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contractor payroll

Understanding the why and how of negotiating rates with pre-identified contractors 

The term pre-identified contractor refers to a contingent worker that is sourced by a hiring manager, using the power of their personal network, rather than through their organization’s competitively sourced vendor program.   

In most cases, there is a significant benefit to hiring a contractor this way, as pre-identified contractors typically come with a proven track record with the manager or as a referral from a trusted team member of the manager. This vote of confidence usually extends to their ability to deliver value on the project they are being hired for.

The downside with hiring a pre-identified contractor is that far too often, the organization ends up paying more than it should for the individual.  And more often than not, it’s the result of the negotiation habits of the hiring manager. 

Why organizations overpay when hiring pre-identified contractors 

Put simply, organizations are overpaying for pre-iIdentified contractors because they’re not effectively negotiating with these workers during the recruitment process.  

When you consider the competitive sourcing process, candidates are asked by a recruiter to commit to a rate well before any interest is shown in them by the client organization, let alone the actual hiring manager they may end up working for.  

The competitive sourcing process puts pressure on both the candidate and the staffing supplier to balance their financial objectives with the conditions of the market, helping to ensure that they are a competitive option for the client and not overlooked during the process.  

When you contrast this with the pre-identified hiring process, the rate conversation is usually the last thing that happens; hiring managers have met the worker, expressed interest in them joining the team, and then look to discuss rate. This inverse order has effectively flipped the balance of power in the negotiation.  

The primary motivator for a hiring manager is not the cost of the resource 

As controversial as that statement sounds, it’s an accurate one. While the timeless anecdote of “on time and on budget” does have a financial component to it, hiring managers don’t view paying a resource the rate that he or she is asking for as something that is going to sidetrack their project finances, especially if they have room in their budget.  

The decision to add a key resource to the team when they need them to help them deliver a project takes a priority over whether they left money on the table when negotiating a pay rate with the worker.  

That said, hiring managers do not have bad intentions, rather, the process that they are following isn’t set up for success.

Why the pre-identified hiring process isn’t set up for success 

There are many factors at play when negotiating rates with talent, however, one of the primary issues for hiring managers when hiring a pre-identified contractor is that the hiring manager is typically not aware of the market pay rate for a particular skillset, rather, they may be more familiar with the bill rate that the company will pay for a similar skillset. 

  • Many hiring managers are not aware of current market rates, so they do not negotiate and simply accept the number.
  • Hiring managers will often agree to a rate with a pre-identified resource immediately if the rate fits into the budget, even if the rate is above the TARGET ratefor fear of losing that resource.
  • Established relationships can also lead to overpayment. In some cases, organizations have long-term working relationships with particular contractors or contingent workforce agencies and simply pay whatever the contractors or third-party vendors ask for as long as it fits the organizations’ budgets. 

In fact, many companies don’t bother to negotiate contractor pay rates if the proposed rates fit their payroll budgets. For an organization with a sizable contingent workforce, this can lead to significant lost revenue. 

Factors to consider when negotiating contractor pay rates 

Fair market rates for contract workers vary widely based on the industries in which they work and the skills they possess. Hiring managers must understand the current market for particular positions and technical competencies. 

Experience 

There are circumstances in which it may benefit an organization to pay more for contingent workers who have deeper training and professional experience than contractors who may have the desired skill set but lack hands-on expertise. 

Length of service 

An organization can expect to pay more if they have an urgent need for a highly skilled worker to address a short-term project. On the flip side, a contractor may be willing to agree to a lesser rate if they are offered the security of work that spans an extended duration. 

Industry standard 

Finding a happy medium that profits both contractors and employers is not always easy, but it is achievable with the help of rate cards. Contingent workforce programs often employ rate cards to guide contractor spending and assess the ongoing financial effectiveness of contingent labor within their industry. 

How rate card management saves on costs 

Thorough, regularly updated rate cards can be advantageous to contractors and organizations alike. Rate cards offer contingent workers current, comparable pay scales for their services based on their professions and experience levels. They provide employers with low- and high-end caps to gauge individual contractor rates and evaluate their overall payroll budgets. 

Classification categories 

Rate cards must be detailed and should reflect current job categories and experience levels (e.g., “junior” positions versus “senior” positions). They should also account for the classification differences between Contract Workers and traditional, full-time employees. 

Access to market information

Rate card integrity is critical for organizations that rely on Contract Workers. Most reputable contingent workforce vendors, for example, update their rate cards on at least a semi-annual basis depending on the labor climate and the industries they serve. 

It may be necessary to appraise rate cards for some job categories more often, even every month. Rate card terminology should reflect the market and consider core and niche skills. Still, employers should also avoid categorizing outside of a rate card, as it may not align with their contingent workforce vendor’s categorizations and may lead to worker misclassification. 

Transparency 

Employers and contingent workforce agencies should also have transparency when it comes to rate card visibility. Contract workers should understand the actual rate offered and whether it includes any deductions, while organizations that partner with contingent workforce providers should know what fees the provider is taking and whether those fees impact their access to talent. 

Indicators that a rate card may need to be updated include but are not limited to increasing contractor rejections in favor of other offers, rising requests from contractors for rates that exceed those established in the rate card, and growing difficulty finding qualified talent. 

How to negotiate rates with pre-identified contractors 

Pay rate negotiation can be uncomfortable, but it’s also critical to prevent contingent workforce overspending and save on an organization’s overall payroll costs

One important tactical tool for contractor payroll negotiation is information. There is a wealth of available pay rate data by industries and job categories that can be used to update rate cards and steer negotiations. 

That said, there’s a fine line between overpaying and maintaining competitive rates. Rates can change rapidly for some high-demand job categories and niche skills. Organizations should be prepared to make competitive offers to attract the most qualified candidates. 

An effective solution for negotiating and managing contractor payroll is to engage with a contingent workforce vendor or managed payroll services provider. These agencies have a handle on current contractor rates for applicable job categories within the industries they serve, and they offer accuracy, peace of mind and — ultimately — payroll savings and increased profitability for their partners. 

RFP Checklist for pre-identified contractor payroll vendor selection

Are you getting the most out of your contractor payroll program? Every organization’s needs are different, but there are several crucial elements to keep in mind when evaluating a contractor payroll program. These include:

  • Infrastructure and expertise
  • Worker management
  • Onboarding
  • Rate management

However, there are other, less obvious criteria that still make a big difference in cost, compliance and satisfaction. 

If you’re evaluating a new contractor payroll provider or would like a tool for assessing whether you’re getting the most out of your current program, download your detailed RFP Checklist for pre-identified payroll vendor selection below:

 

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Understanding the why and how of negotiating rates with pre-identified contractors 

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Understanding the why and how of negotiating rates with pre-identified contractors 

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