“Wait – isn’t your profit simply what you charge the client minus the employee’s pay rate?”
There are many misconceptions about how staffing agencies make their money and what goes into a bill rate – but this one is probably the most common. To be clear, what goes into a bill rate is not a secret (really!) but it’s not winning any awards for simplicity either.
In fact, much of the confusion around bill rates has to do with the somewhat complex, often overlooked, and emphatically dry topic of calculating the real cost of labor (just try bringing it up to anyone outside of HR and see what happens).
Sometimes called “loaded” labor costs, these are the true costs of employees – beyond the hourly rate or salary you pay them.
Beyond Salary: Calculating the Actual Cost of Labor
Senior Lecturer at MIT, Joe Hadzima, uses a fairly simple formula to calculate the actual cost of an employee. According to Hadzima, once you have taken into consideration basic salary, taxes and benefits, the real costs of your employees are typically in the 1.25 to 1.4 times base salary range. In other words, an employee earning $30,000 will cost you somewhere between $37,500 and $42,000.
Just like any employer, staffing companies incur labor costs to employ their temporary employees – including federal and state taxes, insurance and benefits, payroll administration, overhead costs and more.
The Nationwide Average Net Profit for Staffing Agencies
The American Staffing Association recently put together a fact sheet using information from their Staffing Operations Benchmarking Survey to clarify staffing bill rates and the resulting profit. They found that on an hourly rate of $17, a staffing company would need to charge a minimum bill rate of $25.76 to cover operating expenses and legally mandated labor costs and achieve the industry’s national average net profit rate of 3.3% (or $0.85 per hour in this example).
Keep in mind that a staffing agency’s geographic location, area of specialization, supply/demand of talent, and more affect real labor costs and the resulting bill rate. However, if your agency adds a mark-up of about 52% to the employee pay rate, you can expect that their net profit is around 3% of that mark-up.
Average net profit and G&A percentages are from the ASA Staffing Operations Benchmarking Survey.
© 2019 American Staffing Association.
Some Common Billing Terms Defined
Don’t speak staffing? That’s okay! Below are some commonly used billing terms, including those used in the example above, and their definitions:
Hourly Bill Rate: Rate charged to client. The employee’s hourly pay rate + the staffing agency’s mark-up = hourly bill rate.
Hourly Pay Rate: Rate paid to staffing employee
Legally Mandated Labor Costs:
- FICA (7.65%): Social Security (6.20%) and Medicare (1.45%)
- FUTA (0.60%): Federal Unemployment Tax Act (varies by state—minimum used, including maximum potential credits)
- SUTA (4.00%): State Unemployment Tax Act (varies by state)
- WC (1.99%): Workers’ compensation (varies by work type and state)
Mark-up: The percent that a staffing company charges on top of the employee’s pay rate. The mark-up percent includes all labor costs and the staffing agency’s service charge.
G&A: General and administrative expenses (18.70%) for operating and overhead costs such as corporate employee payroll, taxes, and benefits; rent; equipment; and advertising and marketing
Net Profit: What is left for the staffing company after all expenses
More Resources for Calculating Labor Costs
So, there you have it! The real scoop on what goes into a staffing bill rate. For more information on calculating labor costs check out this article on How to Calculate the True Cost of Employees by Beebole or this Labor Cost Calculator by Tsheets.
Or, contact us directly at 952-920-9119. We are more than happy to answer any of your questions about billing (or anything else)!
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