Contingent Workforce Pricing Methodologies: Bill Rate vs Mark-up Pricing

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Factors to Consider and Potential Benefits of Popular Alternatives

Bill rates or mark-ups? This seemingly simple question has caused great consternation among staffing companies as well as human resources and procurement professionals over the last twenty years. As contingent staffing has grown into a $115+ billion industry, having the ideal pricing methodology in place within your organization has become imperative to achieving cost efficiency and attracting high-quality workers. Organizations must consider several factors when considering which methodology to use, including:

  1. An organization’s ability to perform the responsibilities required by the pricing model. For example, if relying on a managed services provider (MSP) for your contingent workforce, these activities may be part of their service delivery model.
  2. The organization’s desire to cap unit costs.
  3. Whether the organization is likely to attempt to forecast contingent labor expenditures.
  4. Whether the organization can rely on its supplier base to maintain quality levels in the face of bill rate ceilings (capped bill rates). If not, can the organization enforce quality standards independently or through an MSP?
  5. If the organization has the right to audit their supplier payroll records.
  6. What labor or skill categories dominate expenditures?
  7. How aggressively the organization’s business practices approach high levels of co-employment risks.

Further, each pricing methodology has responsibilities that, if left unaddressed, will result in a suboptimal program and negate that approach’s benefits. Therefore, your decision must account for your organization’s willingness, expertise, and financial and personnel resources to perform the responsibilities, as outlined in the following sections.

Bill Rate Pricing

DEFINITION AND HISTORY

The only form of pricing available until the mid-1990s, a bill rate model involves establishing negotiated bill rates for every job title. This type of pricing is exactly like buying other goods or services regardless of the client’s knowledge of the seller’s costs.

ADVANTAGES

  1. Standard Rates for All Identifiable Positions/Job Titles: Because bill rates are known and often published, hiring managers will rarely pay more than the published rates for a given position. The published rates serve as an hourly rate cap for each job title.
  2. Easier to Compare Rates Among Suppliers: Though, comparing one contingent worker’s productivity and potential to another’s may still prove difficult, since precise job responsibilities will still vary from worker to worker.
  3. Suppliers Enjoy Some Discretion in Terms of Each Placement’s Profitability: Suppliers can choose to profit levels by varying a specific position’s pay rate. For example, a supplier may discount its profitability when faced with extensive competition, low demand, or the need to get a foot in the door in a new or large account. Regardless of the spread between the bill and pay rate, the supplier is guaranteeing the worker’s quality; though, that doesn’t necessarily translate into the delivery of the best candidate to the customer, as described later.
  4. Easy to Audit and Ensure Contract and Rate Card Compliance: Simply compare the rate charged on the invoice to the rate for that position on the published rate card.
  5. Easier to Calculate Cost Savings.
  6. Easier to Prepare Budgets and Forecasts.

RESPONSIBILITIES

  1. Engage in regular, formal and systematic rate card maintenance to make sure the rate card reflects pricing levels attractive to the supplier base. If not, suppliers will assign their candidates elsewhere or take a chance on delivering less-qualified candidates to the client. Review rate cards at least annually. Even if no change is made, the analysis will verify that rates remain relevant. When facing periods of change in the labor market or overall economy, rate card reviews should take place at least semiannually or the first sign of declining quality.
  2. Confirm that job titles and―more importantly―job descriptions represent the work performed. Continually collect job function data and associate it with the appropriate job title and therefore, bill rate. For example, the executive assistant role has evolved beyond traditional responsibilities to include intermediate knowledge of MS Excel and Access. Failing to account for these added responsibilities will result in upward job title creep, data integrity breakdown, increased hourly costs, and turnover. Hiring managers who can’t find executive assistants conversant with Access may seek the next highest position until they find the job title that includes that skill. If that next-highest and least-costly position is an accountant/office manager, the organization faces several consequences:
    • The organization’s need for an executive assistant with knowledge of Access remains hidden. While less serious for one-off needs, this type of situation has greater implications if the organization’s demand for this skill becomes a company-wide need and resources can’t be identified quickly enough.
    • The need for accountant/office managers is overstated, and conversely the number of executive assistants is understated, skewing metrics and impairing full workforce transparency and planning.
    • The organization is likely to pay more for the accountant than the executive assistant who is familiar with Access.
    • The accountant could abandon the assignment prematurely due to boredom, not being comfortable providing highly administrative duties, or may simply lack less-technical/soft skills in which case the client may ask the accountant to leave.
    • Hiring managers who can’t find candidates using rate cards may circumvent the controls to source workers through unapproved―and sometimes uninsured―more costly suppliers. Even in the presence of A/P department controls, hiring managers may include staffing services charges on their expense reports or receive direct reimbursement from a line manager who subsequently submits it on his/her expense report.
  3. Purchase, conduct, and interpret salary survey data. This responsibility could cost tens of thousands of dollars, assuming authoritative and relevant sources are used, and job descriptions are updated and mapped to survey data.

