Recruitment Agency Margins – How an agency works out its margin

Recruitment Agency Margins Advice
Recuritment Agency Margins Advice

Recruitment Agency Margins

From Aussie contractor site about recruitment agency margins and how they calculate them.

I’ve been getting a few questions lately about recruitment agency margins. There seems to be some confusion and secrecy surrounding the costs an agency has to cover.

To make things clearer, I’ve been doing some research and include a list of the costs below and how we work them out. This should let you see if your agency is treating you fairly.

There are two types of cost structure. Those for a contractor who operates through his own company or an umbrella company, and those for a contractor who is on the agency’s books as an employee.

I will outline the costs as a percentage, and also use an example of a contractor who gets a gross rate of $50 an hour. A gross rate is what we charge the client (less GST), not what we pay the contractor.

This is how we work out recruitment agency margins.

Costs agencies have to cover for every contractor

Collection and Interest: 2-3% of gross

An agency pays you regularly – every two weeks or once a month. In most cases, you’ll receive your money before the client has paid the agency.

Therefore, an agency has to hold an amount in cash in its bank account to cover the period in between them paying you and receiving payment themselves. This is often held on credit and they have to pay interest.

They also must cover themselves for when the client defaults on paying them. It must be said that in the IT recruitment industry it is very rare for a client to default. Most clients are large corporates and government departments. Also, agencies tend to have a list of clients which they work with regularly. However, it does happen.

2-3 % of the gross is typical to cover this cost. So for our gross of $50 an hour, $1.00 – $1.50 would cover that amount.

Professional indemnity insurance: 1.5% of gross

It isn’t compulsory for an agency to hold this insurance. Almost all agencies will, on the off chance they get sued. The amount they pay in premium will vary depending on the insurer they choose, but 1.5% would be typical. So for our gross of $50 an hour, 75c will cover this.

Consultant’s fee: 25% of net margin

Agencies vary how they pay their consultants, but 25% of net margin is typical. Net margin is the income to the agency less all its costs. Agencies usually pay consultant a mixture of salary and commission.

The salary is a safe amount the agent will receive, while commission is the amount they receive for landing a contract.

At the end of the year, both should work out to be around 25% of the net margin. If an agent doesn’t have enough contracts to make up this amount, they’re likely to be shown the door.

So if a consultant makes $400,000 income after costs for an agency over a year, they can expect to receive $100,000 in salary and commission.

On our $50 contact, the person you actually talk to on the phone will be making about $1.50 – $2.50 an hour. Some of this may go to their manager.

Other fixed costs: 2-5% of gross

Again, this varies from agency to agency. This covers such things as office space, phone bills, administrative staff, computers etc. In a well run agency, this should be around 2-4% of gross.

So on our $50 gross contract, this would be around $1.00 – $2.00

Total for a contractor working through an umbrella company or own company

So you can add up the above and see that the total for a contractor working through their own company is between 8%- 14.5% of gross.

A well run agency should be approaching the lower of those two figures. Anything above that is clear profit for the agency. Remember that agencies are businesses, and have a right to make a reasonable profit.

Costs agencies only have to cover for contractors going PAYG

For a PAYG contractor (that is one who an agency employs and doesn’t have an umbrella or own company), there are some additional costs. Those are:

Payroll tax: 6.5% of contractors net earnings

Some agents have told me otherwise, but a reliable source assures me that this tax doesn’t have to be paid for non-PAYG contractors.

This makes sense, as you are effectively a supplier of the agent charging them as a company. Payroll tax is for employees. If an agency disputes this, and can show me evidence to the contrary, I’ll happily publish it.

This is calculated on the contractor’s net earnings, that is what they earn minus the agent’s margin. So on our $50 gross contract, if the contractor gets $40 of that, payroll tax will be $2.60.

Workers’ compensation insurance: 1% of net earnings

This is compulsory insurance that all employers have to have. So on our contract with $40 an hour net, this would be 40c.

Superannuation: 9% of net earnings

This is your money really, but the agent is required to deduct it from your pay packet. So on our $40 an hour net, this would be $3.60.

Income tax and Medicare levy
This varies depending on how much you are paid. You should be able to work it out from your payslip.

Total for a contractor working PAYG

So adding up all the above, the total costs for a contractor working PAYG would be between 22% and 28.5%. Super makes up 7.65% of this gross amount. Anything above that is profit for the agency.

So, that’s how they calculate recruitment agency margins – or so they say.

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