All About Direct Costs, Mark-Ups and Service Fees for Staffing Agencies!

“You’ve got to be kidding… you are paying 'our' employee $20/hr. and billing us $32 – you must be rolling in dough!” How many times have we heard a customer share this "honest perception" of our business and wished it could be true? Yes, we'd like to set the record straight. But we'd also like to arm our readers with the facts about staffing agency bill rates so that when it comes to purchasing temporary or contract staff, you will know how to get the most out of your staffing dollar!  

The largest and most significant component of your staffing invoice are the costs associated with your staffing agency's employer requirements.

We have learned that unless you are an accountant or payroll specialist, most customers simply aren't aware of what it costs in today's regulatory environment to be an employer - let alone what it costs a staffing company to be "the employer" on their behalf. In the state of Washington, DIRECT (statutory mandated) COSTS represent anywhere from 65-85% of a staffing agency's bill rate! And important to note is that these are the same DIRECT COSTS you would be paying if you hired the employee directly, which leaves only 15-35% of the bill rate to cover the actual services provided - sourcing, recruiting and assigning the temporary or contract worker - a percentage very different than most customers assume their staffing agency pockets for service and profits. Are you with me so far?

About Staffing Agency Pricing Models

We think that part of the misconceptions related to agency bill rates is created by pricing models that skip over DIRECT COSTS and focus only on bill rate. In some areas of professional staffing, for example, it is considered impolite for customers to inquire about pay rate, creating the false perception that all agency pay plans, service packages, or profit targets are the same - which is almost never the case. While the upside of a “bill rate" pricing practice is its simplicity - one number making it easy to shop and compare - the  obvious downside stems from this same simplicity and lack of transparency. Buyers often have no idea what their bill rate pays for and take no control over normalizing employee quality or service standards. Bill rate only pricing practices are typically confined to "one off" purchasing scenarios where buying decisions are based more on a supplier/customer relationship than market competition. A more popular pricing practice, designed to increase bill rate transparency and normalize pricing practices, is what is called a mark-up over pay rate pricing model. In these pricing models, the customer either sets or provides guidance around employee pay rates and asks staffing agencies to compete for business by quoting the mark-up over pay rate they will use to calculate the bill rate. This pricing practice is not without rationale. Mark-ups vary substantially between agencies and when normalized can have significant impact on overall agency costs. For example, if an employer specifies a $20/hr. pay rate and Agency A quotes a mark-up of 40%, the bill rate is $28/hr. If Agency B quotes a 60% mark-up, the bill rate is $32/hr. Other service elements equal, a purchaser selecting Supplier A will save $4/hr. or 14%. Additionally, the mark-up over pay rate model is an internal pricing practice commonplace in the staffing industry so that the disclosures requested are not difficult to provide. The mark-up over pay rate pricing model is, however, not without resistance primarily because it fosters the mistaken belief that all agencies provide the same levels of service or will deliver the same quality of employee. Mark-up over pay rate pricing models tend to work against agencies with a strong quality focus, who simply stated, need a larger margin between pay and bill rates to afford the level of services delivered. These models also don't take into consideration statutory differences in DIRECT COSTS that vary based on employee category or local mandates. This pricing model also creates special challenges whenever marketplace competition drives down mark-ups, while the regulatory environment is driving up statutory mandated DIRECT COSTS. Employers simply expect their staffing agencies to eat these increases, which isn't always possible. In those scenarios, quality focused agencies will tend to leave the market, leaving only a sub performing supplier base for employers to choose between. We've seen situations where purchasers were requiring mark ups at rates below statutory mandated DIRECT COSTS, which basically sets up a scenario where only non-compliant vendors can afford to deliver service. In this context, we are watching closely the changes in the staffing marketplace that will kick in later this year in preparation for the 2015 employer mandate of the ACA which will require all staffing companies to provide ACA compliant healthcare insurance to eligible temporary and contract workers. This particular across the board increase in DIRECT COSTS will be at a level impossible for most staffing agencies to absorb. We predict unwelcomed but necessary increases in staffing bill rates - particularly for high volume, lower pay rate temporary and contract workers where current margins are already tightly squeezed. The reality is that all employers face the same regulatory based cost challenges. While DIRECT COSTS will vary based on location and employee type, all agencies and their customers drink from the same employer based regulatory pool and must find a way to deal with increased costs preferably, in our view, working together. At minimum, buyers of staffing services should be wary of bill rates or mark-ups too good to be true! (NOTE: Now would be a good time for employers to ask their staffing providers how they plan to become compliant with ACA requirements. A non-compliant staffing provider can create unexpected problems for their customers down the road!) A new and innovative pricing model that addresses all these issues is a model based on DIRECT COSTs. It is the preferred pricing model of the PACE Staffing Network, reflecting our full commitment to our vision of client-agency partnerships - a vision where we work together to solve staffing challenges! The key components of a DIRECT COST PRICING model are 1) full disclosure of DIRECT COSTS, and 2) clearly identified SERVICE needs. Similar to the Mark-Up Over Pay Rate pricing model, the DIRECT COST pricing model normalizes pay rates but quotes BILL RATES based on a mark-up over DIRECT COSTS, not pay rate. The difference between DIRECT COSTS and BILL RATE are fully disclosed as our SERVICE FEES, which we negotiate with each customer based on their real needs - not prepackaged assumptions! PACE customers pay for the services they need without paying for services they don't! By of example, the following outlines the DIRECT COSTS associated with an employee earning $20/hr. and assigned to work in an administrative or professional role (impacting their workers comp insurance rate):

