Contract margin

On a permanent placement the fee is the gross profit. On a contract, the agency's revenue is the full bill, most of which it passes straight to the contractor, so the number that matters is the spread. A contractor on £550 a day billed at £660 carries a margin of £110 a day, which is 16.7 per cent of the bill. Over a five-day week that is £550. Assuming 46 billable weeks once holidays and bank holidays are taken out, it is about £25,300 from one placement over a year.

Margin is not profit. For a limited company contractor outside IR35 there is no employer's National Insurance, so the margin sits close to the agency's real gross profit. The costs still inside it are the easy ones to forget: funding the gap between paying the contractor weekly and being paid by the client at 30 days or more, insurance, bad debt, and any credit given to keep a client happy. An inside-IR35 engagement where the agency is the fee-payer is a different calculation, because employer's National Insurance then comes out of the spread.

Margin is set in one of two ways. Either both rates are negotiated separately, pay with the contractor and bill with the client, or the bill is set as a percentage on top of pay. The second method is where the confusion between mark-up and margin costs real money, because a 20 per cent mark-up is only a 16.7 per cent margin.

The usual failures are quiet. A contractor's rate goes up at extension and the bill rate does not follow. A client negotiates a discount on a new placement and it is applied to the pay side by mistake. Expenses are reimbursed to the contractor and never recharged. None of this shows until someone compares bill and pay line by line, which is why margin should come from the same approved timesheet that produces both documents, not be rebuilt in a spreadsheet at month end.

The longer answer: How does the timesheet to invoice cycle work on a contract desk?