Taking the Mystery Out of Staffing Agency Bill Rates!

Taking the Mystery Out of Staffing Agency Bill Rates!

by Jeanne Knutzen | May 29, 2020

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how much do staffing agencies charge

How Much Do Staffing Agencies Charge?

A quick guide to help you understand the direct costs and service fees built into the staffing agency bill rate for your business.

Have you ever felt like calling up your staffing agency and saying, “You’ve got to be kidding me… you are paying ‘our’ employee $20/hr. and billing us $32 – you must be rolling in dough!” 

We’ve heard customers share this “honest perception” of our staffing agency countless times, so it’s time to set the record straight on our staffing agency bill rate. But more importantly, we’d like to arm your business 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 agency dollar!

This blog post will reveal the different fees recruitment agencies charge and will introduce you to two of the most popular pricing models used by staffing companies. Finally, we’ll explain the pricing method our staffing company uses and show how it helps employees, companies, and temp agencies flourish together.

Staffing Agency Fees Explained

The largest and most significant components in your staffing invoice are the costs associated with your staffing agency’s legal responsibilities as an employer, not hiring process fees and staffing salary.

Unless your business has an accountant or payroll experts on hand, most recruitment agency customers simply aren’t aware of what it costs in today’s regulatory environment to be an employer – let alone what it costs staffing agencies to be “the employer” on their behalf.  The Pacific area, which includes Washington state, has one of the highest mandatory benefits costs of anywhere in the US.  

In the state of Washington, DIRECT (statutory mandated) COSTS represent anywhere from 65-85% of a staffing agency’s bill rate!

These mandatory benefits include workers compensation, Social Security, Medicare, and unemployment insurance (both state and federal).

These are the same 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 job seekers (temporary or contract workers).

As you can see, given that 65-85% of staffing agency fees are from mandatory benefits like workers compensation and only 15-35% of fees go towards hiring temporary staffing, staffing agencies don’t make nearly as much as it seems.

Are you with me so far?

About Staffing Agency Pricing Models

We think that part of the misconceptions related to staffing agency bill rates is created when agencies use pricing models that 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, per hour rates, service packages, or profit targets are the same – which is almost never the case.

Pros & Cons of Bill Rate Only Pricing

While the upside of using  “bill rate only” pricing practice is its simplicity – making it easy to shop and compare different staffing agencies – the downside of this model is that it can cause confusion for companies due to its 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.

Pros & Cons of Mark-Up Over Pay Rate Pricing

A more popular pricing practice used by staffing agencies, designed to increase bill rate transparency and normalize staffing agency fees, is what is called a mark-up over pay rate pricing model.

In a markup pricing model, the customer either sets or provides guidance around the employee’s pay rate and asks their staffing agency to quote them a mark up over that pay rate. 

This pricing practice is not without rationale. Mark-ups vary substantially between agencies and when normalized can have a 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%.

The mark-up over pay rate model is an internal pricing practice commonplace in the staffing industry but unfortunately 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, that, simply stated, need a larger margin between pay and bill rates to afford the level of services delivered. Mark up pricing models also don’t take into consideration statutory differences in DIRECT COSTS that vary based on employee category or local mandates. While it may seem like these staffing agencies make more than those offering lower fees, the high-cost of maintaining a superior level of service means that their profit margins are comparable to staffing agencies charging less for temporary employees or direct hire.

The mark up pricing model creates special challenges whenever marketplace competition drives down mark-ups, while the regulatory environment is driving up statutory mandated DIRECT COSTS such as the new mandatory healthcare and paid time off and family leave benefit programs for job seekers that have hit Washington employers hard over the last decade.

When employers require their staffing agencies to eat mandatory increases in direct costs, quality focused agencies will 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.

The reality is that all employers, staffing firms and your company included, face the same regulatory-based cost challenges.

While DIRECT COSTS will vary based on location and employee type (e.g. direct hire, temporary employees, and other kinds of job seekers) 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 a minimum, buyers of staffing agency services should be wary of bill rates or mark-ups that seem too good to be true! Because given the severe cost of mandatory benefits, a temp agency or staffing firm that is charging a lower than average fee is likely delivering this price by reducing the hiring standards and quality of their staffing agency service.

PACE Staffing Network’s Innovative Pricing Model

Another more innovative pricing model that addresses all the issues listed above is a model based on a MARK up over DIRECT COSTS.   

It is the preferred pricing model of the PACE Staffing Network, reflecting our staffing agency’s full commitment to our vision of client-staffing agency partnerships – a vision where we work together to solve staffing challenges! 

Our staffing agency pricing model requires:

1) Full disclosure of DIRECT COSTS

2) Clearly identified SERVICE needs

This means that pay rates are normalized, but Mark Ups are quoted over DIRECT COSTS, not pay rate.  The difference between DIRECT COSTS and BILL RATE are the SERVICE FEES, which are negotiated with each customer based on their real needs – not prepackaged assumptions!

This means PACE customers pay for the services they need without paying for services they don’t!

For example, the following pay rate estimate outlines the DIRECT COSTS associated with a job seeker 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)

The bill rate is calculated as a mark-up over DIRECT COSTS.  For example, if 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 paid to the staffing agency for the services they perform – 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 job seeker, contract worker, or direct hire. They have the math to know which the lowest cost staffing option is.

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.

Learn More About the Pricing Models Used by Staffing Agencies in the PNW

If you are interested in learning more about staffing agency 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 the staffing marketplace, our Partner Services and Solutions team would be happy to answer your questions or concerns in a confidential conversation. 

Call us at 425-637-3312 or email us at partnerservices@pacestaffing.com.

We believe that pricing transparency is crucial to building trust between our staffing firm and your business, so take pride in explaining our pricing model and helping customers build a pricing package based on the real needs of your business.

A Staffing Agency That Works for the Buyer & Job Seeker

PACE Staffing Network is one of the Puget Sound’s premier recruitment/staffing agencies and has been helping Northwest employers find and hire employees based on the “right fit” for over 40 years. As your staffing firm, we go above and beyond to find qualified candidates for your business.

A 4-time winner of the coveted “Best in Staffing” designation, PACE is ranked in the top 2% of staffing agencies nationwide based on annual surveys of customer satisfaction.

PACE’s staffing services include temporary and contract staffing, temp to hire auditions, direct hire professional recruiting services, Employer of Record (payroll) services, and a large menu of candidate assessment services our clients can purchase a la carte.

To learn more about how using a staffing agency and partnering with PACE will make a positive difference to how you find and hire employees, contact us at 425-637-3312 or email our Partner Services and Solutions team at partnerservices@pacestaffing.com.

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