Contractors without an established network of contacts will almost always use recruitment agents to find contracts.
There are many advantages to using recruitment agents to find contracts. They are an extremely cost effective method of outsourcing your sales activities.
However, contractors wiill earn less if they don't understand how agencies and agents work in order to maximise their return. When negotiating their rate contractors need to understand that because agents want to maximise their profits they don’t work in your best interest.
How agencies operate
Agencies are a sales brokerage. Their business is reselling products - you the contractor. Like all reselling businesses their profit is obtained by maximising the difference between the buy and sell price – their margin.
Agents get paid a small basic salary plus commission, based on the margin they achieve. A typical agency margin is around 15%. Commission rates for agents are around 10% of margin.
An Example of an agent’s rate and profit margin
Let’s assume a client is prepared to pay £500 per day for a contractor.
The breakdown is as follows:
| Daily rate to client: | £500 |
| Monthly revenue (21 days): | £10,500 |
| Agency commission @ 15%: | £1575 |
| Agent commission @ 10%: | £157.50 |
Rate for contractor = £425 (£500 * 85%)
Contractor Monthly revenue = £8,925
What happens when an agent changes it’s rates?
Let’s look at 3 examples. The first looks at what happens if the agent tries to increase the contractors rate. The other two examples looks at what happens when the agent tries to maximse their profit by underpaying the contractor or overcharging the client.
- Agent attempts to increase the contractor day rate to £475
- Agent attempts to increase their profit margin to 25%, reducing the contractors rate by £50 to £375.
- Agent attempts to increase rate charged to client by £50, whilst still paying a contractor rate of £425.
Option 1: Agent attempts to increase rate to £475 for contractor
| Daily rate to client: | £560 |
| Monthly revenue (21 days): | £11,760 |
| Agency commission @ 15%: | £1765 |
| Agent commission @ 10%: | £176.50 |
Rate for contractor = £475
Contractor Monthly revenue = £9,975
The agents commission increases by an extra £19 (+12%).
The contractors revenue increases by an extra £1070 (+12%)
Option 2: Agent attempts to increase their margin to 25%, reducing the contractors rate by £50 to £375.
| Daily rate to client: | £500 |
| Monthly revenue (21 days): | £10,500 |
| Agency commission @ 25%: | £2625 |
| Agent commission @ 10%: | £262.50 |
Rate for contractor = £375
Contractor Monthly revenue = £7,875
The agents commission increases by an extra £105 (+66%).
The contractors revenue decreases by £1050 (- 11%).
Option 3: Agent attempts to increase rate charged to client by £50, whilst still paying the contractor £425.
| Daily rate to client: | £550 |
| Monthly revenue (21 days): | £11,500 |
| Agency commission @ 23%: | £2625 |
| Agent commission @ 10%: | £262.50 |
Rate for contractor = £425
Contractor Monthly revenue = £7,875
The agents commission increases by an extra £105 (+66%).
The contractors revenue stays the same.
Paying the contractor more money is not the agents primary cause
The examples show that of the three options the least attractive option is to pay the contractor more money! The most attractive options are to overcharge the client and the underpay the contractor. Not surprising really, it is after all how their business works
As the calculations show, despite what some agents might tell you they have no interest in trying to obtain the best possible contract rate for you at all. Furthermore, they have no interest in helping you to gain further skills, pay you an above market rate, or help you to further your contract career because this wil make it harder for them to underpay you in the future. That’s the nature of the contracting business.
Contractors should be aware that maximising their income means fighting with the agent for the maximum share of the clients budget for the contract role. Thinking that you and your agent share the same commercial interests is not really in your best interest!
As this guide explains when it comes to negotiating, contractors must not think that agents are their to maximise their daily rate. This applies both at the start of the contract and for every renewal when you hear the famous phrase “The client is not prepared to pay you any more money – there are no pay rises.”