Show Me the Money: Why Bringing on a Long-term IT Contractor Isn’t as Pricey as You Think

By Outside-In® Team Member Zach Werde

Why would you bring on a long-term IT contractor? It’s twice as expensive as hiring someone permanently, right? WRONG! At a glance, it may seem that bringing on a senior contractor may be exponentially more expensive than hiring a permanent resource. The $100k you were looking to spend to hire someone permanently may turn into a $100 per hour charge from your staffing agency after agency markup and accounting for the fact that a contractor will need more money. Holy cow, that’s more than twice as much money over the course of a year if my contractor works 52 weeks at 40 hrs/week! Here’s where I say….hold the phone! Let’s look at the true differences in cost comparing the hiring of a 100k salaried employee through a staffing agency or bringing on a $100/hr contractor for a year through a staffing agency.

If you speak to your HR department, they will confirm that there is something in the neighborhood of a 15% burden to put this person on your payroll and pay the associated taxes, fees, and insurance. Tack on the $3.5k cost per hire that is the national average and that will bring your annual cost up to $118.5k.

Let’s talk about benefits. I’m sure you are aware of the Affordable Care Act. Employer contribution varies incredibly depending on the insurance you offer your employees, but I imagine your HR department will confirm you are spending between $500-$600 per month on healthcare per employee. It could be more depending on the premiums you offer. If your company offers the standard 3% match on 401k, go ahead and tack on another $3k. Do you offer a bonus? Many firms offer 15%-20% based on individual performance and/or company performance. Let’s say you are only at 10% annually for a good employee and you hire another a good person. There’s another 10k for the year. Assuming you don’t offer any other benefits (which I am sure you do), the benefits total another $19k-$20.2k which brings your cost to $137.5k-$138.7k to hire your “$100k” employee.

Don’t forget, if you are working through an agency and want them to find you a permanent resource, they are going to charge a 20% fee, or more. Tack on another $20k. Now your “true” cost for one year to hire a $100k salaried employee through an agency is around $157.5k-$158.7k.

Perhaps you noticed I left PTO out of the benefits conversation. Remember, assuming your organization offers holidays and vacation time, you are paying them for 52 weeks even though they are only working 47 weeks (I’m guessing they have off for 10 holidays, another 10 business days of vacation, and another 5 for personal days). However, for a contractor, you only pay time worked. All other factors aside, if your contractor works 47 weeks out of the year, you aren’t paying him/her for 5 weeks of the year. So, at $100/hr, even if they work 40/hrs per week, that means your total, all inclusive cost for a contractor for the year is $188k. If they work 37.5 hours a week, you’re looking at $176.2k. For sure, they won’t work during your holidays (since you will be closed), and contractors will take time off just like everyone else, they just won’t be paid for it.

That means, looking at the entire picture, you are spending between 11%-19.5% more over the course of 1 year to bring on a year long contractor, instead of hiring a permanent resource. Not exactly double anymore, is it? Obviously, if they stay on less than a year, then it may actually be less expensive to bring the contractor in, although they may be working less.

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