What is a fair fee margin on an ICT contractor in Federal Government, Canberra?

By Ben Ashman, Founder, Recruitment Hive

Over the past twenty years of Federal Government ICT contracting I’ve given a lot of thought to what is a fair contracting fee margin charged by a recruitment agency?

Ask a professional ICT contractor and they will certainly give you a different answer to that given by a recruitment consultant. Ask a recruitment consultant and they will give you a very different answer to a global recruitment company executive.

I’m a recruitment consultant and a recruitment company executive. I’ve run my own show for many years now and have come to a definitive conclusion as to what a fair ICT contractor fee margin is, but I am a market rarity. Let me take you back through my federal government ICT recruitment upbringing and specifically focus on how I was trained in regards to setting ICT contractor fees.

Back before the turn of the millennium when Novell and Lotus were the bleeding edge, I got a start in the federal government ICT contracting industry through a now defunct (important detail) national ICT recruitment company. Some of my earliest recruitment memories are being trained to push up client rate expectations while pushing down contractor rate expectations to create as large a difference in-between as possible, that difference was to be the fee margin.

Happy Friday…

If, late on a Friday afternoon, you haven’t seen a group of recruiters (a gaggle? A parade?) boasting about how big a fee margin they landed that week then you just aren’t getting out enough for Friday drinks. Many an afternoon, during the infancy of my career, I witnessed a…..pack (?)….of ICT recruiters trumpeting about a thirty dollar contract fee margin that nets the company almost $5,000 per month. The highest fee margin I remember being celebrated well in excess of that and almost three times the Australian minimum wage.

At another job within a local ICT recruitment company, I was awarded $200 gift cards if I achieved a fee margin higher than 20%. Being young and highly competitive all my subsequent fee margins where at least 20%. Roughly between fifteen and thirty dollars per hour on each contractor. The reward structure of the company conditioned me to be as opportunistic as possible.

How did I decide what fee I would charge in those days when working for other companies? It was purely opportunistic. Like my training dictated, I pushed the contractor to their lowest acceptable rate while pushing the client to their highest acceptable rate, what was left in between, minus insurance and tax costs, was the margin.  Fee margin setting, for most recruiters in most companies, is simply opportunistically determined by what is possible resulting from how little a contractor will accept and how much  a client will pay.

These days, my approach to setting contractor fee margins has changed, but I’ll get to that later. First, the other side of the argument needs to be discussed: the costs of running a recruitment company and how they relate to the setting of contractor fee margins.

From the outside looking in, the recruitment industry doesn’t look that complicated or difficult, but it is. I won’t go into a detailed explanation between the perceived functions of a recruitment company and the actual reality of how they operate, but instead just try to give an outsider an understanding of the costs involved. This is important when considering what a fair contract fee margin is.

As an overall cost, to run a medium sized recruitment office of about 8 internal staff monthly can run between $50,000 – $100,000.

Some items included in this are: rent, IT systems, database subscriptions, Seek subscriptions, LinkedIn subscriptions, insurances, phones, wages, accounting.

Running any business is not cheap, recruitment businesses are no different. And like any business, if expenses are not met, they fail. When recruitment businesses fail, like DMA did in 2002 or Wizard did in 2007, contractors all lose their unpaid wages (usually a months’ worth).

It is vital that a recruitment business charges fee margins that make it viable and healthy, so no-one looses out  by it going under.

So what is the balance of a “fair” contract fee margin within the federal government ICT market?

When I started Recruitment Hive, I was determined to sleep well at night

I didn’t want to be kept awake by a conscious troubled by excessive, opportunistic contractor fee margins that would surely upset both Client and Contractor if ever revealed.  The (industry) normal, opportunistic fee approach would certainly not sit well with me if I was either a Contractor or Client subjected to it.

