© 2011 Sixhills Consulting Ltdb. Understand Supplier EconomicsIn this case, understanding contract agency pricing and its relationship to costs, enabled a sliding scale of payments to be implemented, reflecting the reduced cost to the agency as a contractor’s tenure increasesCase Study: Contract LabourJustification for Tenure Discounting1. Agency Cost Breakdown Applied to MarginPer Contractor Per Year£, %1. Observations• Typical industry approach to margins is to charge a fixed percentage regardless of contractor pay rate. As a large proportion of costs are fixed this becomes extremely profitable at high pay rates, where most contractor salaries lie• Agency contractor prices include a mark-up over contractor pay to cover recruitment costs and payroll costs• Assuming equal pay for contractors & permanent staff, this mark-up means that the agency has earned the equivalent of permanent hire fee after 20 months of contractor employment• For contractors working beyond this length of time, it would be reasonable to reduce the level of mark-up given the absence of recruitment costs• Theoretically, it would be reasonable to achieve a margin of only 5% (to cover payroll costs) within 18–24 months3. Results -RecommendedMarginContractor TenureMargin %0-6 months15%6-12 months13.5%12-18 months12.0%18-30 months10%30+ months5%Total Margin PaidInfrastructure (F)Agency Consultant Pay (F/V)Contractor Recruitment ((F)Client Entertainment (F)Ops & Admin (F)Interest/Factoring (V)NI Payable* (V)Profit* (V)0.3%0.5%1.0%1.0%2.9%1.1%8.1%0.2%£31,058Profit 8.1%Total Margin PaidInfrastructure (F)Agency ConsultantPay (F/V)ContractorRecruitment ((F)ClientEntertainment (F)Ops & Admin (F)Interest/Factoring(V)NI Payable* (V)Profit* (V)† Based on agency paying NI for 8-10% of contractors who are not limited companiesNote: F=Fixed, V=Variable; numbers may not sum due to roundingSource: Client interviews; Firm analysis£200/day, 15% Margin£800/day, 15% MarginTotal Margin PaidInfrastructure (F)AgencyConsultant Pay (FV)ContractorRecruitment (F)ClientEntertainment (F)Ops & Admin (F)Interest/Factoring(V)NI Payable† (V)Profit*1.3%1.8%1.0%0.9%4.7%4.4%0.4%0.6%£7,765Profit 0.4%Equates to over 50% of income!Aggressive SourcingP8
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