An agent reader posted “Contractor Perceptions of Agencies are all wrong” in reply to our article on “So What Do Agencies Do for their Money”.
I work for an IT agency and am really interested in your perceptions.
In reality the agency works for the client and it is the client NOT the contractor that pays the agency. Contractor perceptions are wrong here.
Agency Benefits for Clients
For the client, the agency:-
i) Helps purchasing reduce the number of suppliers it has (and the admin burden that goes with that) instead of having to take on dozens of one man limited companies.
ii) For their accounts department they can receive 1 consolidated invoice monthly instead of dozens of separate ones. They also get typically 30-60 days free credit to pay this invoice – thus easing cash flow.
The IT agency, therefore, has to pay the contractor whether he receives the money or not. The agency thus has to make bad debt provision.
iii) Because the agency pays the contractor first and recovers the money hopefully 60 days later, 2 months of contractor income needs to be borrowed at commercial rates.
No Tax Bill for Client
iv) The agency minimises the chance of the end client having to pay the tax bill of a contractor if he/she evades tax. There is a see-through rule which means HMRC can recover taxes from anyone that has benefited from your work. So, if there is an agency involved they have to indemnify the client and take the risk themselves.
v) The agency has to pay for EI, PI and PL insurance. Most client know that if the contractor screws up and tries to claim on the contractor’s insurance, the contractor may just close the company. By using an agency the client know they can recover monies through damages, poor advice, injury to the contractor theft etc.
vi) The agency also checks proof of identity and that the IT contractor’s company is not fictitious. So, in other words we check compliance.
Typical Agency Charge
What does a typical agency charge for all this? Contractor perceptions are wrong here.
Well in our case typical margin is 10% or 5% for just pay roll.
All our fees are negotiated on top of the rate offered to the contractor.
The client sets the contractor’s rate (to ensure some consistency) and agrees or otherwise to pay the appropriate agency mark-up on top.
One client has 7 preferred agencies all charging different markups. So the total charge is different as all contractors get the same.
See, the perception of agencies by many contractors is wrong. We’re not all bad!