t find any good answers. Please help.

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