The money · Lesson 4 of 18 · 5 min
Bill a rate, pay a lower one, keep the difference. That description is right, and it is also how new agency owners end up losing money on placements that looked profitable.
There are five numbers in a contract placement, and they apply in a fixed order. Most people quoting a spread are thinking about the fourth and stopping at the second.
Bill rate
What the client pays you, per hour. Set in the contract, and the only number in this chain the client ever sees.
Pay rate
What the worker receives, per hour. Set by what the market will accept for that skill in that location — you have less control here than you would like.
Employer burden
Payroll taxes, unemployment insurance and workers’ compensation, calculated on top of the pay rate. You pay these as the employer of record. They are not optional and they are not small.
Gross margin
Bill rate minus pay rate minus burden. What the placement actually contributes before any of your own costs.
Net margin
Gross margin minus everything else you run — software, insurance, your own salary, the cost of financing payroll while you wait to be paid.
As the employer of record you owe payroll taxes, unemployment insurance and workers’ compensation on the wages you pay. Those are calculated on top of the pay rate rather than taken out of it, and they come out of your spread.
The size of that charge is not a single number anyone can quote you: it depends on your state, your claims history and the job code the worker sits in. Light clerical work and physical trades are not comparable. The practical instruction is to get your actual rates from your payroll provider and insurer before you quote a client, not after.
Check yourself
You bill $50 an hour and pay the contractor $35. How much of that $15 do you keep?
A client asks you to “drop three points”. Why is that sentence dangerous?
Everything above applies to an hour worked. A permanent fee has no hours, no burden and no float — it is a single number, normally a percentage of the candidate’s first-year compensation, invoiced when they start.
Which makes it look like pure profit, and it very nearly is. What reduces it is not cost, it is leakage, and there are four sources:
All four are commercial decisions rather than accounting ones, which is why they get a lesson of their own next — pricing models, how to ask for the fee, and the documents that have to be signed before you submit anybody.
A permanent fee is earned once. Good money, no payroll to fund, and the revenue ends the day the candidate starts. Fill nothing next month and you earn nothing next month.
Contract margin is earned every hour, for as long as the assignment runs. Ten contractors on long assignments is a revenue base that arrives whether or not you place anyone new — which is the closest thing to predictability this industry offers.
The catch is that you fund it. Contractors are paid weekly; clients pay on terms — and that gap has a number you can work out for your own desk in the cash flow lesson.
Key takeaways
Two ways, and they behave completely differently. Contract and temporary staffing bills the client an hourly rate, pays the worker a lower one, and keeps the difference less employer taxes and insurance — earned every hour the assignment runs. Permanent placement charges a one-off fee when a hire starts, usually a percentage of first-year salary, with no ongoing revenue from that placement. One compounds and needs funding; the other does not compound and needs almost none.
Markup is expressed against the pay rate; margin is expressed against the bill rate. The same placement produces two very different-looking percentages depending on which you quote, which is exactly why the two get confused in negotiation. Fix on one — margin against bill rate is the more honest view of what the business keeps — and make sure you and the client mean the same thing.
Because employer burden comes out of it before you see any of it. As the employer of record you owe payroll taxes, unemployment insurance and workers’ compensation on the wages you pay, calculated on top of the pay rate rather than taken out of it. A spread that looks comfortable can be thin or negative once burden is applied, and the effect is larger in higher-risk job codes.
Entirely. A permanent fee is normally a percentage of the candidate’s first-year salary, invoiced when they start, often with a guarantee period during which you replace them free or refund. There is no payroll to fund and no burden to carry, so the fee is close to gross profit. The trade-off is that the revenue stops the moment the placement is made.
Usually as a percentage of the candidate’s first-year compensation, invoiced on their start date — though flat fees, retained instalments and monthly retainers are all used as well. Because there is no payroll and no employer burden underneath it, the fee is close to pure profit. What actually reduces what a perm desk earns is not cost but leakage: searches that produce no fee at all, discounts conceded during negotiation, an unclear definition of what counts as compensation, and replacement searches run under the guarantee.
Per placement, permanent almost always looks better — a single fee with almost no cost attached. Over a year, a contractor on a long assignment can produce more total margin than several permanent fees, and it arrives predictably rather than in lumps. The catch is that contract margin has to be financed until the client pays, so the more profitable model is also the one that can run you out of cash.
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Next: Perm fees: pricing, agreements and getting paid
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