Managing Costs with Contingent Labor

BlogContract Compliance AuditRisk
Updated on: April 16, 2024

It is not uncommon for a company to use contingent or temporary contract labor to fill gaps in labor needs. As companies aim to stay agile and have a constant need to fill positions, the portion of labor needs filled by contingent resources is growing larger.

What Are Contingent Workers?

Contingent workers are people who are not tied to just one organization. They typically have a certain specialized skill they are being hired for and are usually paid on a per-project basis. Types of contingent workers include:

  • On-call workers
  • Leased employees
  • Temp workers
  • Independent contractors
  • Freelancers
  • Consultants

The Benefits of a Contingent Workforce

The flexibility and cost savings derived from contingent labor are simply too significant to ignore, particularly compared to full-time employees. Sometimes a project is big enough that it’s more efficient to hire a large contingent workforce all at once rather than staff it one position at a time. This helps your organization avoid the chance of losing business due to capacity issues, all while costing less money long-term than full-time resources would cost, as expenses like vacation time or sick pay, health coverage, or unemployment insurance aren’t provided by you. In other cases, the scope of work might be small enough that it’s more cost-effective to contract labor out rather than add a raft of new W2s to your payroll.

The Drawback of a Contingent Workforce

Partnerships with contingent labor suppliers also carry risks of their own. Co-employment, unexpected cost increases, regulatory concerns, and inadequate talent pipelines are just a few of the risks that companies look to their partners to manage. It’s essential to make sure that your contracts are well structured to mitigate the risks, while ensuring fair pay for contingent workers and transparency from managed service providers and temporary agencies.

Reduce Risks When Employing Contingent Workers

Below we have listed ways your organization can mitigate the risks of contingent labor, drawn from our team’s years of experience auditing and overseeing these arrangements:

  • Insist on Time and Materials contracts.
    • There are two typical contract types for contingent labor:
      • Time and Materials (T&M), where the customer is billed for actual hours incurred at the contractual rate.
      • Milestone contracts, where pricing is fixed and based purely on completion of a given project.
    • Obviously, milestone contracts leave your company much more vulnerable to unforeseen costs and markups, so it’s worth insisting on the T&M model subject to Not-to-Exceed caps.
  • Negotiate a well-defined rate card.
    • Create a rate card with the maximum rates allowed for various job titles, locations, and experience levels. Insert contract language that requires a senior-level procurement executive to sign off on any purchases that go above the maximum rate.
  • Establish a markup cap.
    • Markups earned by contingent labor suppliers should be to ensure overhead costs are covered and a reasonable profit is managed. Make sure that your contracts establish a reasonable cap for these markups in the same cost-by-cost way as the bill rate cards above.
    • Establishing a maximum bill rate and a maximum markup cap removes the incentive to find a resource with the lowest pay rate to maximize markup or a resource with the highest bill rate to maximize MSP fee. The supplier can now work to find the best and most cost-effective solution for you, the customer.
  • Require your Managed Service Provider to consult multiple agencies.
    • Once work begins, contingent labor needs can still fluctuate. Suppliers might need to hire additional labor on quick notice, and since time is money, they might be compelled to rely on their go-to agencies. But that might not ensure you receive the best rate, especially if the go-to agency is a related party.
    • Your contracts should require that suppliers consult a set number of agencies before choosing a resource for the placement. Better to have your pick of five rates rather than blindly accepting your supplier’s sole choice.
  • Ensure that contingent laborers’ roles are clear.
    • In many cases, contingent labor is a complement to your existing workforce, so it’s important to avoid redundant or overlapping work by ensuring their respective roles are clear. Beyond contracts that stipulate the bounds of the project, prepare onboarding documentation for contingency hires that address roles, limitations, and what work should be left to your staff.
  • Invest in a post-project audit.
    • You’ll want to monitor expenditures and overall budgeting as the project proceeds. Performing a third-party audit after the project can help identify any places where markups or expenditures exceeded your caps, or any places where contract stipulations weren’t honored.
    • We often tell clients that a trustworthy contractor should welcome the chance to have their work double-checked, since transparency and honesty are what build longer-term relationships and a positive reputation.

Any project big enough to require a contingent labor force should be approached with risk management and cost-effectiveness at the forefront of your mind. While that also goes for the planning and execution phases, a thorough audit after the fact can help you better prepare for the next job. These extra steps can ensure that your temporary workforce operates as efficiently and smoothly as your full-time one.

To learn more about contingent labor audits, or the overall contract compliance audit process, contact us to speak directly with a team member from our Contract Compliance Audit Services practice.

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