The agency invoice is not the cost of agency. The cost is the gap between the agency rate and what the same hour costs on the payroll, and that is also the only part a buyer should add back.
The cost of agency staff is the premium over what the same hours would cost on the payroll, not the agency invoice. On an illustrative 60-bed home where agency covers 10.6 per cent of care hours, the bill is 390,000 a year but the cost is 140,400, enough to cut rent cover from 1.75x to 1.52x. A buyer who adds back the whole bill overstates EBITDARM by 249,600.
Worked in full in Senior Living and Healthcare Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Agency is the line in a care home's accounts that every seller calls temporary and every buyer should test. It has two parts. Most of the invoice pays for hours the residents need anyway, and those hours would cost money whoever worked them. Only the gap between the agency rate and the loaded employed rate is a cost of using agency.
| Input | Care assistants | Nurses |
|---|---|---|
| Paid care hours a week | 2,000 | 450 |
| Of which filled by agency | 200 | 60 |
| Employed hourly rate | 12.60 | 22.00 |
| On-costs: holiday pay, employer NI, pension | 25% | 25% |
| Agency charge rate per hour | 24.00 | 45.00 |
The home charges an average 1,450 a week, so revenue at 90.0 per cent occupancy is 4,071,600. Its rent is 600,000. All rates are illustrative; agency charge rates vary by region and by how late the shift is booked.
Step 1. Load the employed rate. 12.60 × 1.25 = 15.75 for a carer; 22.00 × 1.25 = 27.50 for a nurse.
Step 2. The premium per hour. 24.00 − 15.75 = 8.25 for a carer; 45.00 − 27.50 = 17.50 for a nurse.
Step 3. Annualise.
| Role | Agency bill | Same hours employed | Premium |
|---|---|---|---|
| Care assistants: 200 h × 52 | 249,600 | 163,800 | 85,800 |
| Nurses: 60 h × 52 | 140,400 | 85,800 | 54,600 |
| Total | 390,000 | 249,600 | 140,400 |
Cost of agency = agency hours × (agency rate − employed rate × (1 + on-costs)) × 52
Excel: =Hours*(AgencyRate-Rate*(1+OnCost))*52, per role
= 140,400, 36.0 per cent of the bill, 50.00 per occupied bed per week, 3.45 per cent of revenue
The home reports EBITDARM of 909,600, after paying the full agency bill. Were the same hours worked by its own staff, it would earn 1,050,000.
| Agency share | Premium a year | EBITDARM | Rent cover | Value at 9.0x |
|---|---|---|---|---|
| 0% | 0 | 1,050,000 | 1.75x | 9,450,000 |
| 5.0% | 66,150 | 983,850 | 1.64x | 8,854,650 |
| 10.6% | 140,400 | 909,600 | 1.52x | 8,186,400 |
| 15.0% | 198,450 | 851,550 | 1.42x | 7,663,950 |
| 20.0% | 264,600 | 785,400 | 1.31x | 7,068,600 |
The margin falls from 25.8 to 22.3 per cent and, at an illustrative 9.0x EBITDARM, the value from 9,450,000 to 8,186,400: 1,263,600 for agency use that looks like a staffing detail. Each five points of agency share is worth about 0.11x of rent cover. A lease written at 1.75x with a 1.50x covenant has almost no room left at the current level.
Agency rarely appears as hours in a trading pack. It appears as a cost line, sometimes split between nursing and care, sometimes buried in "other staff costs". Ask for the agency invoices for twelve months and divide each by its charge rate to get hours, then set those hours against the rota. If agency hours plus payroll hours exceed what the residents' dependency requires, the home is not short of staff, it is short of the right staff on the right shifts, and the premium will not disappear with recruitment alone.
A trading pack that presents agency as non-recurring will often add the full 390,000 back, showing EBITDARM of 1,299,600 and rent cover of 2.17x. That assumes the hours disappear. They do not: replacing agency with employed staff still costs 249,600 a year. The full add-back overstates EBITDARM by 249,600 and, at 9.0x, value by 2,246,400. The correct normalisation adds back only the premium, 140,400, and only to the extent the home can actually recruit: a home in a tight labour market that has used agency for three years has a recurring cost, not a temporary one. The way to check is to rebuild the rota from dependency, as in how many staff a care home needs, and compare it with the hours on the payroll.
The arithmetic also prices recruitment. Each full-time carer hired to replace agency saves 16,088 a year, each nurse 34,125. The home uses 13,520 agency hours a year, 6.9 full-time equivalents, so a recruitment campaign costing less than a few months of that premium pays for itself.
The book builds the rota from care hours to a loaded cost per contract, and the free workbook for this case carries the rota and employer cost calculator alongside the full care home model.
Compare the agency charge rate with the employed rate including on-costs. At an illustrative 12.60 an hour plus 25 per cent for holiday, national insurance and pension, an employed carer costs 15.75 an hour against an agency rate of 24.00, a premium of 8.25. For a nurse, 27.50 against 45.00, a premium of 17.50. One full-time carer replaced by agency costs 16,088 a year more.
Only the premium, and only if the vacancies can genuinely be filled. On the illustrative home the agency bill is 390,000, but 249,600 of it would still be paid to employed staff working the same hours. The correct add-back is the 140,400 premium, giving 1,050,000 of EBITDARM, not the 1,299,600 a full add-back implies.
There is no single benchmark, but the cost of each level is easy to compute. On the illustrative 60-bed home every 5 per cent of care hours filled by agency costs about 66,150 a year of EBITDARM. At 10.6 per cent rent cover falls from 1.75x to 1.52x; at 20 per cent it falls to 1.31x.
This article is one calculation from Senior Living and Healthcare Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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