In a book called Freakonomics by Steven Levitt, the author explained how your estate agent may sometimes not try too hard to get a higher price for your property as the rewards don't match the effort. Recruitment agents are no different.
Let's assume that a client goes to an agency, outlines the role they need to fill and says that they are willing to pay £400 per day.
Not all of that goes to the contractor, some of it is kept by the agency as their 'margin', and it's how they stay in business. The margin varies by agency and job, but the industry average is around 15 percent.
Recruitment consultants are paid on a commission basis depending on how many positions they fill, normally around ten per cent of the margin that agencies make.
OK, the simple maths says that if you get a higher rate, the consultant makes more. But the sums aren't that simple.
Let's look at the first scenario, and the end client says they want to pay, in total, £400 per day for the services of the contract. Don't forget that this figure includes the margin the agency takes in order to pay for their services. Lets do the maths:
|Monthly revenue (20 working days x £400):||£8000|
|Minus agency commission (15%):||£1200|
|Equals contractor's monthly revenue before tax:||£6800|
Let's look at what that means for the contractor's real rate and what the consultant gets out of it:
|'Real' daily rate for contractor (85% of £400 daily rate):||£340|
|Recruitment consultant's monthly commission (10% of agency's margin):||£120|
So, the recruitment consultant takes home a £120 bonus per month for successfully placing you in the contract.
Increasing the client's rate
OK, so now we've got a recruitment
consultant who really likes you and negotiates hard with the end
client, arguing that the market rate for your talents is higher
than £400 per day. Eventually, after some tense phone calls and
haggling (all the time trying not to make the end client go
elsewhere) they settle on £460 per day:
|Monthly revenue (20 working days x £460):||£9200|
|Minus agency commission (15%):||£1380|
|Equals contractor's monthly revenue before tax:||£7820|
Lets look at what this does to your daily rate and the commission your recruitment consultant receives:
|'Real' daily rate for contractor (85% of £460 daily rate):||£391|
|Recruitment consultant's monthly commission (10% of agency's margin):||£138|
On the surface you might think "great, I make more and my consultant makes more because of his bargaining", but look closer. For all that effort and work (and potentially creating bad blood between the agency and the client) he or she only makes an extra £18 over the course of the month. The time and energy used in getting that could have been used more productively by them placing someone else in another role and earning the extra one hundred or so pounds from that.
Decreasing your rate
If you're a first-time contractor or new to the area you might not be as well aware of what the market rate for your skills are as you should. This could be taken advantage of by the agency taking a higher margin for your services:
|Monthly revenue (20 working days x £400):||£8000|
|Minus agency commission (25%):||£2000|
|Equals contractor's monthly revenue before tax:||£6000|
The agency is now taking a very healthy looking £2000 a month….
|'Real' daily rate for contractor (75% of daily rate):||£300|
|Recruitment consultant's monthly commission (10% of agency's margin):||£200|
...and the consultant now takes a healthy looking £200 a month, as opposed to the original £120 a month. You, on the other hand, are left with just £300 a day before tax.
Charging the client more
What if the agency is the rare, unscrupulous type (the ones that give the whole industry a bad name) that will negotiate a rate increase and not tell you? It is entirely possible that this could happen at the start of the contract without you knowing or at contract renewal time when you didn't even mention renegotiating the rate.
|Monthly revenue (20 working days x £445):||£8900|
|Minus agency commission (23.6%):||£2099.96|
|Contractor's monthly revenue before tax:||£6800.04|
You are taking home the same monthly revenue (and daily rate) are the same, lets see what it does to your recruitment consultant's commission:
|'Real' daily rate for contractor (76.4% of daily rate):||£340|
|Recruitment consultant's monthly commission (10% of agency's margin):||£210|
In this instance the agency is taking £2099.96 of commission compared to the their original £1200 and the consultant is pocketing £210 compared to £120.
As you can see, it's not as simple as "they will be motivated to help me earn more". We're not saying that all agencies are unscrupulous or will always attempt to make more money at your expense, however, as a contractor (especially a new one) you need to be wary of the fact that the agency can sometimes make more money more easily when they are not operating in your favour.
These calculations really come into play if the client wants to extend your contract when your contract is coming to an end. As you can see above, there is little incentive for them to push hard for a higher rate and besides, they will be more interested in keeping the client happy and receiving their continued business than helping you out.
If you work through an agency and believe that you should be entitled to a rate increase at the end of your contract it may be better to discuss this directly with the decision maker - your client.
Contractor rates - how to determine yours