Do contract agencies have to approve an employee wage through the client company?

Question

I got a W2 offer via contracting agency to work as a contractor for a Fortune 100 company. When the hourly amount was first presented, is was before my interview and hastily thrown at me. I hadn’t done all the math myself so I told them, “I’m not sure if this matches my current compensation, there are a few things I need to calculate, but something near this may be a match.” I’m used to being a salaried employee so I was frank about my hesitancy in the numbers.

After the interview with the tech team at the client company being reported as having gone “remarkably well”, I had an offer within an hour from the contracting agency. I shot back a counter offer that is $10/hr more than originally mentioned. While this is a steep counteroffer, it is exactly matching my current salary compensation (taking into account what I’ll pay out of my own pocket for insurances, no bonus, a better employer match on 401k, no PTO, etc.)

There response was courteous but they said this was largely different than originally discussed and they’d need to go back to the client to ask if this was an acceptable amount, but they’re willing to.

Is this true? Wouldn’t they be billing me to the client at some general Software Engineer II range and if I want a raise, the agency can negotiate that with me themselves?

Answer 1

It seems that they are employing you and will bill your services to a company at their rate.

So any $ you bill them comes out of their pocket against what they billing that company.

IMHO, their response indicate "cheapness" of the agency and there may be issues with any "raise" in the future

Answer 2

This is a hard question to answer since none of us know the specific details of the arrangements between your (potential) employer and their client. However, we can share generalities about contracting arrangements.

It's typical that the contracting firm (your potential employer) will have a multiplier rate - a factor they wish to maintain as a ratio between your hourly pay and what they're billing the client. This ratio allows a margin, for them to keep, as a way to pay overhead and so on. This number might be something like 2.5 - so if you're earning $100 an hour, they're billing you at $250 an hour.

In some contracting firms, this ratio is flexible - they may be willing to have it vary within a range depending on how badly they want a client, or other factors. Your $100/hr rate may be billed at $180 for one client, and $300 for another. These firms can use some of that flexibility to deal with salary negotiations and other variables.

In other cases, when the contracting firm is more of just a pass-through staffing resource, the ratio may be tightly fixed - to the extent that it's the same, no matter what. In that case, if they had budgeted with a client to sell your services for $250 based on a 2.5 multiplier of $100, and now you want $110, they may consider not hiring you unless the client agrees to pay $275. I've seen cases where this multiplier is actually part of a contract, which essentially means the client (not the contracting firm) is essentially indirectly okaying each employee's hourly rate.

So, per your actual question,

Is this true? Wouldn’t they be billing me to the client at some general Software Engineer II range and if I want a raise, the agency can negotiate that with me themselves?

It may well be true, but it may also just be a ploy to counter your negotiation - none of us can really know.

If all that matters to you is how much money you're making on this contract, then you will know everything you need based on how this negotiation plays out. If you're also concerned about maintaining a long term employment relationship with this staffing firm and/or this client, it may make sense to follow up with questions about how salary is determined, or how future raises will work, or how the staffing firm will handle finding other work for you (and determining a rate) once this contract is over.