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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All About the Direct Costs and Service Fees Built Into Your Staffing Agency Bill Rate! 

“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?  And we know your staffing agency bill rate matters to your budgets…or at least it should! .

Yes, we’d like to set the record straight, but more importantly we’d 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 legal responsibilities as an employer.

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.  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 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 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 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, service packages, or profit targets are the same – which is almost never the case.

While the upside of using  “bill rate only” pricing practice is its simplicity – making it easy to shop and compare – the  downside of this model stems from the lack of transparency created by this simplicity.

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 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 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, who 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.

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 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 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!

Another more innovative pricing model that addresses all these issues is a model based on a MARK up over 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!  It requires  1) full disclosure of DIRECT COSTS, and 2) clearly identified SERVICE needs.   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!

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)

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 or contract worker. 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.

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, our Partner Services and Solutions team would be happy to entertain your questions or concerns in a confidential conversation.  Call us at 425-637-3312 or e mail us at partnerservices@pacestaffing.com.

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PACE Staffing Network is one of the Puget Sound’s premier staffing /recruiting agencies and has been helping Northwest employers find and hire employees based on the “right fit” for over 40 years.

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 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 partnering with PACE will make a difference to how you find and hire employees,  contact us at 425-637-3312 or e mail our Partner Services and Solutions  team  at partnerservices@pacestaffing.com.


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