Running a contract desk can be a highly profitable way of growing a recruitment agency. However, the administration, compliance, and funding requirements involved in running a contract desk are considerably greater than those associated with permanent recruitment alone.
There are many questions agencies should ask before launching a contract desk but the below six are some of the most important considerations.
Does Your Client Base Require Contractors?
Speaking with your existing client base is often one of the best ways to transition from permanent recruitment into contract placements. In many cases, clients may already be using another agency for their contract hiring needs.
Expanding your service offering can help strengthen client relationships, reduce the risk of losing business to competitors, and demonstrate that your agency can support all areas of recruitment.
It may also be that clients have not fully considered the advantages of hiring contract workers, particularly if they have struggled to recruit permanent employees for a prolonged period of time.
How Will the Contract Placements Be Funded?
One of the biggest differences between permanent and contract recruitment is that contractors often need to be paid before the client settles the invoice. This creates a cash flow gap that agencies must be prepared to manage.
To fund this gap, agencies may choose to finance placements themselves, obtain a business loan, or use a specialist funding solution.
These funding solutions can include pay-and-bill facilities, factoring, or invoice discounting arrangements, each of which comes with its own benefits and costs.
If the agency chooses to self-fund placements, it should also consider protecting that cash flow through credit insurance, as this protection is often included within pay-and-bill or invoice finance solutions.
Who Will Manage the Administration and Accounting?
Another major difference with contract recruitment is the increased level of administration required.
In addition to onboarding the contractor, agencies must also manage timesheets, invoicing, payroll processing, and contractor payments. This is not always a service that a standard accountant can provide.
As a result, agencies may need to manage the process internally or work with a recruitment-specific back-office provider.
If the agency uses a pay-and-bill solution, much of the administration is often included as part of the service, although this will typically come at an additional cost.
What Compliance Requirements Will Need to Be Completed?
When placing contractors, agencies must ensure that the correct contracts are in place between both the client and the agency, and the contractor and the agency.
Agencies must also ensure contractors are being paid correctly under IR35 legislation, which may require additional checks on umbrella companies and limited companies to confirm compliance.
Clients may also require further compliance documentation to verify that candidates are suitable for the role, including insurance documentation, DBS checks, credit checks, references, or industry-specific certifications.
Ensuring compliance is handled correctly from the outset can help protect both the agency and the client from future risk.
What Risks Are There to the Agency?
If a contractor placement is managed correctly and compliantly, the risks to the agency should be relatively limited. However, there are still several areas that require careful attention.
Regularly monitoring a client’s creditworthiness can help reduce the risk of financial loss if a client becomes insolvent.
Agencies should also ensure contractors are operating through correctly registered umbrella companies or limited companies, ideally accredited by organisations such as FSCA or SafeRec, to help minimise the risk of joint and several liability issues.
Having the appropriate insurance policies in place, such as professional indemnity insurance, can also protect the agency if a contractor breaches contractual arrangements with the client.
What Positive Impact Could a Contract Desk Have on the Agency?
One of the biggest advantages of running a contract desk is the recurring revenue it can generate. Every day a contractor is on assignment, the agency continues to earn income.
If contractor-generated revenue is sufficient to cover the agency’s overheads, any permanent placement fees generated in addition can significantly increase profitability.
Preparing for Long-Term Growth
A successful contract desk can also increase the overall value of the recruitment business. Permanent recruitment agencies may typically achieve valuation multiples of around 0.5 to 2 times EBITDA, whereas contract-focused recruitment agencies can often achieve multiples closer to 3 to 5 times EBITDA.
Starting a contract desk can create significant opportunities for growth, recurring revenue, and increased business value. However, success requires careful planning around funding, compliance, administration, and risk management.
MAYACHI has helped many recruitment agencies successfully transition from permanent-only recruitment into contract recruitment. Through strong relationships with recruitment-specific back-office providers and invoice finance companies, MAYACHI can help agencies put the right funding and administrative support in place to build a successful contract desk.
