The contract staffing back office

The day a direct-hire firm takes its first contract placement, the back office stops being event-driven and becomes calendar-driven. Perm is one placement, one invoice, one commission. Contract is a timesheet every week, an invoice every week or month, payroll every week, and a margin that has to be calculated rather than agreed. The work is not harder. It arrives on a clock instead of on a win.

This guide covers what that change does to your cash, your billing cadence, your commission plan and your reporting, with the arithmetic run on one contractor so you can substitute your own rates. It does not cover choosing software, which the accounting software guide for staffing firms already handles.

What actually changes when a perm firm takes its first contract placement?

Everything downstream of the placement changes shape, and nothing upstream of it does. Sourcing, screening and closing are the same job. What changes is that the placement stops being the end of the revenue event and becomes the start of a recurring one. A perm placement generates one invoice and then goes quiet. A contract placement generates an invoice every billing period for as long as the person works, and a payroll run every week whether or not the client has paid you.

Four things follow from that, and they are the whole of the transition.

The last row of that table is the one owners underestimate. On perm, your revenue is at risk for the length of the guarantee and then it is yours. On contract, your revenue is at risk for the entire assignment, because an assignment that ends in week six simply stops billing. There is nothing to claw back and nothing to argue about. The revenue just stops.

Who employs the contractor, and why that decision comes before anything else

Somebody has to be the employer of record, and that choice sets every other part of the back office you are about to build. Until it is settled you cannot answer what payroll looks like, who carries workers' compensation, which state's rules apply, or what your real cost per hour is. Three routes exist and they are not equivalent.

1. You employ the contractor on W-2. You run payroll, withhold and deposit taxes, carry workers' compensation and unemployment insurance, and register in every state where a contractor works. Highest cost to set up, lowest cost per hour once running, and the only route where the margin is entirely yours.
2. A back-office or employer-of-record partner employs them. They take the employment relationship and a share of the spread. Fastest to start, and the share they take is a permanent reduction in your gross margin rather than a setup cost you write off over time.
3. The worker invoices you as a 1099 contractor. Cheapest on paper and the one with real exposure, because whether a worker is an employee or a contractor is determined by the facts of the arrangement rather than by what the paperwork calls it.

That third route is where firms get hurt, and it is not a back-office question so much as a classification question. The IRS publishes the common-law factors it uses in its guidance on independent contractor versus employee status, and the Department of Labor sets the wage and hour obligations that attach to an employee under the Fair Labor Standards Act. Read both, then take the specific arrangement to your own counsel. A blog post is not the place to settle a classification, and the cost of getting it wrong lands years later with interest.

What has to exist before the first timesheet?

Six things, in this order, and the first contract placement should not start until all six are answered. Each of them is cheap to decide in advance and expensive to improvise in week three, when a contractor is waiting to be paid and the client has questions about an invoice.

1. The employer of record. Settled as above, in writing, before an offer goes out.
2. Pay rate and bill rate on the placement record. Both of them, stored as data, not buried in a signed PDF. Everything downstream is arithmetic on these two numbers, and if they live only in a contract nobody can calculate anything without opening it.
3. A way to capture and approve hours. Whatever the mechanism, the rule that matters is that the client approves before you invoice. An invoice raised on unapproved hours is a dispute waiting for a reason.
4. A billing cadence, written into the client agreement. Weekly, biweekly or monthly, with payment terms attached. This is a cash decision more than an admin decision, and the arithmetic below shows by how much.
5. A payroll run that can pay weekly. Contractors expect weekly or biweekly pay. Perm firms often run monthly payroll and discover this the week before the first assignment starts.
6. The commission rule for contract, written into the plan document. Not a verbal understanding that you will "work it out". Contract commission is a different calculation from perm commission and it needs its own clause.

Nothing on that list is optional and nothing on it is software. They are decisions. Software makes them cheaper to execute, and no software makes them for you.

How does a timesheet become an invoice?

The chain is hours captured, hours approved, hours priced at the bill rate, invoice raised, invoice sent, payment collected, and it breaks at the approval step more often than anywhere else. Every link after approval is arithmetic a computer can do. Approval is the one that depends on a human at the client who has other work.

Run the chain out and the failure points are visible.

Two of those are worth naming individually because they are specific to contract and perm firms have never had to think about them. Overtime needs a rate agreed in the client contract before it is worked, because the premium hour costs you more and a bill rate agreed for a standard hour does not cover it. And the approver needs to be a named person with a named backup, written into the agreement, because a week of unapproved hours is a week you have already paid for and cannot bill.

The invoice itself is the same object it is on perm. How it gets chased once it is out is the same problem too, and the invoicing and collections guide applies without modification. What is different is the volume, which the next two sections put a number on. For this chain run as a dated weekly calendar, with the chase ladder, the overtime pricing rules and the reconciliation that catches hours you paid for and never billed, see the weekly billing run.

Markup or margin: which number are you actually quoting?

Markup is calculated on the pay rate and margin is calculated on the bill rate, so the same assignment produces two different percentages and a client will always quote you the flattering one. Get this wrong in a negotiation and you will agree to a number you did not mean.

