Pay contractors or hire employees? – A cost breakdown

 

 

6 MINUTE READ

 

“We don’t hire contractors, their rates are outrageous!”

 

As an IT recruitment agency, we hear this line at least once a day.

 

Of course, this is understandable. Many employers are instantly put off when they see quotes of a few hundred pounds per day. So they reject the idea without any further investigation.

 

But diving into the numbers reveals some interesting insights. In many instances, the actual cost of a permanent member of staff can be higher to your organisation than brining in a contractor.

 

Cost Breakdown

 

As an example, we’ve selected a role we recruit for regularly on both a permanent and contract basis. The role is a Senior JavaScript Developer in London. Let’s take a look at the cost breakdown for a contractor and a permanent member of staff.

 

Senior JavaScript Developer – Contract

 

Typical Day Rate: £450 (inc. agency fees)

 

Total Cost: £450 per day

 

Let’s take a look at how this compares to a permanent member of staff.

 

Senior JavaScript Developer – Permanent

 

Typical annual salary: £70,000

 

By taking this basic salary and dividing it by the average number of weekdays in a year we can work out the cost per day. In total there are 261 week days in a year, but obviously not all of these are worked. We need to account for annual leave and bank holidays.

 

261 – 25 (minimum holidays) – 8 (bank holidays) = 228 total work days.

 

So the day rate works out as:

 

£70,000 / 228 (average working days) = £307.01 per day

 

If you finish your calculation here, it appears you would make a significant saving by recruiting a permanent member of staff.

 

However, this figure is not a true reflection of the cost of permanent member of staff.

 

Actual cost

 

Employers have to account for many more costs associated with permanent employees on top of their basic salary. If we include these extra costs in the calculation, things look quite different.

 

Class 1 National Insurance Contribution (13.8%) = £9,660

 

20% agency fee: £14,000

 

70,000 + 9,660 + 14,000 = £93,660

 

Additional Benefits

 

Healthcare (£1000) = £94,660

Life Assurance (£250) = £94, 910

Pension (5% basic salary) = £98, 410

Training (£1000 estimate) = £99, 401

 

Total: £99, 410

 

All things considered, the true cost of a permanent member of staff is significantly higher than their basic annual salary.

 

With this new figure we are now able to calculate a more accurate approximate day rate for a permanent member of staff.

 

£99,401 / 228 = £435.96 per day

 

A Senior JavaScript Developer earning a basic salary of £70,000 is likely to cost your business somewhere in the region of £435 per day.

 

Compared to the rate of a contractor at £450, permanent members of staff are still cheaper, but only by a small amount.

 

The complete picture

 

There are also a number of other costs that could have been factored into the calculation above. These include sick pay, redundancy packages, maternity leave, administrative costs, productivity decline etc.

 

Ultimately, when you take into account all the additional costs it’s likely that the day rates for both contractors and permanent employees are pretty much the same.

 

To take it even further, permanent staff usually take a significant amount of time to recruit. It can take a long time to find the right permanent candidates, and when you’ve found them, you have to contend with notice periods from 1 to 6 months. This is a problem as open vacancies cost money.

 

Contractors vs Permanent Employees – Who should I hire?

 

While there isn’t much difference in terms of cost, your recruitment strategy should tie in with your organisation’s goals.

 

In our experience, hybrid approaches tend to work best. Both permanent staff and contractors present different pros and cons depending on your current circumstances.

 

The takeaway message here is: don’t be afraid of using contractors.

 

If you’re recruiting permanent staff members in roles that are difficult to fill, put contractors into those roles whilst you’re recruiting. Similarly, if you have a series of projects on the horizon, look to take on contractors instead of permanent staff. As outlined above the difference in cost is negligible.

 

If you would like to find out more about the benefits of hiring a contractor for your business, get in touch with our contract recruitment team today on 0203 137 7005.