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The Components of Business Deals
Bill rate is the rate a company pays to a staffing agency for the services of a temporary worker. There are several components of pricing to take into account when figuring out your bill rate.
Gross Margin – The amount of money a staffing firm gets to keep after paying the temporary workers’ payroll, benefits, payroll, and other statutory expenses. Gross profit margin dollars are used to pay internal overhead costs and the owner’s profit.
Burden Rate or Statutory Expenses – Taxes, insurance, and other charges required by law. For staffing firms, it includes:
Federal Unemployment Tax (FUTA) – Unemployment taxes paid to the Federal government. The FUTA rate is 9.0% with a wage base of $7000, and employers can take a credit of up to 4.2% of taxable income if they pay state unemployment taxes. If you qualify for the highest credit, then the minimum FUTA rate is .6%.
Social Security and Medicare Tax Rate (FICA) – A single flat fee/ rate to all employers of 6.2% for social security and 1.45% for Medicare tax. This is capped at a salary of $187,700 for Social Security for each employee in 2022. There is no cap on Medicare tax.
State Unemployment Insurance Tax (SUTA) – Rates and taxable wage limits vary significantly from state to state. And Worker’s Compensation Insurance.
Worker’s Compensation Insurance – An insurance policy that covers work-related injury and illness. Workers comp insurance rates vary by skill type, vendor, and state.
Markup – A percentage charged by the staffing firm on top of the pay rate. Markups can include various factors; statutory expenses, overhead and operating costs, and profit. Operating expenses can cover rent, equipment, recruiting fees, commissions, and more.
Pay Rate – The pay rate is the direct pay given to the worker and makes up the majority of the bill rate.
Profit Margin – A measure of profitability is calculated by taking net profit (revenue-cost) and dividing it by revenue.
What Is The Average Markup?
The average staffing agency markup for temporary employees or independent contractors can range anywhere between 20 – 75%. Permanent placement markups are typically 10 – 20% of the employee’s gross annual salary.
Calculating A Profitable Scenario
Let’s say you have an administrative assistant on assignment who has a pay rate of $15. Assume your burden rate is 12%. Assume your mark-up is 50%. The formulas you need are as follows:
Bill Rate = Pay rate * (1+Mark-up)
Direct Cost of Labor = Pay rate * (1+Burden rate)
Gross profit margin = Bill Rate – Direct Cost of Labor
Now let’s put the numbers into the formulas.
What is your Bill Rate? – $15 * (1+.5) = $22.50
What is your Direct Cost of Labor? – $15 * (1+.12) = $16.80
What is your Gross Margin? – $22.50 – $16.80 = $5.70 per hour
The $5.70 hourly gross margin is what you have as a staffing company to cover your overhead and your net profit.
How does mark-up affect gross margin?
Let’s take the same example and calculate using a 30% markup rather than 50%.
$15 * (1+.3) = $19.50
Your direct cost of labor stays the same: $15 * (1+.12) = $16.80.
What is your new gross margin?
Changing your markup from 50% to 30% has a significant impact on your gross margin. ($2.70/hr compared to $5.70/hr)
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