I’ve determined this for The Recruitment Hive mostly by lying in bed at night, during the early years of my ICT recruitment career, wondering how “contractor X” will react when he/she finds out that there is a twenty- or thirty-dollar fee margin on top of their rate, being charged to the client. Putting myself in “contractor X’s” position, I didn’t feel comfortable at all. I’d lose sleep about this, not feeling great about the business I was doing or about myself. I was not at all happy with the opportunistic approach to setting contractor fee margins.

Therefore, when I started my own federal government ICT contracting recruitment business, Recruitment Hive, I was determined not to be kept awake at night by a conscious troubled by excessive contractor fee margins.

Attempting to put myself in the mindset of an ICT contractor while, at the same time, balancing the need to run a viable and healthy recruitment business, I conjured the following fee margin rate card which is now included within every email sent by The Recruitment Hive team.

We disclose our low contracting fees (charged to client)

Rather than working on a percentage basis, which results in disproportionately high fees for high Contractor rates and disproportionally low fees for low Contractor rates, I have defined fee levels for high and low parameters of the Contractor fee. This results in fee margins ranging from 8.3% to 10.5% across the full range of contractor rates; from $35.00 per hour (ICT Support Officers) to $150.00 per hour (Solutions Architects).

Now, in my own business, when Recruitment Hive is charging on average $9.50 per hour for a contractor fee margin I find myself sleeping well at night. Firstly, that my business is viable and healthy and not going to be forced into receivership, but also, and just as importantly, that I am doing good business from the perspective of all parties, not just my own. There is no chance that any of my clients or contractors will be shocked when any of Recruitment Hive’s contractor fee margins are revealed. As everyone that Recruitment Hive deals with, on both sides of the coin, is already well aware what fees we are charging. We disclose our fee rate card up front. Strangely this is quite revolutionary within the federal government ICT contractor industry.

So as not to confuse, I will give an example of how a Contractor’s rate gets turned into a Client charge rate once the fee margin, payroll tax and insurance costs are included.

Let’s use the example of a Business Analyst who is getting paid $110 per hour (including super), engaged directly to the recruitment company (not using a separate payroll management company).

  • Contractor Pay Rate: $100 per hour (including super)
  • $10.50 per hour Recruitment Hive fee margin
  • $5.00 per hour to cover obligated on-costs: WC, PI, PL insurance, long service leave (5%)
  • $6.85 per hour in ACT payroll tax (6.85% in the ACT)
  • Client Charge Rate = $122.35 per hour (ex-GST)
  • Total Client Charge Rate = $134.59 per hour (inc-GST)

Many recruitment companies charge an additional 2.5% to cover the administration costs of conducting the Contractor’s payroll. Recruitment Hive does not include this additional charge as we feel this service cost is covered by our fee margin.

Sadly, opportunistic fee margin setting is probably still the industry standard. With so many national and international recruitment companies in the market that have corporate hierarchies that disappear in ivory towers into the Swiss Alps or glass-clad Texas sky-scrapers, opportunistic contractor fee margin rates are here to stay.

The good news though is that some Australian Federal Government ICT recruitment companies are prepared to be transparent with their moderate contractor fee margins. The Recruitment Hive is one of them.

If you ask us what a fair ICT Contractor fee margin is in the Australian Federal Government contractor market we’d say:

An explanation of  Recruitment Hive’s self-find fee structure

The Recruitment Hive’s Self-find fee structure is designed to allow our federal government clients a recruitment mechanism to leverage off of their most powerful recruitment advantage: the professional networks of their incumbent teams of technology specialists.

It is well established knowledge that the best recruitment outcomes occur when trusted incumbent team members recommend professionals who they have worked with in the past and who they want to work with in the future. Internal hire recommendations produce better outcomes and, when coupled with Recruitment Hive’s Self-Find fee structure, are acquired at a lower cost to the Federal Government.

Our self-find fee structure is designed specifically so a client-recommended ICT contractor can be considered, at a reduced rate, as a part of a formal, competitive and merit based tender process.

Higher quality at lower costs.  Surely a significant benefit to the Australian economy.

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