Staffing Gross Profit Margin: Calculating Your Way To Success

In today's high tech world, the poor calculator seldom gets its due. Yes, most recruiters are mental giants, and thus the manipulation of numbers for bill rates, hours, and gross profit margin is a trivial thing, but for those who are busy trying to reconcile Plato's dialogues with the later manifestation of votives in hero tombs often turn to the trust desk calculator figgerin' numbers.

An old saying in the recruiter's world is that all you need to start a staffing agency is a phone and a phone book.  Smiling and Dialing for candidates may indeed by the path to riches, but no one gets far without a trusty calculator, which is why every recruiter today gets a desk, chair, phone, computer, pencil, pen, and...calculator.   

As a perm recruiter, you have it pretty easy.  You take the Salary and multiply it by your fee percentage (20-30% is standard) and voila - you have your commission.  As long as your candidate stays 30-90 days (standard, depending on the contract), the money is yours. Remember to collect it up front.

Contract recruiters have slightly more complicated. The numbers you'll need as a contract recruiter are: 

Bill Rate:
The total rate a client pays you to hire a contractor.   

Pay Rate:  This is the amount of money you pay a contractor, usually broken out into an hourly rate.  Is you're estimating for a year, the figure of 2000 hours is normally multipled by the rate, but in many places, your contractor will work only 1920 hours or less because of vacation, sick, site-shutdowns and the like.

Burden:
The percentage your contracting company takes to cover the costs of FICA, Medicare, Unemployment, Liability and administrative costs. Vacation, sick, and benefits all add to your burden.  Burdens run 14% to over 30%, depending on the market you are in, the benefits you provide, and the mark-up the company takes to process paperwork. 

Gross Profit Margin (GPM):
Gross Profit Margin is the difference between the cost of employing and paying a contractor and the bill rate.  The formula looks like this:

Bill Rate - (PayRate X Burden) = Gross Profit Margin.   Thus, with a Bill Rate (BR) of $75, A pay rate of $50 an hour, and a burden of 19%, the Gross Profit Margin would be ($75-($50x1.19)= $15.50).  The GPM on this rate is $15.50.

Mark-Up:  Mark-up is the percentage difference between the payrate and the billrate.  The equation is (Bill Rate/PayRate).  In our example.  The payrate was $50, and the Bill Rate was $75, so the Mark-up is $75/$50 = 1.5, so the mark-up is 1.5, or 50%.

Mark-up is often confused with GPM, and the difference is very large.  Mark-up doesn't take into account any costs of employing a contractor.

Gross Profit Margin Percentage:  Some companies have a standard percentage of GPM they must have to agree to take on a contractor.  This number runs from 20-30%, and is calculated as a percentage of the bill rate, not the pay rate.   The Equation is figured by taking the GPM and dividing it by the Bill Rate.  For our example, it's (15.5/75 = 20.67).  The GPM is 20.67%, which is not acceptable to some staffing firms.  Not acceptable means in some cases, you do not get paid your commission because you're not making enough.

For fun, multiply 15.5x2000 to come up with $31,000 a year.  If your contractors stays on for one year, the company has a gross profit margin of $31,000, and that isn't acceptable, because of the percentage.

Your Commission Percentage:  This is a very important number - the most important for a salesperson is your commission percentage.  Staffing companies can be as slippery as car dealers, so make sure you fully understand your commission plan.  Some companies give you a dollar for dollar credit for each of your contractors.  Some split the difference with your recruiter, or recruiting team, or even the office in a group pool.  When comparing plans, make sure that 40% commission plan isn't actually a 20% commission plan, and don't be discouraged if your company has a 10% plan, but you get a full salary on top of it.

For final amounts, calculate the number of hours your contractors work in a given month, 160-176 hours times your GPM amount per hour to figure out your monthly results.

Comments

[Tim]

Please tell me how do you determine an average staffing percentage rate of the salary by city and state? Are there any websites that can help?