What is Gross Margin?
In corp to corp or w2 hourly basis, Gross Margin is the difference between the sell rates and buy rate for each billing rate per hour. It may have some other definition also in other industries but what we mentioned above is most frequently used in hiring industry.
This gross margin will be helpful in finding out the gross profit for the company.
Example:
Client Name: ABC Inc.
Tier1 Client: JKL Inc.
Tier2 Client: XYZ Inc.
Case: 1
- ABC Inc. sends “Oracle DBA” requirement to JKL Inc.
- JKL Inc sources resume and fixes the rate with candidate at $70 as the billing rate per hour and then submits that candidate’s resume at $100 per hour to ABC Inc.
- Candidate is selected by ABC Inc and works with ABC Inc for 3 months (500 hours) on contract basis.
Gross Margin (Gross Profit) for JKL Inc.
= Sell Rate – Buy Rate) * (No. of Hours worked)
= ($100-$70) * 500
= ($30) * 500
= $15,000
Case: 2
- ABC Inc sends “Oracle DBA” requirement to JKL Inc.
- JKL Inc finds difficulty in sourcing the resume and forwards the requirement to XYZ Inc.
- XYZ Inc sources resume and fixes the rate with candidate at $70 as the billing rate per hour and then submits that candidate’s resume at $85 per hour to JKL Inc.
- JKL Inc submits the same resume from XYZ Inc at 100$ per hour to ABC Inc. Candidate is selected by ABC Inc and works with ABC Inc for 3 months (500 hours) on contract basis.
Gross Margin (Gross Profit) for JKL Inc.
= (Sell Rate – Buy Rate) * (No. of Hours worked)
= ($100-$85) * 500
= ($15) * 500
= $7500
Gross Margin (Gross Profit) for XYZ Inc.
= (Sell Rate – Buy Rate) * (No. of Hours worked)
= ($85-$70) * 500
= ($15) * 500
= $7500