Recruiters should be aware of correctly pricing their contract assignments when the client does not permit conversion fees.
Profitability on a contract assignment should be no different than when providing direct placement personnel to the client. Many clients seek to undercut recruiting fees by shortening the contract period while simultaneously prohibiting conversion fees. In addition, some even control the markup during the contract period, limiting the billing rate to a specific markup. All these restrictions lead to losing value on talent, and ultimately cause financial instability for the recruiting firm.
What to avoid: clients who combine the prohibition of conversion fees, shortened contract period, and simultaneous maximum markup requirement. This three way combination invariably costs recruiters a lot of money, effectively lowering the direct placement fee to less than 7% in many cases. When direct placement fees are effectively forced this low, to maintain a successful business an independent recruiter must make nearly one successful placement every week throughout the entire year. Doing this alone would be a monumental feat, and there would be little ability to hire internal staff for recruiting help because profit margins are too low.
What to do: if the standard direct placement fee is 20% of annual salary, on a $50,000 salary placement the fee is $10,000. If the client prohibits conversion fees, the fee must be priced into the billing rate of the contract assignment.
The best option for a client who does not pay conversion fees is to negotiate extending the contract period. In most cases, three months is not a long enough period to earn the entire fee without raising the billing rate too high and breaking the client’s budget.
Also, if the client wants to control your maximum markup, if at all possible, walk away from the deal. There is usually no money or long term success in high volume, low markup business.
For help on pricing contract assignments, contact ECS today.
Ed Kelly, ECS President