Hiring contractors can be more cost effective than full-time employees (FTEs) in certain scenarios. The document compares the direct and indirect costs of contractors versus FTEs across three scenarios: 3 months of employment, 1 year of employment, and 3+ years of employment. It finds that contractors have lower total costs than FTEs for the 3 month and 1 year scenarios, but FTEs have lower costs for employment of 3 years or more due to benefits and lack of rehiring costs with FTEs. Therefore, contractors are more cost effective for short-term needs while FTEs are better for long-term, ongoing positions of 3 years or more.

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2. Is a Contractor a more expensive resource than a Full
Time Employee?
What are the REAL costs of hiring and firing Contractors
vs. Full Time Employees?
These are questions frequently asked by hiring managers, HR, procurement, recruiting
departments and finance. Greythorn, part of the FiveTen Group has carried out extensive
research to compare the cost of Contractors vs. Full Time Employees across a variety of
scenarios; this white paper helps companies weigh all of the factors and make an informed
hiring decision.
DIRECT DOLLAR COSTS (Quantifiable and relatively standard)
Costs begin to be incurred from the moment the opportunity arises and continue through the
hiring process, thus they are partly dependant on how long it takes to fill a vacancy. In this
respect the faster the job is filled there is a considerable saving.
Ongoing costs of a fully burdened and benefit entitled full time employee (FTE) must then be
compared to the bill rate of a contractor, in the event of a separation of the employee there
are another set of costs associated with this; an oft ignored area that must be factored in to
make the comparison accurate.
A breakdown of all of the costs and accompanying research can be found in Appendix A:
Where did we get the numbers from?
INDIRECT COSTS (Can be quantified but will vary widely)
In addition to the more visible and immediate dollar costs, there are potential costs that vary
widely but which need to be considered, in particular those around employment liability and
the impact on existing staff while positions remain vacant.
For the purposes of this study we have used overly conservative numbers in our
calculations.
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3. THE SCENARIOS
Below is a cost comparison of an $80,000 per annum individual in three of the most common
scenarios comparing a contractor through a recruitment agency to a direct hire FTE.
Scenario 1: 3 MONTHS employment then TERMINATION - termination for poor performance
after three months and then the role has to be re filled.
Contractor FTE
Cost of Open Position $10,000 $40,000
Cost of Hiring $5,000 $36,000
Cost of running contractor/employee $27,804 $25,700
Cost of Separation 0 $16,133
Cost of Open Position Second time round $10,000 $40,000
Cost of Hiring Second time 0 $36,000
TOTAL $52,804 $193,833
Scenario 2: 1 YEAR employment then LAY OFF/RESIGNATION – after a year’s employment
there are cut backs or the person resigns voluntarily.
Contractor FTE
Cost of Open Position $10,000 $40,000
Cost of Hiring $5,000 $36,000
Cost of running contractor/employee $129,090 $102,800
Cost of Separation 0 $8,067
TOTAL $144,090 $186,867
Scenario 3: 3 YEARS & ONGOING - three years plus of continuous employment.
Contractor FTE
Cost of Open Position $10,000 $40,000
Cost of Hiring $5,000 $36,000
Cost of running contractor/employee $387,270 $308,400
Cost of Separation 0 0
TOTAL $402,270 $384,400
How long do you need an FTE to work for the company to make this
method of hiring more cost effective than a contractor?
3 YEARS PLUS
Answer:
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4. Analysis of Results
There are many variables that need to be taken into account when making these comparisons.
Costs and risks will vary from company to company, situation to situation as well as the final
outcome of the engagement/employment.
COMPARISON SUMMARY: Based on an $80,000 a year Professional.
Contractor FTE
Open Position For revenue generating projects For positions or projects that are a
contractors are a preferable option due few months off and time is not
to faster time to hire. critical.
Short hire time Longer hire time, higher risk
Cost: $10,000 $40,000
Cost to Hire Recruitment agency has already Potential high cost in terms of time
invested the time and money to find and dollars if internal resources or
candidates. Only cost is time spent search firm fees are used.
interviewing candidates.
