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 bringing in a contractor. Indeed, the UK contract market is booming with new contract recruitment agencies opening up every week.
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.
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.
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
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
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.