Managing the Hidden Costs of a Contingent Workforce

Although utilizing a contingent workforce provides businesses with flexibility and access to talent without the hefty cost of hiring and benefits associated with permanent employees, if you’re not paying attention, the hidden costs can end up being more than you planned.

For example, while you may be using a managed service provider (MSP) to oversee vendor mark-ups and provide process efficiencies and technology expertise, the invisible costs of unplanned turnover and retraining, unauthorized overtime or scope creep can add up quickly if you’re not managing them.

It’s time to bring the hidden costs of a flexible workforce out in the open. Here are some examples of expenditures that may be going unnoticed and our top tips for keeping them in check.

Scope Creep

In order to hire a contingent worker, line managers usually need to determine the major duties and tasks that need to be performed and submit a requisition that includes a job title and the corresponding pay and bill rate ranges for that position.

But occasionally, after a requisition has passed the approval process, a manager may request an exception to a higher job classification or title allowing him or her a wider wage band for the originally requested skills. Unfortunately, this gives managers the option to pay a worker more or allow for raises or bonuses down the road.

When the exception becomes the norm, the client ends up overpaying for the work being performed.

Generating exception reports and conducting regular procurement reviews can help program managers and staffing buyers spot patterns in requisitions that override the system.

Sometimes managers just need a subtle reminder to follow the rules or perhaps the job descriptions and pay ranges in a specific category need to be updated to reflect changing market conditions. But bringing the issue into the open invites resolutions and heightened focus on oversight and compliance.

Overpaying for Background Screening

Do you know how much background checks for your contingent workers cost your organization? If the charges are incorporated into a staffing firm’s overhead or if your company isn’t leveraging supplier relationships and purchasing power to obtain discounts, you may be paying more for background checks than you should.

The fees for background checks should be passed through directly from the staffing firm to the client without any markup. And since staffing firms are running background checks for numerous clients, be sure to take advantage of their contracts with background vendors to save money and ensure that checks are conducted consistently and fairly.

Sky High Insurance Limits

What happens when a client demands that their staffing firm have insurance limits of $25 million or more? Most suppliers adjust their fees and mark-ups accordingly to offset some or all of the increase in premiums.

Why pay for something you’ll never use?

Consult with your risk management team or run a bench-marking analysis to determine how much coverage your company needs to cover contingent worker risks.

Extended Payment Terms

To manage cash flow more effectively, businesses sometimes push for extended payment terms from staffing suppliers. But is the practice really in the client’s best interests? Probably not.

Smaller staffing firms may resort to factoring (invoice factoring costs between 1 to 3 percent and more) and pass the charges along to clients. Some may even eliminate or reduce services to make up the difference. The simple truth is that financing receivables is very expensive.

End of Assignment Miscues

Failing to review contingent assignments well before they are scheduled to end can result in overlooked costs. For example, if a manager accidently lets a work order expire, the contractor will assume they are not needed and accept another assignment. The cost of hiring a new contractor, retraining and ramp-up time can be significant.

On the other hand, some managers keep granting extensions to sidestep budget limitations for FTEs.

Without proper review and approval processes in place, the total cost of resources to complete a project may not be captured, or worse, the charges may not be passed along to external clients.

Statutory Benefit Costs

To manage the complexities of paid sick and family leave laws, many staffing firms treat the cost as overhead expense and charge clients a higher markup. The problem is that you are being charged for sick time that is accrued over the course of employment but not always used.

Treating sick time as a pass-through cost when used by contingents assigned to your company not only lowers overall costs, it provides a more accurate and relevant accounting of benefit-related expenses.

Workplace Violations

EEOC laws –including anti-discrimination and anti-harassment laws – apply to all types of workers and work situations, including hiring, firing, wages and benefits. If your managers aren’t trained – or think the rules don’t apply to contingent workers – you may incur a hefty, unexpected expense. For example, the average cost for claims that resulted in defense and settlement payments totaled $160,000 in 2017.

It’s a fact: What gets measured, gets managed. Don’t let the hidden costs the hidden costs of a flexible workforce chip away at your company’s bottom line.