Take a bill rate of $85 an hour against a pay rate of $60 an hour. The spread is $25.

• Markup is the spread over the pay rate: $25 divided by $60, which is 41.7%.
• Gross margin is the spread over the bill rate, after employment costs: $25 less burden, divided by $85.

Both describe the same $25 and they differ by roughly twenty points. A client who says "we work at a 40% markup with our other suppliers" is describing a thinner arrangement than a client who says "we expect a 40% margin", and the second one is asking for a bill rate you probably cannot reach. Say which convention you are using every time you quote.

Burden is the part perm firms forget, because on perm there is no burden. It covers employer payroll taxes, workers' compensation, unemployment insurance, and whatever benefits you offer. It varies by state, by role and by claims history, so use the number your payroll provider gives you rather than a rule of thumb. The worked example below runs at 12% of pay so the arithmetic is visible. Substitute your own figure before you make any decision on it.

What does one contractor actually do to your cash?

One contractor at a $25 spread earns about $712 a week in gross margin and requires you to carry roughly $14,400 of your own cash permanently, if you bill monthly on net 30 terms. That second number is the one that decides whether you can afford to add contract at all, and it does not appear in any markup calculator.

Here is the weekly arithmetic on a single full-time contractor.

Over 48 billed weeks that contractor produces $163,200 of revenue and $34,176 of gross margin. Against a perm book billing $28,000 a placement, one contractor running a full year is worth a little over one placement in margin. That is the honest comparison, and it is the reason contract is a volume business rather than a margin business.

Now the cash. You pay the contractor on a weekly payroll, roughly five days after the week they worked. The client pays you on terms, counted from the invoice. The distance between those two events is money you are lending.

The cash figures are the weekly cost of $2,688 multiplied by the gap expressed in weeks. At ten contractors those become $144,000 and $96,000. Neither is a loss. Both are a standing position you have to fund out of retained profit, a facility, or invoice finance, and it does not unwind while the contractors are working. It unwinds when they stop.

This is the structural reversal from perm, and it is worth stating plainly. On a perm placement with commission paid when the client's invoice is paid, the money arrives before it leaves. On contract, the money leaves before it arrives, every single week, for the life of every assignment. The time to cash guide walks the perm version of that clock. Contract runs the same clock with the sign flipped.

Does invoicing weekly instead of monthly really change anything?

Switching from monthly to weekly billing on the same net 30 terms cuts the cash you carry per contractor by about a third, from roughly $14,400 to roughly $9,600, and costs you nothing in fees or negotiation. It is the cheapest change available to a firm adding contract, and most firms bill monthly because that is what they did on perm.

The reason is that under monthly billing the work you do on the second of the month waits until the last day of the month to be invoiced, and then waits another 30 days to be paid, while you paid for it in week one. Weekly billing deletes the first of those two waits. Payment terms are untouched, the client's obligation is unchanged, and the only thing that moved is when you press send.

The trade is administrative volume, and it is real.

Ten contractors billed weekly is roughly eleven times the invoice volume of a four-placement-a-month perm book, and the timesheet approvals sit on top of it whichever cadence you choose. That is the actual shape of the contract back office: the cadence that is kindest to your cash is the most expensive in admin, and the cadence that is kindest to your admin is the one that makes you fund six extra weeks of payroll.

Pick weekly and automate the volume. Firms that pick monthly to keep the admin down are paying about $4,800 per contractor for the privilege, and they are usually paying it without having worked out that they are. The comparison of invoicing automation for staffing firms covers the options for handling that volume, and automating invoicing at a staffing firm covers the workflow itself.

How do you pay commission on a contract placement?

Pay a percentage of gross margin, not a percentage of the bill rate, and pay it on collected margin rather than on billed margin. Those two choices remove the arguments that otherwise arrive in month four. Three structures are in common use and only one of them keeps the recruiter's interest pointed the same way as yours.

The trigger matters as much as the rate. Contract commission paid weekly alongside payroll adds those dollars to the funding gap you are already carrying, because you are now paying the recruiter for margin the client has not yet paid you. Paying monthly in arrears on collected margin keeps the commission behind the cash instead of in front of it, and it is far easier to reverse when a client disputes a week of hours.

Write the contract rule into the plan document as its own clause rather than adapting the perm one by analogy. The perm clauses on payout triggers and tier design mostly transfer, with one exception: there is no guarantee period on contract, so the guarantee-length reasoning that shapes a perm payout trigger does not apply. What replaces it is the collection question, because an assignment that ends mid-week and an invoice that goes unpaid produce the same problem a falloff does on perm.

What should you measure that you never measured on perm?

Gross margin per contractor per week, and the cash position those contractors create. Fee percentage, the number a perm firm lives by, does not exist on contract. If your reporting still shows revenue and placements you will grow the top line and find out about the margin at year end.

Five numbers cover it.