Zero cost to hire, minimal risk High cost to hire, minimal risk
Cost: $5,000 Cost: $36,000
Running Bill rate is typically higher than the Subject to cost of headcount and
salary paid to an employee. benefits packages offered (varies
contractor/employee
considerably), but typically less cost
than a contractor. Min package used
for this calc (no 401K match etc)
Higher cost, low risk Lower cost, mid-high risk
Cost: $129,090 Cost: $102,800
Cost of Separation A major benefit of contractors is the Can be high, in terms of
ease of separation, a call to the performance management or
recruitment firm who will then handle redundancy costs / severance
the exit. packages.
Zero cost, low risk Mid cost, mid-high risk
Cost: $0 Cost: $8,000-$16,000
Cost to Replace an Easy to remove underperformer from Cost of a poor hire can have
site, staffing firm will replace quickly. extensive costs, in terms of exiting
Underperformer
the employee, damage to team
morale and credibility of
management. Then the need to
embark on a new search to replace.
Low cost, low risk High cost, higher risk
Cost: $10,000 Cost: $76,000
Total Potential
$159,090 $262,800
Cost Pool
Conclusion
• If you retain an employee for three plus years and the initial need to hire is not time
critical then the FTE option is preferable.
• For greater flexibility, lower risk and lower cost (over a three year period) then
contractors can be a more effective strategy.
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5. APPENDIX A: Where did we get the numbers from?
In order to paint a full picture certain assumptions needed to be made to quantify various costs
which were based upon our own experience and market knowledge as well as authoritative industry
bodies.
COST OF AN OPEN POSITION DURING SEARCH FOR THE RIGHT PERSON
DIRECT COSTS
Loss of Earnings: Loss of revenue is the most obvious and most quantifiable cost associated with
open positions. An employee should produce 3-5 times of their annual salary in production. For an
$80,000 employee this would equate to a daily loss of $920 - $1540.
This is calculated through:
• Delayed revenue resulting from longer delivery of products/services
• Lost revenue resulting from products/services that could not be introduced
• Underutilized equipment and corporate assets
• Decreased output because employees are performing additional duties
• Decreased output because employees are performing unfamiliar tasks
INDIRECT COSTS
In addition there is ‘wear and tear’ cost on those left to carry the burden. The added workload
and higher stress levels can result in a number of challenges:
• Increased hours (and overtime payments)
• Sending a message that the company isn’t performing well
• Less opportunity to focus on the growth of the current employees by sending them
to development programs and training
• Reduced creativity and innovative thinking
• Less chance of employees reaching individual goals
• Increased frustration
• Increased scrap and rework/error rate
• Increased stress, missed deadlines, leading to increased illness, absenteeism,
lateness and finally higher turnover
FACT
A typical contract can be filled in 2 weeks; a typical FTE role takes 8-12 weeks to fill.
SOURCES: Greythorn Inc, FiveTen Group
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6. COST OF HIRING
DIRECT COSTS
How is it possible that the cost of hiring and hiring poorly can to be so much?
Research by the Corporate Leadership Council shows that when companies hire by themselves the
average cost per hire is 45% of the new employee’s first-year salary. Costs include:
Writing advertising copy
o
Cost of advertisement
o
Organizing and assessing resumes
o
Phone time to arrange interviews
o
Interviewing
o
Testing
o
Reference Checking
o
Letters to denied applicants
o
Some of these costs may be reduced by using a staffing firm for the search process; however the
fee then charged can off set some of the above costs.
INDIRECT COSTS
Although there are some risks associated with discrimination in the hiring process, a good HR team
can mitigate these risks. RISK is LOW whether through a staffing firm or when recruitment is
carried out directly by the company.
SOURCES: Staffing Industry Analysts, Corporate Leadership Council, Greythorn Inc, FiveTen Group
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7. COST OF RUNNING CONTRACTOR/EMPLOYEE
DIRECT COSTS
All the scenarios are based upon an individual who earns $80,000 per annum.
