Bill Rates Versus Markup: Setting Contingent Workforce Rates for a Flexible Workforce Advantage

Secure the right person for the work, right now, at the right cost. These long-held workforce priorities still apply today, and they will remain relevant well into the future. But changes are being felt:

  • More workers embrace careers as contractors and freelancers.
  • Advanced strategies and technologies give companies a path toward managing flexible workers.

Organizations of all sizes are embracing these strategic practices and innovations, as mid-market companies adopt solutions formerly associated only with larger enterprises.

One such practice is the managed services provider (MSP) solution that coordinates staffing suppliers and other sources of non-employee talent through a single program. An effective MSP maximizes the strength of the talent supplier network. It provides visibility into the workforce supply chain, delivers quality candidates, and enables companies to control their costs and total spend on non-employee talent.

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The last part of the MSP equation around cost control has a significant influence on program impact. Here are key questions that can help organizations arrive at an MSP cost strategy that is right for them.

What are the Cost Calculation Choices?

Two options are at play.

First is the “bill rate” or rate card approach to tracking talent costs.

  • In this approach, the price for talent is considered the total rate the supplier is being paid for the worker’s services.
  • This rate includes the base pay rate paid to the worker plus the supplier markup on that rate.
  • The client sets the strategy by establishing a maximum bill rate it would pay for talent for given roles.

The second choice is a “markup” approach.

  • In this case, the market and the supplier may determine the base pay rate needed for a given role.
  • At the same time, the client dictates the percentage a supplier is allowed to apply as a markup on top of the contractor’s pay rate.

Both approaches have their merits. For decision-makers in the initial stages of MSP planning, the markup approach may seem compelling at first, as it appears to offer an easy path for Procurement to demonstrate visible cost-savings to the company. However, two decades of experience aligning cost management tools to client program objectives have shown that a bill-rate strategy typically provides the most lasting positive impact. Either approach should be applied only after careful consideration.

What is the Full Impact of the Cost Calculation?

The real cost of talent is not determined in a vacuum. Companies must navigate a shifting balance of workforce supply and demand. Ultimately, cost is a function of three elements:

  • How much a worker is paid
  • How much a supplier marks up that cost
  • What impact the cost has on the quality of talent and speed of delivery

The challenge, if the company dictates the markup, is that suppliers may deliver talent at an unnecessary low quality or high cost.

Start with the risk of reduced quality. If a supplier is told how much it will be paid to deliver on a certain talent need, it will prioritize the task accordingly. Consider the factors that go into the supplier’s effort — statutory costs, insurance, and benefits, to name a few.

These elements vary by supplier. If the markup does not adequately match the hard work needed to secure that talent, then the best suppliers in the network may opt-out of the potential business, leaving the client with sources that take longer to deliver candidates or provide lower-quality results. These quality issues add pressure on hiring managers to sort through inadequate talent choices or to suffer from making poor selection decisions and handling the fallout of a misaligned worker.

shutterstock_1075401713On the other side of the equation, consider the high-cost potential. With less focus on contractor base pay, the markup model leaves less incentive for the supplier to negotiate the most competitive rate due to current market conditions. This approach leads to raised costs when fixed to a skill set that varies by geography, cyclical demand, or other external factors.

When markup applies, a supplier may see an opening to deliver talent at a base rate that is higher than market value, providing a larger margin as the value of its markup percentage will be inflated due to the elevated base rate. Over time, the unnecessarily high base pay rate can lead to overall rate inflation and pay equity issues.

Without Procurement’s continuous and detailed attention to the market, the risks of low quality or high-cost variations will remain a factor throughout the life of the contingent workforce program if a markup calculation is used to determine pricing among suppliers.

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Bill Rate Versus Markup

Bill Rate

The client sets the maximum rate to be charged by suppliers for a role or skill being sought. The supplier determines the base pay plus mark-up (supplier profit), but the total does not exceed the stated client bill rate.

Pros

  • Allows the supply chain to adjust to market fluctuations
  • Achieves consistency in overall cost, speed of delivery, and quality of talent
  • Enables the highest-quality suppliers to deliver their best workers
  • Controls the total cost of ownership effectively

Cons

  • Decreases visibility on the tactical cost breakdown to the client

Markup

The client sets the percentage by which a supplier is allowed to mark up the base pay for a given role. Suppliers invest resources or opt-out, as needed, based on business alignment with the set markup percentage.

Pros

  • Gives clients a detailed breakdown of talent costs
  • Boosts perceived savings by adjusting the markup

Cons

  • Creates challenges in adjusting to fluctuations in effort and costs associated with acquiring talent
  • Puts quality suppliers at a disadvantage, as the margin may not reflect their investments in a needed talent type or skill
  • Encourages high base rates to improve markup value
  • Increases privacy risks due to sharing VMS pay rate data
  • Permits clients to be at risk for co-employment if perceived as setting a pay rate based on markup

Does the Bill Rate Approach Give Up Control to Suppliers?

In a nimble organization, each contributor in the workforce supply chain is empowered to bring its strengths to the table while coordinating with other contributors as part of a larger workforce strategy. To do their best work, suppliers with the best resources and connections to fill a talent need may come at a higher markup than others.

Add in variations in supply and demand in geographic markets, and the forces at play will impact the program’s ability to deliver talent consistently and reliably. When the MSP and the supplier work toward a standard bill rate, the markups can be adjusted up or down as needed to accommodate a smooth and continuous flow of talent. In essence, the buyer cedes some control of the engagement method to the suppliers that specialize in their fields but improves control of the outcomes by holding them to a standard bill rate.

Are There Regulatory or Privacy Implications?

Finally, evolving privacy regulations add a new concern to the mix. Holding suppliers accountable to a set pay rate plus markup requires access to pay rate data through the vendor management system (VMS) used in the MSP program.

While the use of such data is currently permissible, this data is not typically captured today due to the privacy best practice of data minimization or to only processing data that is essential for performing a service. Under the General Data Protection Regulation (GDPR), a client, as controller of such data, can instruct the MSP program to process information such as pay rate on their behalf as long as the data is collected for specific and legitimate purposes.

As regulations continue to evolve, capturing pay rate information is the VMS may add another level of risk. In the changing landscape of data privacy, the pay ray is considered personal information that is particular to the contractor, compared to the bill rate, which is specific to the job. This relation of data to the contractor may lead to a further restriction on the capture or sharing of pay rate information necessary to enforce a markup strategy.

A Bill Rate Strategy Addresses the Big-Picture Need 

Today, the best practices applied for calculating value and cost apply to mid-market organizations and large enterprises alike. For anyone thinking about how to manage their spend on non-employee workers, careful consideration of the big-picture impact typically makes the bill-rate calculation a solid foundation for controlling costs, maintaining timely delivery, and achieving quality results.

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    Mike Moxie
    Written by Mike Moxie
    Mike Moxie helps small to mid-sized organizations seeking a more effective way to procure and manage contingent labor programs. Joining AGS in 2016, he brings over eleven years of human capital industry experience helping clients implement solutions, integrate technology and hire qualified staff. Mike received his Bachelor of Science degree from The Ohio State University, and is Project Management Professional (PMP) certified.