Staffing agencies play a crucial role in today’s economy by connecting qualified talent with employers. However, operating a profitable staffing firm requires meticulous financial planning and pricing. Two key rates agencies must calculate are bill rate and pay rate. Understanding the difference between these figures is essential for the health of any staffing business.
This guide will clarify bill rate vs, pay rate and provide useful tools to determine appropriate rates for your staffing agency
What is Bill Rate?
Bill rate is the hourly or daily amount a staffing agency charges the client per temporary worker This covers the pay rate plus additional markup for
- Employer payroll taxes and insurance
- Staffing company overhead
- Profit margin
For example, if the pay rate for a contractor is $30/hour, the bill rate charged to the client hiring them may be $50/hour. The $20 difference constitutes the markup.
Bill rate is a crucial factor determining the revenue and profitability of a staffing agency. Calculating an optimal bill rate involves balancing client affordability against your own financial sustainability.
What is Pay Rate?
Pay rate, also known as direct pay, is the hourly wage or salary paid directly to the contracted worker. For temporary staffing, it’s usually expressed as an hourly rate vs. an annual salary.
Factors impacting pay rate include:
- Prevailing wages for the position based on supply and demand
- Worker qualifications, skills, and experience
- Geographic location of the job
- Client budget
Pay rate forms the foundation of the bill rate calculation. The higher the pay, the higher the bill rate must be to maintain profit margin.
How Bill Rate and Pay Rate Interact
There is a direct correlation between bill rate and pay rate:
- Pay rate goes up ➜ Bill rate must also increase
- Bill rate goes down ➜ Pay rate needs to decrease
For a staffing agency to sustain profitability, the bill rate charged to the client must sufficiently exceed the pay rate to the temp
However, the agency must also keep bill rates competitive to win and retain business. This tension requires careful management of pay rates in line with prevailing market conditions.
Calculating Bill Rate and Pay Rate
Several variables factor into determining appropriate bill rates and pay rates:
Bill Rate Formula
- Pay rate
- Employer payroll taxes – FICA, SUTA, FUTA
- Workers compensation insurance
- Staffing company overhead
- Desired profit margin
Pay Rate Considerations
- Market rates for the position
- Geographic region
- Client budget
- Worker qualifications
- Supply and demand dynamics
Complex Excel models are often used to calculate precise rates. However, a simple markup percentage applied to the pay rate can also generate a reasonable bill rate.
Bill Rate vs. Pay Rate Calculator for Staffing Agencies
To easily derive pay rates and bill rates, staffing agencies can utilize a bill rate calculator like the example below:
Input fields include:
- Pay rate
- Markup percentage
- Statutory employer tax rates
The calculator automatically outputs:
- Bill rate
- Gross margin
- Gross profit
Handy downloadable bill rate calculators are offered by third parties to help staffing firms efficiently model different pricing scenarios.
Real World Examples
Below are two examples illustrating how bill rates and pay rates work together:
Administrative Assistant
- Pay Rate: $25/hour
- Markup: 30%
- Taxes: 10%
$25 x (1 + .30) = $32.50 bill rate
$32.50 – ($25 x 1.10) = $5.75 gross margin per hour
IT Manager
- Pay Rate: $80/hour
- Markup: 50%
- Taxes: 13%
$80 x (1 + .50) = $120 bill rate
$120 – ($80 x 1.13) = $26 gross margin per hour
These examples demonstrate how bill rates and pay rates align to cover costs and profit.
Key Takeaways
- Bill rate is charged to the client; pay rate goes to the temp
- Bill rate must exceed pay rate to cover taxes, overhead, and profit
- Pay rate is dictated by market forces and client budget
- Bill rate calculator simplifies rate modeling
Accurately pricing services via optimal bill rates and pay rates is crucial for staffing agencies to sustain and grow their business. Mastering this math is at the heart of running a successful agency.
Calculate Your Profitably Now
Owning a staffing firm can be profitable, but only if you know what to charge your customers. Charge too much; you might lose contracts to your competitors. Too little, and you are undervaluing your services and cutting into your profit margin. Striking the right balance is key and a big challenge for this competitive industry.
To succeed in your staffing business, you need a comprehensive understanding of pricing and everything that goes into it. To get you started, we have laid out some basic pricing terminology and definitions, as well as a sample profit assumption to help determine your bill rate.
Pricing correctly is a difficult balance to strike, so we’ve compiled a few simple points to keep in mind. For a more in-depth look into pricing, download the free How To Price Your Staffing Services whitepaper.
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)
T-Bill Rates, Pricing & Interest | High Rate vs Investment Rate
FAQ
What is the difference between pay rate and billing rate?
Pay rate is the amount of money workers are paid per hour, week, etc. Bill rate is the amount a company or professional charges per hour of work.
What percent of your billable rate should be your salary?
Not 50%. Not 40%. Only 33. Three percent of all billing should go to payroll, which includes employees who can’t be billed, like receptionists and legal assistants. If you’re spending more than 33% of your payroll, your payroll needs to change.
How to determine a billing rate?
One easy way to figure out the billing rate is to divide the number of billable hours by the total number of hours worked for the company. This is a direct method to assess efficiency. It gives you immediate insight into what proportion of working hours contribute to direct income.
What is the difference between pay rate and Bill rate?
Pay rate is the amount of money workers are paid per hour, week, etc. Bill rate is the amount a company or professional charges per hour of work. People often mix up bill rate and pay rate, but they are both important when deciding how much to charge for your services as a freelancer, consultant, independent contractor, etc.
How do you calculate bill rate?
To get a bill rate, divide the employee’s salary by the number of hours they can bill each year and then multiply by the overhead multiplier. The multiplier in this formula is used to reach the profitability goal of the company. The higher the multiplier the higher the profit. The multiplier Another way to calculate Bill Rate is using the following formula:
How much does a bill cost per hour?
Use the average multiplier of 1. 56 to find your bill rate: $45. 00 (Hourly Pay Rate) X 1. 56 (Multiplier) = $70. 20 (Bill Rate) You would bill your client $70. 20 per hour. What does the mark-up cover?.
What is a billing rate?
A billing rate is how much a business will charge a customer per hour in order to make a certain amount of money, taking into account their costs and how much capacity they are using. How to calculate the bill rate?.
How much do you charge for a bill rate?
As a general rule, between 75% and 80% of your bill rate goes to pay rate and statutory expenses. The rest covers overhead and profit margin. But how do you figure out how much to charge? A bill rate calculator can help you this. Figuring out your true bill rate requires looking at four key components: 1. Pay Rate.
How do you calculate a bill rate for a contract worker?
Once you know the markup, multiply it by the hourly rate of pay for the contract worker to get the proposed bill rate. Let’s say you want to pay a contract worker $45. 00 per hour. Use the average multiplier of 1. 56 to find your bill rate: $45. 00 (Hourly Pay Rate) X 1. 56 (Multiplier) = $70. 20 (Bill Rate).
