Director of National Sales at Lone Oak Payroll and TempWorks Software, Claudette Dunlap, provides insight into best practices on how to set bill rates to maximize profitability.*

There is no “one size fits all” formula when it comes to marking up bill rates for services. Different locations and industries have different expectations of healthy margins for profitability. The staffing industry is no different. Furthermore, each market sector within the staffing industry, whether it’s light industrial, clerical, medical, or executive, has distinct markers for what bill rates should be set at to make sure your staffing agency is making a profit. Additionally, there’s a fine line when it comes to marking up bill rates to remain competitive but still get the return that you need to maintain strong operational margins.

So how do you assess the “correct” bill rate at your staffing agency? In order to determine this, let’s first discuss the basics of what is covered in the bill rates you are quoting. Obviously, you must pay your employee first. Second, you have a burden rate which includes your statutory expenses, such as taxes, insurance and other charges required by law. These include Federal Unemployment Tax (FUTA), State Unemployment Insurance Tax (SUTA), Social Security and Medicare and workers’ compensation insurance. Given these costs, your mark-up rate will typically be anywhere between 1.45 and 1.75 for a profitable business depending on the size of the order. From this mark-up, you can assess your gross margin, which is used to pay overhead expenses and determine bottom-line profit.

To help you keep track of gross margin and profitability, here is a simplified formula that you can use to assess whether your bill rate is set at an appropriate amount.

Example with 60% Mark-Up: 

• Burden rate (i.e. statutory expenses): 12%
• Typical Pay Rate on Clerical Assignment: $14.00 per hour
• Mark-up (typically between 45-75%): 60%

Formula:

Let’s take another example so you can see how the mark-up affects your gross margin. In our next example, we will use a 20% mark-up.

Example with 20% Mark-Up: 

• Burden rate (i.e. statutory expenses): 12%
• Typical Pay Rate on Clerical Assignment: $14.00 per hour
• Mark-up (typically between 45-75%): 20%

Formula:

Since your costs remain the same, your gross margin depends on making sure that your mark-up is set at an appropriate amount. This amount can vary significantly based on the size of the order. For example, your markup may be lower in order to staff a high-volume contract. While there may be a lower margin per worker, you’re able to recoup expenses based on the head count. Otherwise, it is generally advised to stay in the 45 – 75% range to reach a typical revenue and net profit goal for a staffing agency.

To demonstrate the two examples above, let’s assume this order was for a 12-week contract for three clerical temporary employees at 40 hours per week. The 60% mark-up example would equate to a $9,676.80 gross profit. Meanwhile, the 20% mark-up equates to a $1,612.80 gross profit. While winning an order from a customer might seem important, it might not be profitable for your staffing agency in the end. Depending on your overhead costs, this formula can be a helpful tool to help you determine where your mark-up needs to be in order to cover overhead costs, meet your revenue goals and contribute to plans for growth.

I hope you have gained some useful information today.  If you have any questions, please contact us today! At Lone Oak Payroll, our goal is to partner with clients and help them make smart business decisions for their staffing verticals.

ABOUT CLAUDETTE DUNLAP

Claudette has served the temporary staffing and recruiting industry for 32 years, spending nearly a decade as a manager for two leading national staffing companies. Claudette joined TempWorks Software and Lone Oak Payroll in 2012 after guiding hundreds of staffing companies through successful software implementations at several staffing software firms. In her spare time, Claudette is an accomplished orchestral pianist.

*The information and examples provided above were used only for demonstration purposes. In no way does this article offer or provide financial advice. Every business is unique and expenses, margins, and other costs may vary. Please contact a licensed accountant or attorney for advice specific to your business.