DISADVANTAGES

Published bill rates force a customer and supplier to agree upon a published job title regardless of the assignment’s actual requirements. As stated in the responsibilities on the previous page, an organization must be careful to align match job titles and job descriptions to the work performed.  Significant gaps may work to the benefit or detriment of the customer, supplier, or contingent worker. But they can also present less-apparent, more-harmful consequences.

If actual assignment requirements and job titles don’t align, a hiring manager may resort to requesting the published job titles (and associated rates) commensurate with the actual assignment requirements. Such a scenario significantly blurs the client’s real needs and builds a foundation for the accumulation of erroneous data. Take, for example, an organization that has an assignment that calls for a clerk. However, the published clerk rate is too low to attract the appropriate candidates. To secure a contingent worker with the necessary skills, the client requests an executive secretary because the secretarial rate is higher and therefore has a better chance of finding a clerk. Obviously, this behavior will overstate the number of executive secretaries needed and understate the number of clerks actually needed.

This single disadvantage has the potential to wipe out all of the advantages. Luckily, a two-fold approach can remedy this situation:

  1. First, make sure that the published rate card accounts for as many job titles and variations of job titles as possible. Moreover, each job title should have an updated and comprehensive job description. For example, a published rate card may include Clerk I, Clerk II and so on, where each numerical increment represents more experience/skills, and therefore, a higher bill rate. The same logic can be applied within all job families such as accounting, engineering, and light industrial.
  2. Organizations should monitor bill rates no less than every six months or whenever the supply of qualified candidates begins to wane or grow. If neglected, the quality of the program could erode.

Mark-Up Pricing

DEFINITION AND HISTORY

Mark-up pricing entails suppliers and buyers negotiating a fixed mark-up percentage to be applied to a floating pay rate for each job title or job family (i.e. clerical, professional, technical). This model became popular in the mid-1990s, as a way for buyers to gain some control over contingent labor quality and gauge supplier profitability. Until then, clients had little visibility into contingent worker pay rates and markups. Buyers asserted that knowing these details would enable them to make better decisions regarding a fair profit for the supplier and driving worker quality, since pay rates correlate so strongly with skills, experience, and therefore performance.

The approach has grown in popularity over the last decade. Some client organizations even try to achieve even greater control by dictating worker pay rates. The rationale behind this approach being that the higher pay rates will attract better candidates. In this scenario, the supplier also enjoys a reduction in recruitment costs due to being able to competitively compensate their contingent workers. However, this approach fails to address one dynamic: while pay rates determine which supplier a contingent workers chooses, mark-ups determine where (which client) the suppliers choose to place their contingent workers. If the negotiated mark-up is not competitive, an organization has little chance of seeing the best candidates since the supplier won’t realize sufficient profit.

ADVANTAGES

  1. The customer has greater control over the quality of their contingent labor. Sometimes, however, this ends up being no more than the illusion of control.
  2. Publishing bill rates or even pay rates for any job titles/positions is often unnecessary―in fact, not practicable. The contingent labor market is highly efficient, with many buyers and sellers. This laissez-faire approach automatically finds the right pay rate, making conducting business much easier: simply apply the negotiated mark-up to the pay rate. Moreover, if mark-ups are competitive, improved supplier relations and fewer contractors worker turnover may result.
  3. The accumulated spend data paints a more representative picture of qualitative attributes of an organization’s contingent labor expenditures. The data accurately reflects the nature of the organization’s needs, enabling better decision-making.
  4. Suppliers generally favor fixed or semi-fixed (mark-ups with in a negotiated range) mark-ups with the freedom to pay their contingent workers a competitive market rate.
  5. Easier for suppliers to grant raises and, therefore, retain a talented workforce. Client organizations benefit by enjoying more continuity and fewer breaks in productivity.
  6. Contracts are less complicated. Fewer points to negotiate and suppliers are more amenable to them.

DISADVANTAGES

  1. Much more difficult to budget and control contingent labor expenditures without a bill rate cap.
  2. Client organizations must be more vigilant when evaluating contingent labor costs and quality.
  3. Less reliance on job titles and job descriptions will compromise the data’s value. It may also expose the client to spending more money for a contingent worker they like versus the worker’s productivity.
  4. Can be more difficult to evaluate supplier performance. Clients struggle to find a common denominator where different suppliers provide the same job title, but pay and charge different rates.
  5. Cost savings can be more difficult to calculate. What does one compare to previous bill rate or mark-up? Correlating previous job titles to new job titles is burdensome.
  6. Can increase client exposure to co-employment litigation, if client organizations choose to control contingent worker pay rates or supplier bill rates and mark-ups (and therefore, pay rates).

Closing

Each pricing methodology's details and benefits give organizations much to consider when determining which best meets their unique business environment and objectives. Equally important are the responsibilities associated with each model, whether they are performed directly by the client organization or by an MSP. Choosing an experienced MSP to assume these responsibilities will give you the expertise and tools to get the most value from whichever methodology you choose. Such a solution will also help you take action before adverse trends manifest themselves and, most importantly, align contingent workforce procurement and management with broader and more strategic goals.

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