3 EASY Steps to Determining Contract Bill Rates

One of the biggest stumbling blocks that keeps recruiters from pursuing contract placement opportunities is confusion over determining the rates, particularly the hourly bill rate that is charged to the client company. But once recruiters understand the formula, establishing bill rates can be quite simple.

First, let's look at what makes up the hourly bill rate:

Hourly Pay Rate + Tax Burden + G&A (Back-Office) + Recruiter Share =
Hourly Bill Rate

Determining bill rates can be made easier by following a simple three-step process:

  1. Establish a bill rate range. Asking the client for a range of bill rates that they will accept helps you as you work through the rest of the process because you will know if you are in the ballpark.
  2. Determine contractor pay rate. What the contractor will be paid on an hourly basis is the largest single component of the bill rate so it is a logical place to start when actually calculating a proposed bill rate. There are multiple methods for determining the pay rate. If you are trying to place an experienced contractor, they can likely tell you what they want to make per hour. You can then determine whether that is reasonable based on their education, experience, skill set, etc. For new contract candidates, you can determine how much someone in a similar position would make annually on a salary basis. You can draw from own experience in the niche, the candidate's current or previous salaries, or from research (try sites such as the Bureau of Labor Statistics or www.salary.com).  Then you will want to convert the annual salary to an hourly pay rate by dividing it by 2,080 (the average number of working hours per year). There are a number of factors aside from education, experience, and skills that could adjust that hourly pay rate upward or downward:
    • Assignment length - Higher pay rates are normally necessary for short-term contracts to attract quality candidates.
    • Conversion potential - The pay rate can be closer to a direct salary if the position is likely to convert to direct.
    • Benefits - Quality benefits (health, dental, vision, and life insurance, 401k, etc.) can justify a lower pay rate.
    • Unemployed period - The longer a candidate was unemployed, the lower the pay rate may be.
  3. Apply a multiplier (mark-up). Now that you have an hourly pay rate, you can apply an average multiplier to calculate the company's bill rate.  Traditionally, the average multiplier has been between 1.51 and 1.67. It was at 1.60 for March 2014. A number of factors can affect that average, though. For example, some locations, such as New York City, call for a higher multiplier. It may also be higher for hard-to-find and in-demand positions, such as healthcare.  Once you have selected a mark-up, simply multiply it by the pay rate to get the proposed bill rate.  EXAMPLE: $45.67/hr pay rate x 1.60 = $73.07/hr bill rate

The margin between the pay rate and the bill rate covers the tax burden, G&A, and the recruiter share. Here is a breakdown of these three factors:

  • Tax Burden - Contractors are usually W-2 employees of the recruiting/staffing firm or of a contract staffing back-office utilized by the firm.  When a worker is paid on W-2, there is a tax burden that includes state and federal taxes, Workers' Compensation, etc.  The burden varies by state and job classification.
  • G&A (General and Administrative) - This refers to the costs assumed by the firm or back-office tied to the legal, financial, and administrative duties associated with contract placements.
  • Recruiter profit  - The remainder of the margin after the tax burden and G&A is recruiter profit. Therefore, the wider the margin between the contractor pay rate and the company bill rate, the more profit there will be.  

Contract staffing can be very lucrative for recruiters.  Since you already know how to recruit candidates, once you learn the basics of rate negotiations, the rest is easy!

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.

Views: 1210


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