Contact-to-hire from the perspective of the headhunter agency?

Question

I operate a small IT consulting firm. One of my clients has expressed an interest in having an ASP.Net programmer on-site at their location for a six-month contract, with an option to hire. I've never really operated my company as a body shop (renting out talent for the long term) and an unfamiliar with how to price my quote. Assume I were to bring on a new developer as a 1099'ed contractor and then contract that person out to my client for the duration of the project.

• If I'm billing my client $X per hour for this developer's time, what should I be compensating this developer? $X/2 per hour? What's the typical ratio?

• If the client decides to hire this person at the end of the contract, what should I be compensated? Is it a flat finders fee, or maybe a function of the developer's annual salary?

• Would there be any advantage to actually hiring the person as a 1040'd employee rather than a 1099 contractor even if I can't offer him benefits? I know other body shops (like Robert Half) do this and never understood why.

Answer 1

I think a 30-40% margin would be considered healthy but reasonable for a small IT consulting shop, and this includes some estimate of the costs of acquiring that sale and G&A to support the developer as well as the developer's total compensation.

If the client hires that person, I believe a typical headhunter would charge at least 1 month's salary as a fee (and possibly up to 2 or 3 if they thought they could get it). This should be stipulated in your contract up-front.

Not sure on the 1040/1099 question (IANAL or accountant), but I suspect it has to do with tax deductions, holding "rights" on a valuable commodity (a skilled developer) or both.