Employee Pay Rate/Hr.	$20.00
FICA Tax	$1.24
Medicare Tax	$0.29
WSES (State Unemployment Tax)	$0.80
FES (Federal Unemployment Tax)	$0.12
Workers Compensation	$0.12
Seattle Sick and Safe Set Aside	$0.70
B and O Tax	$0.35
Prorated Background Check Costs	$0.08
TOTAL DIRECT COSTS	$23.70
(18.5% of pay rate)

Based on these DIRECT COSTS the bill rate is calculated as a mark-up over DIRECT COSTS. If, in the above example, the mark-up is set at 25%, the bill rate would be $29.63, which translates into a SERVICE FEE of $5.92/hr. or $236.80/week (assuming a 40 hour week). In the DIRECT COST PRICING model, when DIRECT COSTS change, bill rates change in fully rationalized ways. SERVICE FEES are lowered (or increased) based on service requirements. Bill rates are fully transparent with full disclosure of the fees actually pocketed by your staffing agency - taking the mystery out of your bill rate. If the upside of this pricing model is its transparency, the downside is the amount of information that is made available to purchasers who aren't always as interested in staffing math or employer costs as we are. At PACE, we see the importance of educating our clients who want to know more and simplifying our pricing conversations for those who don't. Some of our clients prefer to do their own calculations of direct costs so they can better decide if and when to hire directly; when to get work done by using a temporary or contract worker. They have the math to know which the lowest cost staffing option is. For our readers' reference, in 2014, the following represent the DIRECT COSTS faced by all Washington employers:           1. Government Mandated Costs:

• FICA Tax (calculated as 6.2% of all employee earnings up to $117,000 annual earnings)
• Medicare Tax (calculated as 1.45% of all employee earnings)
• State Unemployment (WSES) Tax (calculated as a percentage - 3-5% - of the employee’s earnings up to $41,300 depending on assessed risk by job type)
• Federal Unemployment (FES) Tax (calculated as .6% of the employee’s earnings up to $7000)
• Workers Compensation Insurance (calculated as a rate ranging from $.10 to $2.50/hr.)
• Local Mandated Benefits (ex. For employees working in the City of Seattle, employers are required to provide up to 9 paid days off. These costs are 3.5% of the employee’s hourly pay rate.)
• Business and Occupation Tax (calculated as 1.5% of the pay and tax components of the bill rate)

2. Client Mandated Costs: The costs paid by your staffing agency (on your behalf) to comply with your “fit for duty” or compliance requirements - background checks, drug screens, vaccination requirements, and in some cases on pre assignment training or orientations. These costs vary from client to client depending on their "fit for duty" requirements. We believe the DIRECT COST PRICING model is the most transparent and "easy to manage" pricing model in the staffing industry. It provides the right platform to have honest direct conversations about ways to reduce your staffing agency bill rate while protecting service and employee quality.   Right behind DIRECT COSTS, the second most important component of your bill rate includes the dollars dedicated to service delivery - the work your agency performs to source, recruit, retain, refer, and manage the employee(s) they assign to your workforce. In Part II of our Pricing Primer, we will present an outline of these service offerings, plus offer tips on how to get the most out of your staffing dollar by negotiating skillfully around your service needs.     If you are interested in learning more about the staffing industry's pricing practices including the DIRECT COST PRICING model used by the PACE Staffing Network, or simply want to benchmark your current bill rates against what might be available to your company in the staffing marketplace, I’d be happy to entertain your questions or concerns in a confidential conversation. On any matter related to staffing services or agency bill rates email me at jeannek@pacestaffing.com or call our InfoDesk at 425-637-3312. This article was written by Jeanne Knutzen, founder and CEO of the PACE Staffing Network.