Inside the murky world of agency margins
Tuesday, 2 October 2007
This article was originally written four years ago, but I thought it was worth re-posting as it answers questions that bother a lot of people.
The longer someone has been contracting, the more agency margins play on their mind. A new contractor is often so happy just to get a job that what the agency is taking doesn’t bother them. With more experience, a margin that is perceived as too high can ruin the relationship between a contractor and their agency. In extreme cases, it may lead to the contractor leaving their job, or the agency attempting to replace them.
It's surprisingly difficult to find information about margins in the Australian market. Searching the internet reveals little. Talk to agents about their margins, and the conversation can quickly turn nasty. I’ve heard of agents taking 75% of a naive contractor’s billed rate. I’ve also seen them go as low as 8% for contractors who found their own job and shopped around for an agent to work through.
So what is a standard or fair rate for an agent to take? This is a much easier question to answer in the UK market, where the standard is widely perceived as 15% of the billed rate before VAT (the equivalent of GST). Some UK agents will charge a little less, some a little more, but 15% is about average. Of course some will take whatever they can get.
In Australia, most contractors have no idea what their agent should be taking. Some agents refuse to say what their margins are, even making clients sign non-disclosure agreements.
In my last contract, the agent took 25% before GST. I was happy with the job, so didn’t argue with them too strenuously until renewal time. At that time, getting them to lower the rate was like getting blood from the proverbial stone. They argued, pressured, threatened to replace me, and called my manager saying I was refusing to renew. They accused her of breaking the contract by revealing my rate to me. After days of stressful negotiation, they agreed to drop their rate to 21.5%. Needless to say, I wasn’t impressed.
To better understand the market, I contacted more than twenty agencies before writing this article. I sent detailed questions and said that I wanted to put forward their point of view. Only two agents cared to comment, so before we continue, well done to Duncan Amos from Hays IT and Penny Walsh from eurolinkglobal.
“In today’s market, margins are often fixed by the client,” Amos says. “Clients will have preferred suppliers with whom they will negotiate pricing arrangements. These arrangements vary from client to client and usually depend upon the volume of business and exclusivity being offered. Clients know that the power has shifted to them recently and they are becoming tougher on agent’s margins. Government contracts always operate on fixed margins.”
“Agencies no longer have a free rein in the selection of margins,” according to Penny Walsh, “they are dictated by the clients under preferred supplier arrangements. The days of high margin business are long gone.”
The costs that agents have to cover when you work though them depend upon the type of contract that you have. If you are working directly for the agent, they will have to keep money for PAYG income tax, super (currently 9%), insurance and workers’ compensation. If you are going through an umbrella company, or your own limited company, the only mandatory cost is payroll tax of 6%. On top of that, agents have to cover overheads such as office rental, phone costs, salaries, advertising and profits.
“The margin really equates to the service the agency provides,” Walsh says. “A professional, reputable agency acts in the best interests of both candidates and clients. An agency puts time and money into finding good roles and matching them with candidates with suitable skills and experience, and who are a correct cultural fit into the organisation.”
Agencies do provide a valuable service, for which they should receive a fair price. They bring in the work, vet candidates, and give contractors advice. They also often pay their contractors before they themselves have been paid by the client. Cash flow risk is of large concern to recruitment agencies. If the client dawdles with paying their invoice, they can be out of pocket for weeks after they have already paid the contractor.
A fair margin to cover these costs and risks is around 10-20% after on-costs (PAYG, super, payroll tax etc). If your agent is charging more than that, you should try to negotiate the margin down.
Before signing a new contract, ask your agent what their take of the pie is. Try to get it in writing, if possible. If the agent refuses to reveal this information to you, it should be regarded as suspicious. It will be up to you whether you want to take the contract under those terms. In rare cases, the client may refuse to let the agent reveal the margins. You should definitely tell other contractors and your managers what occurred and who the agent was. If agents understand that their customers regard this practice as unacceptable, they’ll soon feel the pressure to be more forthcoming.
“I’m more than happy to disclose margin information and explain why we charge what we do,” Amos says. “To be honest though, in today’s market, not many people ask me.”
“If [agencies] are providing the best possible services then they can justify their margins,” Walsh adds. “Here in the Australia, clients and contractors are far more in tune with wanting to know what the agency margins are. Eurolink has operated under an open book policy for years; we have certain clients whereby we have signed 3 way contractual agreements, in which all rates, terms and conditions, are exposed.”
If you’re not willing to ask your agent about their margins, you shouldn’t be surprised if they are higher than you think.
