Definition · Staffing and agencies
Staffing Gross Margin
Definition
Staffing gross margin is the share of revenue a staffing agency keeps after paying the worker and the employer costs tied to that pay, such as payroll taxes and workers' compensation. It is usually calculated per hour as gross profit divided by the bill rate, and it is the number that decides whether an account is worth running.
Also called: Gross margin in staffing, Spread, Gross profit per hour, GP per hour, Margin in staffing
Formula
Gross profit per hour = Bill rate − Pay rate − Burden per hour. Gross margin % = Gross profit per hour ÷ Bill rate
- Bill rate
- What the client pays per hour.
- Pay rate
- What the worker earns per hour.
- Burden per hour
- Employer FICA, FUTA, SUTA, workers' compensation and any required benefits per hour worked, usually expressed as a percentage of pay.
- Spread
- Bill rate minus pay rate, before burden. Some agencies call this gross margin; most finance teams subtract burden first.
Worked example
A light industrial temp earns $18.00 with a $25.92 bill rate (44% markup). Burden is 19% of pay, or $3.42. Gross profit per hour = 25.92 − 18.00 − 3.42 = $4.50. Gross margin = 4.50 ÷ 25.92 = 17.4%. With 120 temps averaging 38 hours a week, the account produces about $20,500 in gross profit weekly.
Spread vs gross margin
Agencies use 'spread' and 'margin' loosely, which causes confusion in pricing conversations. The spread is the dollar difference between bill rate and pay rate: $7.92 in the example above. Gross margin subtracts burden as well, leaving the gross profit that pays for recruiters, account managers, offices, software and profit.
Gross margin is also different from markup, which is calculated on pay rate rather than bill rate. A 44% markup does not mean a 44% margin; the spread is 30.6% of the bill rate and the gross margin after burden is 17.4%. When an agency and a client discuss 'margin', confirm which number each side means.
Typical gross margins by segment
Margins vary widely by segment and client size. As rough industry ranges:
- Light industrial and high-volume clerical: often in the mid-teens to low 20s percent
- Office and administrative: often around 20% to 28%
- IT and professional contract staffing: often around 20% to 30%
- Healthcare per diem and specialty: varies widely with demand
- Direct hire and conversion fees: close to 100% gross margin, since there is no pay rate to cover, which is why direct hire revenue lifts an agency's blended margin
Large MSP-managed accounts usually carry thinner margins than small and mid-size clients, in exchange for volume and predictability.
What erodes gross margin
- Rising burden. A higher state unemployment rate or workers' compensation premium comes straight out of margin unless the contract allows a rate change.
- Unbilled overtime. Paying overtime when the client rate card does not include an overtime bill rate, or billing it at straight time.
- Pay rate increases without bill rate increases. Minimum wage changes and competitive pressure push pay up mid-contract.
- MSP and VMS fees, often 1% to 4% of spend, deducted from invoices.
- Unpaid time: orientation, training or drug test time that must be paid but is not billable.
- Bad debt and slow payment, which do not hit gross margin directly but reduce real profit.
How agencies protect margin
Price every order from the pay rate up, with burden modeled by state. Include rate change clauses for mandated wage and tax increases. Bill overtime and holiday hours at a matching premium. Track gross profit per hour by client, not just gross margin percentage: a 15% margin on a $40 bill rate earns more per hour than 22% on $22. And watch early turnover: every worker who leaves in week one carries recruiting and onboarding cost the account never earns back.
From the client side, understanding the agency's margin helps in negotiations. Squeezing a light industrial supplier below about 14% to 15% gross margin usually shows up later as lower pay rates, weaker recruiting effort and declining fill rate.
Frequently asked questions
What is a good gross margin for a staffing agency?
It depends on the segment. Light industrial and high-volume staffing commonly runs in the mid-teens to low 20s percent; professional and IT contract staffing is typically higher. Direct hire fees raise the blended margin.
How do you calculate gross profit per hour in staffing?
Subtract the pay rate and the burden per hour from the bill rate. A $30.00 bill rate, $20.00 pay rate and $3.80 burden give $6.20 gross profit per hour.
What is spread in staffing?
Spread is the difference between bill rate and pay rate, in dollars per hour, before subtracting payroll taxes and insurance.
Is markup the same as margin?
No. Markup is calculated as a percentage of the pay rate; margin is a percentage of the bill rate. A 50% markup equals a 33.3% spread before burden.
Why are staffing margins low?
The worker's wage and the employer taxes and insurance on it take most of the bill rate. Competition and large-client pricing pressure keep the remaining gross profit thin.