818 new recruitment agencies are registered at Companies House every month, according to Insider.co.uk. In fact there are now 35,275 in the UK with most new agencies choosing work with clients and candidates on permanent and temporary placements – making the recruitment sector an increasingly crowded marketplace.

For recruiters looking for additional revenue opportunities, is the traditionally underserved third market of contractor recruitment the answer? Umbrella Broker’s team shares their insights, thoughts, and experiences on the role of recruitment agents in building successful contractor provision businesses.

There are now more contractors than ever before

Since the Great Financial Crash of 2008, an increasing number of UK employees have completely given up working for someone else. The reasons behind this steady shift away from the traditionally-perceived safety of the world of the employment are thought by commentators to be that:

  • employment is not perceived as safe as it used to be
  • employer loyalty is at an all-time low, with careers spanning many employers
  • the lack of control over a person’s career and educational training development when working for someone else
  • office politics
  • employee sell your time at “wholesale” rates rather than “retail”
  • more favourable tax treatment for contractors outside the scope of IR35 than standard employees

But how big has the shift been? According to the Office of National Statistics, in 2001, there were 3.3m people in self-employment, representing 12% of the workforce. By 2017, this number had increased to 4.8m (15.1%).

The ONS figures show that nearly a quarter of all contractors work in the construction sector.

TheEngineer website reported that there was a 68.3% rise in the number of engineering contractors between 2011 and 2016, taking the total up to 55,393. Channelweb reported that the number of IT-related contractors continues to rise with an annual jump in the number of female IT contractors jumping 24.6% in 2017.

Is this a threat to traditional recruitment consultants?

No. However, as we’ll outline later on, a decision not to offer contractor recruitment services closes an avenue of ongoing billing opportunities and the high level of profitability associated with that billing.

The traditional employer-employee relationship will be going nowhere any time soon. In fact, the UK is currently enjoying record levels of people within traditional employment (as reported on the Government’s website).

So the issue at hand definitely isn’t one of diminishing opportunities in traditional recruitment but instead one of the ongoing increase in competition amongst recruiters to fill those positions outstripping the growth in actual opportunities. With competition forcing down profitability, stepping into the contracting market is an inevitable sidestep that can sure up any businesses starting to suffer.

Whether or not you go into contractor recruitment is not a question of survival for your agency. Rather it is a question of growing your business through entering a part of the market enjoying much lower levels of competition.

Would your clients consider a contractor rather than an employee?

Hiring a contractor is fundamentally different to hiring an employee. Contractors, including those who use recruiters to find their jobs, have much wider and deeper level of skills in general than an employee. They will be, in general, far more experienced and they will also be far more able to work at a very high level of quality with little or no supervision.

If your client hires a contractor on a fixed-term basis for a specialist role, the likelihood is that they will have successfully worked with other companies on similar development and transformation projects.

Contractors have no in-built loyalty to existing working practices nor to existing staff or management. They are tasked to deliver an outcome under a specific and broad-ranging remit from your client of “do whatever needs to be done to complete this project”.

Contractors can be brought in at short notice to fix issues with staffing howsoever caused. They are much more flexible on where they work, on the hours they work, and on the level and detail of reporting required than a standard employee.

In addition, no holiday, overtime, statutory, or sick pay is paid to contractor. There is no 13.8% National Insurance Employers’ Contribution for your clients to pay on their labour either. Yet best of all because agencies invoice the client direct for the contractors time, take their margin and then pass on the remaining funds to the client there’s no hefty up front recruitment fee for a client to stomach either. All in all hiring a contractor over an employee is often the savvy choice to make.

Do contractors mind recruiters taking some of their margin?

The evidence strongly suggest that contractors see recruitment agencies as essential partners in the development of their careers and in the general widening of their network of contacts.

52.1% of contractors get work through recruitment agencies, according to the 74,000-member-strong Association of Independent Professionals and the Self-Employed (IPSE) whereas only 31.8% of contractors seek out their own work exclusively.

A Research Manager at IPSE, said that “Agencies have a variety of contacts and provide opportunities with large and lucrative clients. Additionally, agencies often pay independent professionals if the client fails to do so which provides a safety net, so this may be another reason behind a high number of freelancers choosing to use agencies.”

What fees should you charge contractors for your services?

According to ContractorCalculator, the percentage of a contractor’s daily fee retained as commission by a recruiter is around “15 percent although it can range from 10 to 40 percent.”

Some contractors are more sensitive to the rate of commission taken than others although they are aware that you need to make a profit to make providing the service worthwhile. Those who are more sensitive will often attempt to bargain with you regarding the rate they receive from you and you will find that as contractors mature in the industry their tolerance for high fees (and need for a recruiter) will diminish.

In return for your fee recruitment consultants should:

  • find placements, minimising the time a contractor is out of work
  • ensure timesheets are submitted to an agency
  • ensure invoices are issued to the client
  • ensure that the contractor is paid on time
  • negotiate higher contract rates as the contractors skills increase

Most of the contractors you work with will expect you to pay them on a particular date regardless of whether your agency has been paid by the client. In common with temp recruiters, there is a healthy and competitive market in contractor-related invoice factoring which you can use to pay your contractors.

You’ll earn more through ongoing billing with contractors than via one off placements

When placing a candidate in a £40,000 a year job at which he or she may stay for 5 years, you will get one opportunity to bill the client, probably earning within a range of £4,000 to £8,000.

Yet with a 15% margin on the contractor rate, you’ll earn that in just over 133 days of work for the contractor. Assuming your contractor works 240 days a year, if you kept them in work for 5 years you could stand to earn £30,000, a healthy premium on your standard placement.

The trade-off then is simply that your funds will take time to surpass that original £4-8,000, but if you can wait the rewards of contracting can be great.