IT Contractors – what happens with your day rate?

Availability of advice for IT contractors has never been more plentiful. There are numerous blogs and forums offering support on varying subjects such as managing your taxes, insurance, IR35, pension planning, mortgages etc. However, few if any seem to offer any guidance on what is probably the most fundamental question for the majority of IT contractors – what is the going day rate for someone with my skills and experience? In all our interaction with contractors at RoleConnect, this type of question is one we probably hear most frequently.

We could turn to the Romans who had a deceptively simple solution for assessing worth: Res tantum valet quantum vendi potest – ‘A thing is worth only what someone else will pay for it’. Given, however, that the majority of IT contractors are still hired via recruitment agencies they have no idea of their worth  – they are only aware of what the recruitment agency offers whereas their true worth is what the employer is willing to pay for their time.

So what day rate should an IT contractor expect?

As RoleConnect’s interaction between employer and contractor evolves, we will have more insightful data regarding day rates which we can share with the community. However, we wanted to give an idea to contractors now as to what day rates were applicable – how much of what the employer pays is being divided between the contractor and the recruitment agency. So we went and built our Fee Speedometer. Please feel free to use this tool as often as you need, all the tool needs to know is the duration of your contract, job title, where you work and what your day rate is currently.

Get your figures straight

Dont confuse markup and margin

Using markup
Contractor day rate 375.00
Markup (25%) 93.75
Employers charge 468.75

 

Using margin
Employers charge 500.00
Margin (25%) 125.00
Contractor day rate 375.00

Recruitment agencies take a margin from the amount the employer pays, not a markup on the contractors day rate. How to Calculate Markup & Margin

What do recruitment agencies charge?

So what margin does the recruitment agency take for each IT contractor placement. Many recruitment agencies state that they take a margin of 10% – 15%. Many of our cloak and dagger insiders working for recruitment agencies in IT contracting tell us that they agency will never go below a margin of 25%. Ultimately its impossible to know. However, when we look at the world’s largest recruitment agency who derive 92% of its €20.5 billion revenue from contracting (Adecco 2011 Annual Report) it would seem to be quite a healthy margin.

How does the Fee Speedometer work?

Every year, the various recruitment agencies specialising in IT contracting produce their Annual Salary Survey (see sources listed below). These surveys are effectively the recruitment agency suggested retail pricing for skill sets and their intention, we assume, is to set a cost expectation amongst employers – anyone in permanent employment will know that these surveys are often quoted at salary review time.

We took the data for IT contracts from each of the leading recruitment agencies, categorised their advertised rates by job title, location and years experience and then averaged the results out across the various agencies. From there the process is straightforward, the tool does a simple look up and calculates the average amount charged to the employer for your skills and experience – it shows the amount the contractor earns and the amount the recruitment agency will earn.

For example, a Java developer with 5 years experience working in Dublin on a 6 month contract and earning €400 per day – the tool looks up the aggregate recruitment agency data which shows an average charge of €540 per day; therefore the agency earns €140 per day and €18,270 over the lifetime of the 6 month contract.

a screen capture of RoleConnect's Fee Speedometer used to help IT Contractors calculate their day rates and check what the recruitment agency charges

RoleConnect's Fee Speedometer

The image above is a screen capture from the RoleConnect Fee Speedometer showing a typical use i.e. a Java IT Contractor with 5 years experience on a 6 month contract based in Dublin, Ireland.

Are the results perfect? Nope, absolutely not. It is, however, an insight into what the recruitment agencies publish as their expected rates – your mileage may vary. Ultimately every contract awarded is a negotiation between, at first, the employer and the recruitment agent and secondly, between the recruitment agent and the contractor. Of these three parties, two are at best blinkered and at worst in the dark as to who is paying what to whom – the recruitment agency are controlling the information flow to both the employer and IT contractor. Our fee speedometer is intended to throw some light and some transparency on this process and to give some clues as to where the money is being distributed.

A bitter pill to swallow

The reaction to our Fee Speedometer has been mostly positive – but not entirely so. It has also been dubbed as ‘crazy’ and questioned with comments such as ‘surely this can’t be accurate’.

Let us be very clear, the Speedometer is only a guideline.  A tool to help you achieve your greatest potential as an independent worker and to take control of your career. Given the background outlined above, we cannot provide an accurate assessment of each and every individual contract – its a guideline tool to give you an approximate picture of where your IT contract funds are going.

Neither though have we been surprised at those questioning the results. Marketing professor Peter Darke of York University in Toronto speaks of the emotional reaction people feel when they get what they perceive as a good deal – the elation seems to stem from two places: People’s perception that they’d been treated fairly, and people’s self-evaluation. “There’s some evidence to suggest that it reflects back on them as rational, good, effective and skilled”. Conversely, nobody likes to believe they’ve been taken advantage of so its not surprising then when confronted with what is potentially a bad deal that many will question the data rather than examine the industry that is less than transparent in its dealings.

Sources:

The data for our Fee Speedometer has been compiled from the following leading recruitment agencies operating in Ireland (click each to be linked to that companies salary survey). We will be shortly adding data for UK recruitment agencies so please check back for an update.

Robert Walters
CPL
Brightwater
Morgan McKinley
Hudson
Sigmar
Abrivia

Only a few of the recruitment agencies explain the process by which their salary survey is compiled, the explanation given by those that have are shown below:

Robert Walters Group: “Compiled by our dedicated research division, the Survey is based on the analysis of permanent, interim and contract placements made across each of the Group’s geographies and recruitment disciplines during 2011.”

CPL: “This is compiled through market data through live roles that we have worked and through job placements made. Like all surveys this is to be used as a guide. We are aware that all companies have specific remuneration structures of which pay is often just one part.”

Hudson: “The figures have been thoroughly researched by our consultants, who have many years’ collective experience. Base salary figures do not include benefits or bonus. They originate from a variety of sources including job offers by clients, candidate disclosure of salaries and advertised salaries. It is important to note that all salaries are dependent on a number of key factors such as size of company, location, sector, hiring profile and benefits. This publication should be used as a guide only.”

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