Replacement Guarantee Economics
What does my replacement guarantee actually cost, in expectation?
Use your own historical replacement and refund rates here, not an industry average; guarantee terms and candidate quality vary too much for a generic default to mean anything.
Why this comes up
Every direct-hire placement carries a guarantee, whether it's stated in the contract or just an unwritten expectation: if the placement doesn't work out inside some window, you either redeliver a replacement candidate or refund some or all of the fee. That guarantee has a real cost, but it's easy to forget it exists once the placement fee lands, because the redelivery or refund only shows up in the books later, on a different placement, at a different time. Ignoring it makes every placement look more profitable than it actually is on average.
How we calculated this
Expected Guarantee Cost = Probability of Replacement x Expected Redelivery Cost + Probability of Refund x Expected Refund Amount Expected Placement Contribution = Placement Fee - Initial Delivery Cost - Expected Guarantee Cost
Worked example, using the calculator's own defaults: a $16,000 placement fee, $3,500 initial delivery cost, a 10% probability of needing a replacement at $2,500 expected redelivery cost, and a 3% probability of a refund at $8,000 expected refund amount.
Expected guarantee cost = 0.10 x 2,500 + 0.03 x 8,000 = 250 + 240 = $490 Expected placement contribution = 16,000 - 3,500 - 490 = $12,010
The guarantee only costs $490 in expectation here, small next to the $16,000 fee, but it's still real money that a per-placement profitability figure would otherwise overstate by leaving it out entirely.
What this means
- This is an expected value across many placements, not a forecast for any single one; any individual placement either does or doesn't trigger the guarantee, the expected cost is what it averages out to across your full placement volume.
- Refund probability and redelivery probability are independent inputs here because they're often different failure modes, refunds tend to come from very early terminations, replacements from a broader window; keep your historical rates for each separate rather than blending them into one guess.
- A higher redelivery or refund rate on a specific role type or client (a role you have trouble filling well, or a client with unusually high turnover) means that segment deserves a higher expected guarantee cost than your blended average, don't apply one flat rate everywhere.
- The expected placement contribution figure is what should feed into any full profitability check, not the raw placement fee minus delivery cost alone.
Limitations
This is an expected-value estimate across many placements, not a prediction for any single one. Use your own historical replacement and refund rates rather than an industry average, since guarantee terms, candidate quality, and client fit all vary too much for a generic rate to mean anything. It also treats redelivery and refund as the only two outcomes, it doesn't model a partial refund or a renegotiated fee, fold those into your expected refund amount input if they're common in your contracts.
Common mistakes
- Leaving guarantee cost out of placement profitability entirely because it doesn't show up until a later period, if it shows up at all.
- Using an industry-average replacement or refund rate instead of your own agency's actual historical rate, which can be meaningfully higher or lower depending on your sourcing and screening process.
- Applying one blended guarantee rate across every role type, when a hard-to-fill or historically volatile role segment carries a materially different real rate.
Frequently asked questions
Where do I get my own replacement and refund rates?
Pull them from your placement history: replacements and refunds issued divided by total direct-hire placements over a representative period, ideally 12 months or more to smooth out noise.
Should redelivery cost equal the original delivery cost?
Not necessarily; redelivering after a failed placement can cost more (urgency, a narrower remaining candidate pool) or less (some sourcing work may already be reusable), estimate it from your own experience rather than assuming it matches the original.
Does this replace a written guarantee policy?
No, this estimates the expected cost of whatever policy you already have. Use it to check that your fee rate actually covers that cost, see Direct Hire Fee Engine.
Next decision
Learn more
Temp, Temp-to-Hire, and Direct-Hire Economics — how a direct-hire guarantee changes the real economics of a placement fee.