Regardless of the scale of an organization’s contract hiring needs, a reputable staffing agency is a good way to find the best talent for open roles within the company. But before reaching out to either a workforce management partner or a staffing agency directly, it is important to understand how the pricing models work.
Organizations will want to take into consideration the two most prominent pricing models within the realm of contract workforce management, as well as the costs which these pricing models are built around.
There are generally three major cost considerations that staffing agencies must account for, and they are what comprise the final billing rate.
Sometimes called the “burden rate”, there are a number of taxes, insurance, and other costs required by law. These include state and federal unemployment tax, social security, Medicare, worker’s compensation insurance, and any further local mandates. Statutory costs often represent the second largest portion of the overall spend, after the contractor’s pay rate itself.
This is what the contract employee ultimately earns. Depending on the pricing model the staffing agency uses, client organizations may or may not have visibility into the contractor pay rate. More on that later.
Everything that is left over falls into this third bucket. The gross margin encompasses internal operating costs (including logistics, equipment, and support for the contract hire) and profit.
Different agencies will come up with different ways to address the overall costs of doing business, some of which may include project- or performance-based compensation models. However, there are two pricing models in particular that tend to be the most common, which we’ll call flat hourly billing rates and markup percentage over cost, and each has their own set of pros and cons.
Flat hourly billing rates are when agencies quote a specific billing rate for a given role. For example, “our engineers cost $100 per hour.” In this way all operational expenses are wrapped up neatly into a fixed price.
This pricing model benefits the consumer by way of simplicity and convenience. It’s a simple and easy way to package the agency’s rates, and it makes it much easier to shop around and compare with other agency pricing that follows the same model. More consistent and predictable pricing means clients have an easier time managing budgets.
The downside of this pricing model is the lack of transparency. Clients generally don’t have visibility into how costs break down, including what percentage the agency keeps as a markup versus how much the contractor actually takes home. Additionally, there is little to no control over the normalizing of candidate quality when applying a blanket pay rate across a wide breadth of experience and skill levels in candidates.
Under a markup percentage pricing model, clients provide guidance around the contract employee’s pay rate and the agency simply takes a markup percentage over that agreed upon amount.
This pricing model is much more transparent when compared to a flat hourly billing rate. Clients generally get a better understanding of cost and how much the contractor will ultimately earn. This in turn affords the client some measure of control and flexibility over the quality of the candidates it receives.
Markup rates can vary from agency to agency, along with how everything is packaged. This can make it challenging to gauge the value of other competing agencies, and often feels like an apples to oranges comparison. Also, the level of granularity isn’t something that everybody will want to budget time for, although there is a payoff of finding a more refined fit for the client organization’s open roles.
Whether to opt for a flat hourly billing rate or a markup percentage boils down to the client’s unique needs and preferences. Client organizations will need to consider the nuances of these two pricing models carefully in order to make the best decision for their own circumstances.
HireArt is a contract workforce operating system that lets companies source, employ, and manage top-performing contract workforces. We provide our clients with the tools and visibility needed to easily manage their contract workforce and staffing vendors in a single seamless, instantly-deployable platform.
To learn more or to schedule a discovery call, visit HireArt.com
