How to Calculate Staffing Agency Markup Rates

Last Updated October 25, 2024

Maximizing profit margin is one of the most important points of emphasis for every business owner, and a routine way to achieve optimal profits is by properly valuing what to charge customers. In the staffing industry, this is where markup rates come into play.

Staffing agency markup rates prove to be a big part in determining the profitability of a staffing company. Alternatively, business owners utilizing staffing services to fill positions need to be aware of how markup rates work so they’re getting cut a fair deal.

With that being said, continue reading to learn more about:

• What a Markup Rate Is
• The Average Staffing Agency Markup Rate
• What Factors Go into Determining Markup Rates
• How to Calculate Markup Rate

What Is a Staffing Agency Markup Rate?

A staffing agency markup rate is a percentage added to the pay rate for each position filled by a staffing firm.

For example, if a staffing company fills a $35 per hour position for a client while charging the client $42 per hour, the markup rate would be 20%.

What Is the Average Staffing Agency Markup Rate?

Markup rates fluctuate depending on the type of position being filled.

It’s customary for permanent placements to have a markup rate somewhere between 10% and 20%. Temporary positions or contract roles, on the other hand, widely vary based on a few factors, such as operating costs, gross margin, and statutory expenses. The markup rate for temporary roles can be anywhere from 20% to 75%.

What You Need to Determine Your Markup Rate

There are a few factors that will go into determining your staffing agency markup rate. When calculating markup, you’ll want to take into account the following:

Pay rate: This is how much you will be paying each employee you hire (per hour). For instance, if a nursing staffing agency secures a placement for a nurse at a local hospital for $30 per hour, the pay rate would be $30.

Total cost (statutory expenses plus operating costs): This is the total costs associated with filling each respective position.

Statutory expenses are costs required by the government imposed on your staffing agency, such as taxes, insurance, and any permits required by law.

Operating costs are any costs that play a role in your agency filling positions, such as employee wages, accrued vacation, recruiting fees, and equipment. You will add up statutory expenses and operating costs to determine your burden rate, which is what will be added to the top of your pay rate. This “financial burden” directly leads to the need for markup.

Markup: Expressed as a percentage, this is the additional cost you impose on top of the pay rate. Using the previous example of the nursing position, if a staffing agency adds up its total financial burden and determines that, in order to be profitable, a $15 per hour fee must be levied for the position, the markup would be 50% ($15 markup / $30 pay rate).

Bill Rate: Your bill rate is simply what you bill your clients. For this example, the bill rate would be $45 per hour. This is calculated by adding the markup ($15 per hour) to the pay rate ($30 per hour). Therefore, the bill rate would be $45 per hour.

Gross Profit: The above factors will determine your gross profit for each placement. To calculate your gross profit for each job you successfully hire for, simply subtract the pay rate from the bill rate ($45 – $30 = $15 gross profit).

How to Calculate Your Markup Rate

Now that you’ve learned how to ensure profitability for every job you successfully place, you might still be left wondering how staffing agency markup rates are precisely calculated.

The most important thing to remember when calculating your markup rate is to make sure you’ve taken every single cost into account. Remember, this includes:

1. Calculate Statutory Expenses

Statutory expenses are costs required by the government to operate a staffing agency, such as taxes, insurance, and permits required by law.

A few examples of statutory costs include:

• FICA (Federal Insurance Contributions Act) taxes, which require employers and employees to each forgo 7.65% of their income. This money goes directly into funding Medicare and Social Security. Thankfully, this will come straight out of the employee’s pay stub, so you don’t have to worry about getting into more of the nitty-gritty of figuring out how to file them, but it should be taken into account when determining your markup rate, as it’s 7.65% of your total would-be profit that you’ll have to forgo.
• Unemployment insurance taxes, which assist unemployed Americans. Federal unemployment insurance taxes will take 6% out of the first $7,000 each employee earns. State unemployment insurance tax rates vary just slightly, usually hovering around 4%.
• Healthcare, which is required for businesses with 50 or more employees. This may or may not affect your staffing agency.
• Workers compensation insurance and other insurance coverages required for staffing agencies, which typically costs staffing agencies a few thousand dollars per year.

2. Gather Operating Costs

These are your day-to-day costs that are required to maintain business operations.

A few examples of operating costs include:

• Your recruiter’s hourly pay (make sure to take into account their hours spent not only recruiting but also working with your clients to learn about the positions that need filled)
• Recruiting software and tools
• Equipment, such as the recruiter’s laptop
• Rent

Relevant Factors to Consider When Calculating Markup Rates

Doing a bit of research can aid in providing a solid baseline to measure your markup rate vs. your competitors. A few external factors that can assist in determining your markup rate include:

Industry Demand

If you specialize in staffing for an industry in high demand, you’ll likely be able to charge higher bill rates than industries in low demand.

A few industries in high demand in the U.S. include IT services, construction, and trucking.

Competition

Some small business owners might think of heavy competition as a challenge, but when it comes to markup rates, it can actually be very beneficial. Competing with numerous other staffing agencies for the same clients allows for more flexible pricing. Offering a lower markup rate than your competitors can entice prospective staffing clients; just remember to set a rate that ensures profitability.

Analyzing competitors and figuring out what they’re doing right and wrong will help grow your staffing agency by setting your business apart from the rest.

Existing Relationships

Building relationships and networking are crucial when starting a staffing agency. And once you’ve formed meaningful connections in your industry, you should focus on maintaining those connections. It can help you in the long run.

If you’re working with clients who trust you and truly value your partnership, you can probably impose higher markup rates than if you’re working with a new client who’s more skeptical about working with your business. Just remember not to get carried away; you should always have tangible data that supports the bill rate you charge your clients.

In-Summary: Staffing Agency Markup Rates

It can be difficult and time-consuming to add up every single cost that adds to your financial burden when trying to best calculate your staffing agency markup rates. You may not land on a bill rate that’s accurate to the hundredth decimal point. For example, overhead costs can be tricky to calculate, and determining which costs are directly tied to hiring for a position and which are standard overhead costs can be subjective.

It’s important, however, to do your best to find the fairest markup rate to the best of your ability. There’s a good chance you’ll have to explain to your client at some point how you came up with your markup rate and why they’re being charged more than their new employee will be getting paid. Successful staffing agency owners are organized and document every relevant cost in case clients ask follow-up questions or challenge your rate. This will prevent any significant disputes between you and your business partner.

Need Additional Funding for Your Staffing Agency? Try Payroll Funding

Even if you price your services correctly, it can be difficult to close the cash flow gap needed to make payroll on a weekly or bi-weekly basis. Unfortunately, many small staffing agency owners can’t qualify for traditional funding methods due to a lack of business assets or credit history. If this sounds familiar, you should consider alternative lending.

Payroll funding is one of the most commonly used alternative financing solutions. Factoring involves selling your unpaid customer invoices to a third-party factoring company in exchange for an immediate advance against each invoice. Typically, you’ll be advanced 80 to 90% of the value of each invoice.

The factoring company, or “factor”, then takes responsibility for collecting your customers’ payments. Once your customer submits payment to the factor, the remaining value of the invoice is released to your business, minus a small factoring fee.

The benefits of factoring for staffing firms include improved cash flow, ease of making payroll, and reduced accounting responsibilities.

If invoice factoring sounds like a fit for your company, give altLINE a call at +1 (205) 607-0811 or fill out our free factoring quote form. One of our representatives would be happy to provide more information about how factoring can help your staffing company grow.