Paul Knapp (editor@brainbox.com.au)
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Sensible marginsAn interesting article.... One thing worth pointing out is that in some cases the agreement between the agency and the client actually prohibits the agent from disclosing the charge rate. I think that margins in the region of 17% are pretty reasonable to start with, maybe reducing annually for long-term assignments. At the end of the day both sides - contractor and agent need to understand each others needs and costs and most important of all - BE REASONABLE!!!!!! Rather than negotiating about margins, try negotiating a better service from your agent. Things like salary packaging, leasing, paid time off for training…… have a think about what matters to you – not just $$$$ Contractors – if you want to pay low or no margins…..get your own insurance, work direct and wait between 4 to 8 weeks to get paid. Agent – is you want to get huge and unreasonable margins for little or no service………… get into Real Estate! TRSolutions, 10/09/2007 11:03:12 AM
Sensible Contracting"I think that margins in the region of 17% are pretty reasonable to start with, maybe reducing annually for long-term assignments." 17%????? Surely you jest. As if agents ever offer to drop margins. What a hoot. They're good at promising but conveniently forget next renewal. "Contractors – if you want to pay low or no margins…..get your own insurance, work direct and wait between 4 to 8 weeks to get paid" Or if you're in Canberra don't find work through with one of the expensive ITCRA affiliated agencies. Never forget the hard work they did in recent years to REPLACE Australian IT professionals with cheap overseas labour. Get all all of the above - insurance, immediate payment for a low fixed price with no anti competitive "six month" clauses. It's so good you'll think you're working direct. Strike back against high margins and try out one of the following companies today: Compas Computing - http://compas.com.au/ Tarakan Consulting - http://www.tarakan.com.au/html/index.htm Southern Cross Computing - http://www.scc.com.au/ WinMill consulting - Tony Winmill (Google for the email address or ask around) You'll be glad you did matey!!!! Bill Hickock, 10/09/2007 12:43:04 PM
Rates“I think that margins in the region of 17% are pretty reasonable to start with” – I think a large margin such as this is only appropriate if the agent really had to get the candidate the role. Most of my roles I found myself by going direct, however the few times I have had an agent the agent has been honest with me and told me he had to do no work. This is because I advertise myself well (so he found me easy) and have been offered every role I have ever gone for. Why should he still take 17% for simply introducing me? “salary packaging, leasing, paid time off for training” … sorry I do all this myself anyhow via salary packaging, so it doesn’t reduce the agents cost one jot “Contractors – if you want to pay low or no margins…..get your own insurance, work direct and wait between 4 to 8 weeks to get paid” – when direct I get paid fortnightly since that is in the contract I draw up, and I don’t mind chasing the PA or accounts payable for payment in any case (they’re sometimes good looking girls ;). But in my current contract I supply my own insurance etc anyhow, but the agent sticks by his “preferred supplier” rate of approx 21% even though he’s not at risk whatsoever… he gets paid when I get paid etc. Topdown, 10/09/2007 01:54:54 PM
AgreeI agree with Topdown. 17% is a huge margin and hard to justify. I think most contractors with a clue would agree. Large agencies crying skills shortage need consider margins. If they find it hard to get people it's probably due to their high margins and bad rep. Easy solution though. Just find a low cost agency. In Canberra you'll find huge numbers of contractors are going this way. It's hurting the big agencies and I for one are smiling with glee. Bill Hickock Bill Hickock, 10/10/2007 02:36:19 AM
agency ratesSpeaking as a smallish agency (Stratagem) operating in Canberra for 22 years, I don't believe that any of the small to medium companies take large margins. Many of the panel contracts, such as DEST and ACMA ask agencies to separate their margin from the contractor rates so that it can be monitored and controlled. We have always divulged our rates to our contractors and have a totally open policy. I've just looked at my current average % margin for all our contractors and it is running at slightly over 9%. I don't include payroll tax, super etc, as the majority of contractors in Canberra are truly independent and work under arrangements which mean they are not liable for payroll tax and they look after their own oncosts. Many contractors in Canberra work directly to the client and I respect anyone who is prepared to go and find their own work. Others prefer not to have that hassle and like to have the low cost service we provide. The bit I find amazing is that there are many contractors working in Canberra who do go through the large companies and pay premium margins! Jenni Oliver, 10/10/2007 05:36:19 AM