1. Gross margin per contractor per week. The unit of profit in this business. Revenue per contractor is not a proxy for it, because two contractors billing the same rate can have pay rates twenty dollars apart.
2. Margin erosion since assignment start. Pay rates get raised to keep a contractor from leaving, and the bill rate frequently does not follow. Compare today's spread to the spread on day one for every live assignment.
3. Hours billed against hours expected. A contractor billing 32 hours in a 40 hour week is a 20% revenue cut that no report will surface unless you look for it.
4. Days from timesheet approval to invoice sent. The one lever inside your own control between work done and cash collected.
5. Funded position. Total cost paid out and not yet collected, across all live assignments. This is the number your bank balance is actually responding to, and it should be on the same page as the margin figures rather than discovered at month end.

Assignment end dates belong next to those five. An assignment ending is not a falloff, but it has the same effect on next month's revenue and it is the one thing on a contract book that is genuinely predictable. Knowing which assignments end in the next 60 days is the contract equivalent of knowing which guarantees are still open. The mid-office guide covers how the reporting layer fits with the rest of the back office.

When is contract worth adding, and when is it not?

Contract is worth adding when you already have client relationships asking for it and enough cash to fund the gap, and it is not worth adding as a way to fix a slow perm quarter. The second case is the common one and it is backwards, because contract consumes cash for its first several months before it produces any.

Three questions answer it honestly.

1. Can you fund the position? Take your realistic first-year contractor count, multiply by the per-contractor cash figure you calculated on your own rates, and ask whether you could carry that for a year without it affecting anything else. If the answer is no, the answer is no.
2. Is the demand already there? Contract demand usually announces itself as clients asking. Building the back office first and then hunting for contract roles is an expensive order to do it in.
3. Who runs the weekly cycle? Somebody has to chase timesheets, get approvals, raise invoices and reconcile margin every single week. On a perm book that person does not exist, because there is no weekly cycle. Naming them before the first placement is the difference between a working back office and a founder doing timesheets on Sunday night.

If all three answers are good, start with one or two contractors at a single client, run the full cycle end to end for a quarter, and only then decide what to build. The first assignment teaches you your real burden rate, your real approval lag and your real collection days, and all three of those are firm-specific numbers that no guide can give you.

What breaks first, and in what order

Timesheet collection breaks in week two, margin visibility breaks in month two, and cash breaks in month four. That sequence is consistent enough to plan around, and each one has a cheap fix if it is put in before it breaks rather than after.

1. Week two: hours. The first week everybody is attentive. By the second, a contractor forgets and an approver is away, and you cannot bill. Fix it with a named approver, a named backup and a deadline written into the client agreement.
2. Month two: margin. The pay and bill rates are in a signed document and the spread has never been calculated per assignment. Fix it by putting both rates on the placement record as data on day one.
3. Month four: cash. The funded position has grown with every new assignment and nobody projected it. Fix it by calculating the per-contractor figure before the first placement and tracking the total weekly.

Perm firms that move to software rather than spreadsheets usually do it after the second of those three. Doing it after the third is more expensive, because by then the problem is not reporting, it is a bank balance that surprised somebody.

Frequently asked questions

Do we need a different ATS to run contract placements?

No. The ATS handles candidates, jobs and placements the same way it always did, and a contract placement is still a placement in it. What is missing is everything after the placement record: timesheets, pay and bill rates, recurring invoices, margin per assignment, and a commission calculation that runs off the spread. That gap sits between your ATS and your accounting system, and it is the same gap perm firms have on invoicing and commissions, just with more events in it.

Should we bill weekly or monthly?

Weekly, if you can handle the volume. On the same net 30 terms, weekly billing cuts the cash you carry per contractor by roughly a third compared to monthly, because it removes the wait between doing the work and raising the invoice. Payment terms do not change and the client is not being asked for anything. The cost is more invoices, which is an automation problem rather than a cash problem.

How is contract commission different from perm commission?

It pays out repeatedly rather than once, and it should be calculated on gross margin rather than on revenue. A perm plan pays a percentage of a fee when a trigger event happens. A contract plan pays a percentage of a spread every period for the length of the assignment, which means a single placement can carry commission for two years. Write it as a separate clause and state whether it pays on billed or collected margin.

Can we use a back-office partner instead of building this ourselves?

Yes, and it is a reasonable way to take the first few assignments without registering for payroll in four states. The trade is that the partner takes a share of the spread for as long as you use them, so what starts as a way to avoid a setup cost becomes a permanent reduction in gross margin. Work out the crossover point on your own volume before you sign anything: a share of the spread on twenty contractors is usually more than the cost of running it yourself.

What happens to an assignment that ends early?

Billing stops and there is nothing to recover, which makes it simpler than a perm falloff and worse for forecasting. Bill the approved hours to the last day worked, close the assignment, and pay any commission due on the margin actually collected. The thing worth building is notice: the end dates you can see coming are the ones you can replace before the revenue disappears.

Do we need to register in the state where the contractor works?

If you are the employer of record, usually yes, and the requirements differ by state. Payroll tax registration, unemployment insurance and workers' compensation are all state-level, and a single remote contractor can create an obligation in a state where you have no other presence. This is the single most common reason a firm's first contract placement takes longer than expected. Settle it with your payroll provider and your counsel before the start date, not after.

Get started free: all features unlocked for your first 5 placements, no credit card required.