Most businesses and contractors that make use of Recruiting agencies have no idea how much money is lining the pockets of the Agencies.
“The most they’ll pay is $60/hr, Sugar”
Why not? Because the Agencies keep it a secret; why do they keep it a secret? Because if they didn’t keep it a secret, no one would make use of their “Services”.
To put it simply, the average recruiter Margin today is 40%. 40%! And after that you pay another 40% to Uncle Sam, leaving you with what, a pittance? Exactly.
Unlike a Full Time Employee, where the amount the recruiter makes is fully disclosed (and usually around $25,000), the contractor margin is almost never disclosed.
This author argues that it is a pox on the industry that this “fee” is not disclosed to either the company engaging the Agency, nor the Engineer employed by the Agency.
This is bad for a number of reasons, primary amongst them that the Agency’s goal is to make the biggest spread between the bill rate and the amount they pay the Engineer, thus they are incented to find the “cheapest”/”worst” talent and bill them for the highest rate.
This is bad for corporate accounting and fiscal responsibility because they have no idea how much money is being wasted.
This is bad for the Engineer because they are unfairly being taken advantage of.
How can I “be sure” it’s 40% if it’s hidden? The math is simple my friend. How many times as an Engineer have you been told that, the “most the client will pay is $60/hr” or, “the most they will pay is $55/hr”. Tons of times right?
So do the math. They are billing the client $100/hr, or $99/hr, and then they skim their 40% and the most they have to pay is, voila, $60/hr.
So what’s the alternative? Simple. In the Internet Era companies don’t have to be at the mercy of the Headhunter Pimps and their rolodexes.
They can just advertise their jobs directly on job boards such as Craigslist, Monster, etc.
They’ll get more Developer for their money, and for the money saved, can probably get 2 developers for the price of one.
Finally, for those that continue to use Agencies, they should force the recruiter to disclose the margin. If their service is worth their fee, then noone should complain about their margin. But if it isn’t, and no service is worth the 40% they charge, the margin should be adjusted to be realistic.
It’s bad enough to be pimped around by these folks — the least they can do is disclose the Pimp fee.
And don’t forget to advertise your job directly.
After all, the gals in the “oldest profession” have pretty much given up on pimps and tend to advertise directly on the net.
They should know how best to play the game.
The Practice and Art of Software Composition 
Ah my wife and I call them the pimps! Thanks for confirming I am not the only one who views them in this way.
I have recently returned to the UK from Canada and was shocked to see how few non-recruiter ads were out there. Now, a recruiter put me forward for the role I start on Monday and I was grateful enough to take them a bottle of wine. (Not naive enough to think they did not make a nice fee too!)
Strongly agree, ADVERTISE YOUR VACANCIES YOURSELF!
Thanks again maestro!
I am a recruiter. I do not make even close to 40%. In fact, I have been left with nothing several times by multi-billion dollar companies with no eithics who use my services to find great candidates, then hire them and not pay me anything. I am commission based only so there could be months where I am making nothing. I am from the IT industry, so when I find and screen candidates, they are the best.
I believe this article is associated to large recruiting and services houses. Let’s be clear, the small agencies like mine, strive for honest, reasonable transactions with our customers and clients best interests in mind. And, I have letters of appreciation as proof from my clients.
Where to start? Or is it worth it?
40% markup is for placing a consultant in a temporary role. Now the consultant is a W2 of the staffing agency. The staffing agency now pays for the consultants benefits, 401k, insurance, taxes, etc. This is called Burden cost and is about 15% of the consultants payrate (from your example $60/hr). Now we are down to a 25% Gross Margin.
The advantages for the company are that they do not have to bring the person on fulltime. Typically the burden cost for a company to bring on a fulltimer is a 1.4 multiplier of their annual salary considering the cost of benefits, taxes, etc. If the role is temporary, they can let the contract end and they have not had to fire anyone “due to lack of work” which is bad PR for the company. Nor are they responsible for paying any severance, vacation payout, etc. They just let the contract end. And they have spent no time and money posting jobs or sifting through resumes, etc.
If they were to advertise for themselves to find a candidate they would have to bring them on fulltime and offer them benefits, which ends up creating a 40% markup on the company cost anyway. Now they have a fulltime employee on a temporary job.
If you are talking about recruiting service for permanent placement then your 40% estimate about is way off. Fees for perm placements are between 15-30%.
I particulary like the comment from the agile developer who just got his next job from a recruiter. Why did you buy him wine if your payrate was unsatisfactory? Seems like you appreciated the service… as does the company hence the payment. BTW – I have an agile position in CA for a startup. Good opportunity that you would have never heard about if I wasn’t your pimp.
The entire corporate america is moving more and more to RPO (recruitment process outsourcing) because it makes business sense.
Is BestBuy and pimp also? They put a 400% markup on my wireless keyboard I am using to type this comment.
I spent 4 months finding the right candidate for a VP role recently. The payout is 25% or $32k that I have to pay taxes on and cover my expenses. The new employee loves his job and the company is getting new revenue from the employee. Win/Win/Win.
Now stop reading this and get back to your office, the corner.
One more thing. Our temporary markups are only around 30%, not 40%.
Found this post and it seems for me to be still valid. Actuallly they charge me 23 percent. I would say 7-8% should be max given the work they put in for the duration of a project. Anything more is just goodwill premium. Also while we are at it. They should drop all of their post termination clauses which are accompanied by high penalty fines. These clauses are very restrictive and not needed.
I’m adding a comment that I am discovering that more and more companies ARE forcing their recruiter pimps to disclose the margin.
At least it’s progress. All companies should demand this; it’s becoming standard enough practice the recruiters will just have to learn to live with it
SM
this is not happening in my neck of the woods. So far not one agency will divulge the client bill rate to me.
PIMPS!!!
Yes. This is true. These agencies are pimps. I work very high end IT Security and because I did not know any better I went through one of these agencies. It was an 18 month contract. I made &74,000 … The agency made $90,000. From my sweat. They did nothing to earn this. The client billing rate was not disclosed to me. I assume they were making aobut 15%. I found out later how wrong I was.
There is legislation that goes to the House every yhear which would force these agencies to divulge their client billing rate. Manpower, Inc. has such a tremendous lobby that the bill never goes through.
I never said the agencies would disclose their bill rate to the contractor.
I said now, at least, some of them are disclosing their bill rate to the CLIENT.
However I’d agree that it should be transparent on all ends….and it is not, and only sometimes to the client
SM
Here’s how it works (I was a Sr. Recruiter and I am now a Software Developer).
Burden Rate for W2 is 1.18, burden for 1099 is 1.08 and Corp to Corp is 1.05. Example: The manager of XYZ company will tell the account manager that runs that account that they need a software developer for a 6 month contract with a bill rate of $90/hr. If the recruiter negotiates a rate of $60/hr. W2 with the candidate then the spread the company would make per week is: 90 – ((60*1.18)*40) = $768. 90 is the bill rate, 60 is the pay rate, 1.18 is the burden rate and 40 is the amount of hours you work per week. In most cases the recruiter will not make that money but rather a percentage of that based on how many candidates that have on their payroll. Burdens change from company to company but the aforementioned ones are pretty standard. Industry standard for spread is $500 for per week but a recruiter will take lower than risk not getting a sub/start. You can make more money if you’re 1099/C-C because the staffing firms burden is lower and hence they can pay you more. Hope this helps. Negotiating down to the penny is just a tactic a recruiter will say to make it sound more legit. Always ask for more and know your worth.