In the Philippine labor market, the relationship between a principal (client) and a contractor (manpower provider) is strictly governed by the Labor Code and various Department Orders (DO) issued by the Department of Labor and Employment (DOLE). Understanding the computation of service fees and billing rates is not merely a matter of commercial negotiation; it is a matter of statutory compliance.

The primary regulatory framework governing these rates is DOLE Department Order No. 174, Series of 2017 (DO 174), which provides the rules implementing Articles 106 to 109 of the Labor Code.

1. The Composition of the Billing Rate

A standard billing rate in a legitimate contracting agreement is generally composed of four distinct elements. Failure to account for these can lead to allegations of "labor-only contracting," which is prohibited by law.

Direct Labor Costs: This includes the Minimum Wage, 13th-month pay, and other mandatory wage-related benefits (e.g., Night Shift Differential, Overtime Pay, Holiday Pay).
Remitted Benefits (Statutory Contributions): The employer’s share for SSS, PhilHealth, and Pag-IBIG premiums, as well as State Insurance Fund contributions.
Administrative Cost/Service Fee: The fee charged by the contractor for managing the personnel and overhead.
Applicable Taxes: Primarily the 12% Value Added Tax (VAT) imposed on the gross billing.

2. The "10% Administrative Fee" Rule

One of the most critical aspects of manpower billing is the Administrative Fee. Under Section 9(b)(ii) of DO 174, the service agreement between the principal and the contractor must ensure that the service fee is not less than ten percent (10%) of the total contract cost.

Legal Rationale:

Financial Viability: The 10% floor is intended to ensure the contractor has enough margin to sustain its operations and pay its workers correctly, even if the principal delays payment.
Indicia of Legitimate Contracting: A fee lower than 10% is often viewed by DOLE as a "red flag" suggesting that the contractor lacks substantial capital and is merely acting as an agent (labor-only contracting), which would make the principal the direct employer of the workers.

3. Statutory Benefits and Formulaic Adjustments

Manpower providers must ensure that the billing rate reflects the Wage Order currently in effect in the region where the worker is deployed. When the Regional Tripartite Wages and Productivity Board (RTWPB) issues a new wage order, the billing rates must be adjusted accordingly.

The "Price Escalation" Clause

Under the Law, particularly in the context of Wage Orders, the liability for the wage increase is often shifted to the principal. The contractor and the principal are mandated to amend their contract to reflect the increased labor costs. If the principal refuses to pay the adjustment, the contractor remains solidarily liable with the principal for the wages of the employees.

4. Solidary Liability and the Billing Relationship

The structure of billing rates is designed to protect the worker. Under Article 106 of the Labor Code, if the contractor fails to pay the wages of the employees, the principal becomes solidarily liable with the contractor to the extent of the work performed under the contract.

Payment Verification: Principals often require contractors to submit notarized affidavits and copies of payroll/SSS contributions before releasing the payment for the billing period. This is a recognized legal safeguard to ensure the contractor is fulfilling its statutory obligations.
Bonding: In many instances, the billing agreement may require the contractor to post a bond to further guarantee the payment of wages and benefits.

5. Prohibited Deductions in Billing

It is illegal for a manpower provider to deduct its administrative fee or any recruitment costs from the wages of the workers. The billing rate is a transaction between the Client and the Contractor. The workers must receive their full statutory wages and benefits without any "placement fees" or "service charges" being subtracted from their take-home pay.

6. Value Added Tax (VAT) Implications

The Bureau of Internal Revenue (BIR) generally treats the entire gross billing of the manpower agency as its gross receipts for VAT purposes.

Gross Receipts: This means the 12% VAT is applied to the total amount (Labor Cost + Government Contributions + Service Fee), not just the service fee.
Withholding Tax: The principal is usually required to withhold a certain percentage (often 2% as per BIR regulations on contractors/service providers) from the service fee portion of the billing.

7. Consequences of Non-Compliance

Failure to adhere to the prescribed billing structures—specifically the 10% administrative fee and the inclusion of all statutory benefits—carries heavy legal risks:

Labor-Only Contracting Finding: The contractor may be de-registered, and the principal will be deemed the direct employer of the personnel, with all the associated liabilities (regularization, backwages, etc.).
Compliance Orders: DOLE may issue cease and desist orders or cancellation of the contractor’s DO 174 registration.
Monetary Claims: Workers may file for underpayment of wages if the billing rate was squeezed so low that it compromised their legal entitlements.