So your contractor wants to know their charge rate?

Two questions consultants prefer not to hear from their contractors:

1) ‘How much are you charging the client?’
Usually asked after you’ve hammered the phones to find a suitable role; persuaded your client to conduct an interview; and overcome objections to solicit an offer. (You weren’t expecting a ‘thanks’ now, were you?!)

Before you spontaneously combust with indignation, remember that the majority of people asking this question are doing so for one of the following reasons:

Naivety – perhaps this is the first time the person has contracted, or a well-meaning friend has told them that recruitment companies take ‘their’ money. They think that if there was no
middleman, they would pocket the charge rate in full.


A bad experience – maybe they felt they were paid below market-rates previously, or they’ve lost wages owed to them when a recruitment or pay-rolling company went bust. (Not unheard of during the GFC.)


They’re trying it on – a contractor who has been around the block a few times may use the question as a negotiation tool. They know from experience that some consultants will increase the pay rate because they lack the skills or nerve to deal with the question.


Even less welcome is:

2) ‘You’re charging the client how much?!’
Usually heard when a contractor finds out their charge rate by speaking to the client or, when the wrong copy of the contract has been sent to them. (Another reason to ALWAYS check contracts before they go out the door!).


Fortunately, there are ways of handling this question without increasing the pay-rate or ruining your relationship with the contractor:


• Don’t argue if the contractor accuses your company of making a profit out of them.
This is nothing to feel bad about. Working for a profitable company means a contractor can submit their timesheets and be confident they’ll be paid! It also means your company is doing something right. If clients and candidates were being ripped off, they’d quickly go elsewhere and you wouldn’t be in business.


• Explain that the charge rate is agreed between you and the client.
It’s not your place to disclose or comment on the amount clients choose to spend on contracts, and doing so can breach confidentiality agreements.


• Explain that charge rate does not equal pay + profit.
Don’t go into specifics but explain that the difference between charge rate and pay rate includes statutory costs of payroll tax and workers compensation (costs that would still exist if the contractor worked directly for the client) as well as operational costs such as back office payroll and admin costs, telephone, internet, power, rent, wages... the list goes on. The difference between charge and pay rate is not pure profit; neither is the charge rate what the candidate would earn if the client hired them directly (and if they wanted to hire a permanent person, they’re unlikely to be taking on a contractor.)


• Explain that the pay-rate is the candidate’s concern....
Use evidence such as salary surveys, advertised pay-rates, and (without breaching confidentiality) examples of similar placements you’ve made elsewhere to show why the rate is appropriate for their skills and experience in the current market. Refer back to your original interview notes and remind the candidate why this particular contract satisfies their needs. Their only concern should be whether or not they feel the pay-rate is acceptable to them.


• ...and charge rate is the client’s concern.
The candidate may think that all you’ve done is make a few phone calls, but explain that the fee you charge the client doesn’t just cover the work that the contractor does: it covers your entire service to the client including sourcing not just one, but perhaps multiple candidates for a short-list; managing the recruitment process for every candidate shortlisted; providing market advice and expertise; providing cash-flow (ie. paying the contractor before the client pays you); the back-office costs associated with having a contractor on-site; and so on. You don’t charge the candidate a cent to find them a job... the client pays for the service, and it’s up to the client to decide what they deem appropriate for those services.


If the client is a PSA, or you’re working to set rates, explain that you have no room to move. They are entirely set by the client. An increase in pay rate will involve a larger increase in charge rate (on-costs will rise too) and that could make the contractor too expensive for the client.


Be respectful and take the time to deal with the question. Failure to do so could mean a contractor who is being paid fairly feels as though they’re getting a raw deal, and that could result in the rejection of a decent offer, or problems for the client (whinging, not fully committing to the contract, one eye constantly on the job market etc.).


Useful? Would love to hear what you think, and any other insights into what’s worked for you.
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