“Wait – isn’t your profit simply the rate you charge companies 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 about 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).
For every dollar your employees earn, there are added costs to keep them employed. Sometimes called loaded labor costs or the labor burden rate, this includes both the direct and indirect costs employers incur for employing people.
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 actually cost an employer somewhere between $37,500 and $42,000 to employ.
Just like any employer, staffing companies incur indirect 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.
It’s important to keep in mind that a staffing agency’s geographic location, area of specialization, supply and demand for talent, and much more, affect real labor costs and the resulting bill rate. However, this example provides a solid benchmark to use when examining the amount of profit that a staffing agency makes on the bill rate that they charge.
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 the client. The employee’s hourly pay rate + the staffing agency’s mark-up = hourly bill rate.
Hourly Pay Rate: Rate paid to the 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. This is not the staffing agency’s profit. 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 the staffing company earns after all expenses are paid. This is calculated as follows: Staffing Bill Rate – Employee Pay Rate – Mandated, and Indirect Labor Costs = Profit
*last updated 6.4.2021
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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