When is a contractor not a contractor?I'm probably going to open myslef up to a bit more abuse, but here goes.... I'm not saying that margins of around 17% are applicable if a contractor finds their own job - far from it! In those cases the margin should be much lower. At Targeted we look at each direct case individually and work out all our costs and a minimal dollar amount on top of that. The total margin geranlly works out between 6% - 8% which include insurance cocts and payroll tax. Topdown - If you secure your roles on direct contract, paid fortnightly and you provide your own insurance and do all your own salary packaging - good luck to you!! BUT......You need to remember that you are at 1 end of the spectrum and fall into the 'Real Independent Contractor' basket. Nowadays there are a lot of people that are at the extreme opposite of that. They generally turn to contracting for money, but still want everything done for them. If they had to set up a company and operate as an independent contractor they would not have a clue where to start. They are basically PAYG employees of the agency who want the best of both worlds - high rates, PAYG, benefits, long-term contract stability and low margins. This part of the problem with the IT Contract Market in Australia - contractor who are not really contractors. Sorry - can't have it all ways!! TRSoltuions, 10/10/2007 08:00:34 AM
MarginsTRS, when you say "margin" you need to be clear exactly what this includes. When you say 17%, to me this means your sales commission. It would never include employment costs like payroll tax, workers comp etc. The best solution for a contractor is to use a low cost agency (eg in Canberra Tarakan, Compas, Southern Cross, Winmill etc) who cover PI insurance only. The margin should be a fixed hourly rate with no "six month" clauses. In my experience any agency with restrictive contracts will eventually be a nightmare. Rather than using the agency as your PAYG employer, sub contract to the agency via another company. Find somebody with their own company who charges a small fee to pay PAYG tax, workers comp & super. Some small companies will charge around $0.50/hr providing you pay the workers comp and super. The costs of setting up and running your own company are generally not worth it. If you want your own company then get in a group of mates to share the company setup and running costs. Bill Hickok Bill Hickok, 10/10/2007 02:34:54 PM
ClarificationHi Bill We believe that our margin should include everything with no hidden extras. Within our margins we include: > payroll tax > 10m of PL and PI cover > WorkCover > Options for full salary packaging > 1 paid day off per assignment for job related training > and obviously our cash flow/profit margin. There are no hidden costs and the rate that we agree with the contractor is exactly what they get. The only things that are then deducted are Tax and Super for PAYG contactors. TRSolutions, 10/10/2007 03:32:02 PM
choice for contractorsI think the point that you are missing Bill, is that it isn't a case of one size fits all. Some contractors are very aware and happy to hassle to save a few $. Others have very busy lives, maybe young families etc and just want an agency to look after everything for them and let them get on with their lives. An example of this is Tony Winmill - whom you use as an example of a low cost agency. However he actually contracts through Stratagem and has for many years. Partly because he hasn't been able to get on all the panels we are on and partly because I think he like to know he has a secure income coming in while he builds his own agency. He is on a 4.5% margin with us and he has contracted on and off with us for about 10 years. I suspect it is coming to an end, as he is now getting to a size, where he will want to work through his own company, but we are happy to have him with us until he makes that decision. I tend to agree that contractors are better off being in a company with a couple of other contractors, but I have contractors who work with us a PAYG contractors as they really just don't want the hassle. We tend to always quote our margin as an exact $ amount per hour. Our target % is 12.5, but it is very notional and we have a range from about 4% to 11%. When a contractor wins a contract, we always then say exactly what the $ amount is (in fact we usually give this before tendering, although it can change if a client beats us down in price). After that it is up to the contractor how they structure themselves. If they are working in a payroll exempt company and cover their own PI and PL then all they pay is the negotiated hourly rate. If they want us to cover PI and PL, then that is a flat 40c per hour. (less than $700 per annum normally). If they are not payroll tax exempt then that comes out at 6.85% (which is the exact amount charged by ACT revenue). If they choose to work as a PAYG then they choose how much super they want to pay (minimum 9%) and we take 1% for workers comp (which is exactly what we pay). Thus it doesn't matter if someone is a PAYG or an independent contractor. They pay the same margin and we take exactly what it cost us for any other costs. We don't charge any extra for handling them as a PAYG, unless they want to start packaging leases and other expenses. I know some agencies still take really big % and a contractor has to be a bit sensible about who they choose to go with. However it really is a case of being prepared to do your homework and shop around. This is no different to anything else in life - you can save thousands of $ on travel by shopping around on the internet and yet large numbers of people just go to their local travel agent. :) Jenni Jenni Oliver - Stratagem, 10/11/2007 05:50:08 AM
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