Permanent vs Contract Placements - Who Comes Out On Top?
Often when a recruitment agency begins trading they will usually start by concentrating on making mainly permanent placements as these are generally regarded as being easier to make and involve far less work than a contract placement. The next phase of growth would be for an agency to start considering to move into the contract market in order to both improve client relationships and increase the company value in the long run.
We’ve explored some of the advantages and disadvantages that come hand in hand with making both contract and permanent placements:-
Permanent Placements – The administration and paperwork required when making a permanent placement is a lot less time arduous compared with contract placement compliance as it mainly involves a copy of the terms and conditions being and raising an invoice for payment.
Contract Placements – The administration and compliance needed for making a contract placement is very comprehensive and requires some basic financial knowledge in order to finalise and run a placement. There are often 2 contracts involved - Client and Candidate (including umbrella/limited Company) - that need to be signed and in place before the candidate starts. The candidate will then submit authorised timesheets (paper or portal) which need to be used to raise the corresponding invoices to the client. The candidate would be paid either via PAYE (so payroll would need to be run) or to their limited/umbrella company, which involves raising further invoices. This process is repeated each week/month for the duration of the contract.
Permanent Placements – Permanent placements should not require funding unless cash-flow is extremely tight within the agency. The cost of funding on permanent placements is often more expensive and you would only receive around 65-75% of the invoice value, rather than the contractor norm of 90%. It is often best to have shorter payment terms and a strong credit control process in place in order to reduce the need for financing permanent placements.
Contract Placements – Contract placements often require funding as the client will between 30-45 days but chances are that the candidate will want to be paid within 7-10 days. This cash-flow effect can be mitigated by using an invoice finance facility, where the invoice finance company would provide funding against the client invoice (around 85-90%) which would be enough to pay the candidate. These facilities can be cost effective and provide the necessary funding levels as your business grows.
Permanent Placements – Compliance on permanent placements can often be much simpler than contract placements as the candidate will be employed by the client directly and they will do their own element of due diligence before the candidate becomes a permanent employee.
Contract Placements – Ensuring you complete the required compliance for contract placements is important to protect your agency as the responsibility for the candidate and their placement falls to the agency. Certain industries, such as medical and teaching, require an even greater level of compliance due to the nature of the industry and work itself.
RISK TO THE COMPANY
Permanent Placements – The main risk from permanent placements is if the candidate doesn’t work out and rebates are called upon to repay placement fees back to the client. This is obviously not ideal from a cash-flow perspective as you do not want to be handing back billings to your clients.
Contract Placements – Contract placements often have a lower risk to an agency as long as the contracts and timesheets are signed by the client. By having a signed timesheet, this verifies that the candidate has worked and any invoice should be paid within terms. Also, contract placements are usually for a longer term so the agency can maintain the relationship with clients for the duration and beyond, meaning there is a greater chance for further placements to be made.
Permanent Placements – Agencies that only make permanent placements will always have a lower multiple value compared to a contract agency. This is due to the permanent placements being one off payments and should someone purchase the company, there could be very little future business to be bought (unless there are a number of PSL agreements in place)
Contract Placements – Contract agencies will have a much larger multiple value compared to a permanent agency because when someone purchases the company, they would have future earning from the existing contract placements (with a possibility of renewal on most placements). Also, any future buyer could build on the relationships with the existing invoiced clients which would further increase the company value.
TBOS has a large amount of experience of dealing with recruitment agencies making both permanent and contract placements and as part of our service, we manage the administration side of the placements (timesheet processing, invoice raising and credit control) and can arrange invoice finance on contract placements should it be required. TBOS ensures that the agencies are aware of any compliance required on placements and also keeps up to date with any HMRC legislation changes, such as the Intermediary reporting and PAYE payroll functionality for the agency clients.
For more information on how TBOS can help you with your permanent and contract placements, please contact our office.