Understanding Your STAFFING AGENCY Invoice – Bill Rates. Pricing Models.

Understanding Your STAFFING AGENCY Invoice – Bill Rates. Pricing Models.

by Jeanne Knutzen | July 14, 2015

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“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….plus arm our readers with the facts about your staffing agency invoice so that when it comes time to purchase temporary or contract staffing services, you will know how to get the most out of your staffing dollar!

 

The Direct Costs that Make Up Your Staffing Agency Bill Rate

To better understand how your staffing agency arrives at their bill rates, we need to start with the largest and most significant component of your staffing invoice – the costs associated with being an employer.  These costs include not only the employee’s pay but also a wide range of mandated costs that all employers pay – you included.   I’m talking about payroll taxes – FUTA, SUTA, Worker’s Comp, and of course the Federal FICA tax which also includes the Medicare tax – but also the costs of mandated benefits (like the new Statewide Sick and Safe benefit, the costs of ACA mandated healthcare insurance).  There are also costs you require your staffing agency to incur just get their employee “fit for duty” in your work environment – the costs of conducting criminal background checks, drug tests, or other pre assignment training requirements.).

The DIRECT COSTS associated with the employer role can represent anywhere from 65-85% of a staffing agency’s bill rate, and are the same costs you would be paying if you hired the employee directly rather than asking your temporary staffing agency to employee them on your behalf.  The reality is that only 20-30% of the bill rate you pay a temporary staffing service goes to the services they provide – the sourcing, recruiting, placement and employee related administrative costs.   What’s left for the agency’s profits is a very different number than most customers assume and often depends on the pricing model your staffing agency uses.

To learn more about staffing agency bill rates you need to know more about the typical pricing models used by most temporary staffing companies.  

The Bill Rate Based Pricing Model

Some of the mis-perceptions about agency bill rates are created by pricing models that don’t include disclosures of either employee pay or other direct costs, and focus only on the agency’s bill rate.  In many areas of professional staffing, for example, it is considered impolite for customers to inquire about their contractor’s pay rate, creating the false perception that all agency pay plans, service packages, or profit targets are the same – which is never the case.

While a “bill rate” pricing model makes it easy to compare agency rates, it is a pricing model rarely used in volume purchasing scenarios where both quality and price matter.  Staffing agencies using a fixed bill rate pricing model and faced with increases in their Direct Costs, will often lower employee pay rates as a way to maintain profit targets.  Ultimately this practice impacts the quality of the employee they can deliver.  Most bill rate based pricing models are used in “one off” purchasing scenarios where buying decisions are based more on a supplier/customer relationship NOT market competition.

The Mark Up Over Pay Rate Pricing Model

 A pricing model that has better control over employee quality is a mark-up over pay rate pricing model. In this model the customer either sets or provides guidance around employee pay (ensuring employee quality), and asks their staffing agencies to quote their price in the form of a mark-up over pay rate.

This pricing practice is rich in business rationale. When both mark ups and pay rates can be normalized, an employer can directly control agency fees.  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%.  Purchasers of high volume staffing, will set both pay and mark up rates, requiring suppliers to work within bill rate boundaries.

The mark-up over pay rate pricing model is, however, not without its challenges – largely because it creates the perception that agency services can be purchased as a commodity   It is a model that clearly works against agencies who are asking for a higher markups BECAUSE they are delivering more/better service or higher quality employees than their lower mark up competitors.

And when employers “normalize” markups across multiple cities or states, quality agencies are often excluded from competing for this business given the sometimes significant differences in DIRECT COSTS depending on what city or state you are working in.

In the city of Seattle, for example, the costs of providing Seattle Sick and Safe benefits, is 3.5% of the employees pay rate, a cost not incurred in other areas of Washington.  Statewide, Washington has a 1.5% revenue tax on staffing services, which is not applied to any other State in the US.  These are mandated costs, creating challenges for Seattle or Washington based staffing agencies dealing with clients unaware of these additional cost mandates.

The mark up over pay rate pricing model also has issues whenever the competition for high volume business drives down mark ups while the regulatory environment drives up DIRECT COSTS. Employers anxious to get the “best deal possible” often expect their staffing agencies to eat these cost increases, impacting who is left to compete for that business.   We’ve seen situations where purchasers unaware of the real DIRECT COSTS, were requiring mark ups at rates that actually fell below what we knew would cover the mandated costs,  inviting a scenario where only “illegal” suppliers could afford to compete for the business.

 The Mark Up Over Direct Costs Pricing Model 

A more innovative approach to pricing temporary staffing agency services that we think addresses all these issues is a pricing model built around DIRECT COSTS.  It is the preferred pricing model of the PACE Staffing Network, reflecting our full commitment to work with our clients in partnered fully transparent ways.

Similar to the Mark-Up over Pay Rate pricing model, DIRECT COST pricing normalizes PAY RATES but calculates BILL RATES as a mark-up over DIRECT COSTS, not pay rate. The difference between DIRECT COSTS and the BILL RATE are what we consider our SERVICE FEES, which can be negotiated with each customer based on their real needs – not prepackaged assumptions!  At PACE, our customers pay for the services they need without paying for services they don’t!

By way 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) in the city of Seattle, State of Washington:

 

Employee Pay Rate/Hr. $20.00
FICA Tax (calculated as 6.2% of all employee earnings up to $117,000 annual earnings) $1.24
Medicare Tax (calculated as 1.45% of all earnings, without cap) $0.29
SUTA (State Unemployment Tax) (calculated as 3-5% of the employee’s earnings up to $41,300 annually…depending on the employer’s experience rating) $0.80
FUTA (Federal Unemployment Tax) calculated as .6% of the employee’s earnings up to $7000 $0.12
Workers Compensation Insurance (calculated as a per hour rate ranging from $.10 to $2.50/hr. depending on workplace risk) $0.12
Seattle Sick and Safe Set Aside (9 days of paid time off calculated as 3.5% of employees hourly pay rate) $0.70
B and O Tax (calculated as 1.5% of the employee’s pay and taxes) $0.35
Typical “Fit for Duty” Costs (bkgrd or drug screens) $0.08
TOTAL DIRECT COSTS $23.70

 

Based on these DIRECT COSTS the bill rate is calculated as a mark-up over DIRECT COSTS.  For example, if the DIRECT COSTS MARK UP is 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) to cover the costs of the services we provide in recruiting, screening and evaluating the candidate we deliver to this client. .

In the DIRECT COST PRICING model, when DIRECT COSTS change, bill rates are adjusted.  SERVICE FEES can be lowered (or increased) based on changes in service requirements. Bill rates are fully transparent, taking all the mystery out of your staffing invoice.

If the upside of this pricing model is its transparency, the downside is the amount of information that we make transparent to purchasers.  Not all purchasers are as interested in staffing math as we are.  We make the case that DIRECT COST pricing practices provides the right platform for staffing agencies and their customers to have honest direct conversations about ways to hold down agency bill rates, while protecting service and employee quality.  It also educates our customers on when a temporary or contract worker is the most cost effective staffing solution – and when they aren’t.

This article was written by Jeanne Knutzen, Founder and CEO of the PACE Staffing Network.  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 if you simply want to benchmark your current bill rates against what might be available to your company in a competitive staffing marketplace, Jeanne would be happy to entertain your questions or concerns in a confidential conversation. You can contact her at jeannek@pacestaffing.com or by calling the PSN info desk at 425-637-3312.

 

Jeanne Knutzen

 

 


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