We know agencies use Freelancers. It’s a great way to plug the gap when talent is in short supply.
What we don’t know, is the impact Freelancers have on a brands bottom line. It’s much trickier to track what you’re paying when using this model.
But it is possible to successfully assess freelance talent and gain transparency over your freelancer marketing spend.
Some freelance staff are placed through a recruitment or temp staffing agency and these are typically more expensive. Markups can range from 20%-35% and we’ve seen as high as 50% in some cases.
Some are independent contractors where costs can fluctuate too, depending on the person’s experience, reputation, skill set, supply/demand in the marketplace, etc. For example, you (or an agency) might pay a certain amount for a freelance position on one project and pay an entirely different amount for the same person or job title on another project. There are also other variables like, are you paying an hourly rate, a daily rate, and if so, how many hours constitutes a “day?”
Regardless of how they are being placed, freelancers should be listed on the staffing plan at the net cost for each. The agency should also disclose any markup they’re adding to those net costs. Things like what constitutes a “day” (7 hrs? 8hrs?) should also be clearly defined in the MSA or SOW.
Depending on the structure of the agency/freelancer agreements, typically rates for freelancers should be less than for FTEs because the agency doesn’t carry the same overhead costs for non-employees. For example, they typically don’t pay for health insurance, social security or employee taxes, pensions/401(k), and have lower costs (if any) for freelancers for space & facilities, IT costs, etc.
That said, freelancers may command a higher billing rate from the agencies because they themselves are covering those added costs covered in an FTE’s overhead amount (self employment taxes, insurance, etc) and so they pass on those costs to the agency as part of their billing rate.
In any event, we would expect the overhead factor for freelancers to be lower than comparable benchmarks for full-time agency personnel (i.e., same agency type and same market).
1. Competitively benchmark agency hourly rates for freelancers against reliable, current data sets (as you would agency full-time employees).
2. Be aware of set % markups across all freelancers’ rates. This is because the freelancer’s rate may already be inflated and the agency may just be adding markup to an already high rate. Or the agency may agree to use the freelancer’s “published rate” for billing the client but then pay the freelancer less than the contract rate and pocket the difference (kind of like a media kickback).
3. If a client does agree to markup a freelancer’s rate, the contract should be very clear in definitions, so that the freelancer’s rate is a net cost rate (actually paid to the freelancer) and then the markup is applied to that net cost. But these rates should still be benchmarked to ensure competitiveness (factoring in any markup).
4. Assuming the freelancer has covered his/her own benefits and other costs in his/her net billing rate to the agency, then any additional markup from the agency would basically be profit on top of profit unless the agency is providing some other OH support to the freelancer like office space, IT equipment, etc.
5. Beware of title inflation – it’s not uncommon for agencies to increase the seniority of their permanent employees and likewise, freelancers.
6 . If your agency tells you it’s using freelancers, it is worthwhile making sure they are freelancers operating in the same geographical market and aren’t being sourced from lower-cost, off-shore markets (which can potentially artificially inflate the agency’s profit).