• An $80,000 a year individual, when working through a recruitment agency on an hourly basis
would cost an industry average $63 per hour.
• Clients only pay for hours a contractor works (not vacation days etc), this equates to 1986
hours per year.
• When paying an FTE there is also the Employers tax burden paid by the Employer,
approximately 12% of salary.
• There is also the medical, dental and vision insurance along with life and disability. An
average cost of $400 per month.
• Most FTEs also have a training cost; contractors either come trained or are trained by their
employer.
• Finally there are paid vacations, 401K contributions, holidays and other perks offered to
FTEs. These are NOT quantified in these calculations due to the diverse range of packages
offered from company to company.
INDIRECT COSTS
As the Employer of an FTE the company is directly responsible for the employee and any claims of
harassment, discrimination and employers liability. RISK is therefore MID.
A contractor is the employee of the staffing firm who bears the brunt of this liability. The client
can still be held accountable in certain circumstances (for instance a hostile environment); there is
considerably less risk when the contractor is not an employee of the company. RISK is therefore
LOW.
SOURCES: ADP for average payroll costs of a full time employee in the US, Greythorn Inc, FiveTen
Group.
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8. COST OF SEPARATION
DIRECT COSTS
While employment may be at will, employers are advised to attempt to improve the performance
of under/non performing employees. This involves continuing with the costs of the employee and
also time spent by HR and line management.
Again while employment is at will typically a notice period is offered and in the case of termination
or lay offs typically a redundancy package will be offered.
INDIRECT COSTS
Risk of terminating an employee is HIGH.
Risk of terminating a contractor through a recruitment agency is LOW.
SOURCES: Greythorn Inc, FiveTen Group
COST OF GETTING IT WRONG: SOMETIMES YOU JUST DON’T HIRE THE RIGHT PERSON
DIRECT COSTS
Research by the Corporate Leadership Council shows that the cost of hiring poorly and needing to
replace is at least 3 times the employee's base salary.
Not only do you have the cost of separation, the damage to productivity and team morale but you
also have the costs and time having to hire for the role all over again.
• Wasted salary & benefits
• Severance pay
• Training costs
• Opportunity Cost - Imagine valuable time and therefore money lost when:
o Managers/supervisors/owners spend hours wading through resumes and references,
calling applicants, and interviewing top choices over several rounds
o A necessary and valuable position is left unfilled as the hunt for a good employee
continues
INDIRECT COSTS
Risk of terminating an employee is HIGH.
Risk of terminating a contractor through a staffing firm is LOW.
SOURCES: Corporate Leadership Council, Greythorn Inc, FiveTen Group
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9. REAL LIFE REASONS TO USE CONTRACTORS
• Sometimes a higher level of expertise is required that will not be needed after the
project ends, therefore a contractor is chosen.
• For highly skilled technical resources it can be easier to find a contractor than a
direct FTE resource with the right skills.
• Contractors are not on payroll, so are easy (and no cost) to terminate if they (or the
project) don’t work out.
• Contractors are a way to get around any headcount limitations. Temporary
contractors do not count as headcount but as project costs and are easily disposable
after the project ends. (Many projects are ‘capital’ in nature and thus can support
the addition of cost but not necessarily headcount).
• Flexibility, especially in a questionable economy. If a company does not have the
ability to bring on a large number of “hires” for a major project they may want to
take a contract-to-hire approach that gives flexibility.
• An organization may be transitioning between old technology and new technology
and want temporary contractors to come in to do a change over and eventually be
terminated with no headcount issues.
• In the majority of cases, Contractors cost less that FTEs when all costs are
considered.
And finally:
Research by Staffing Industry Analysts found that:
86% of buyers reported that the use of contingent labor
saved their organization money.
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10. For more information please contact:
NORTHWEST
Joel Hides
40 Lake Bellevue
Suite 100
Bellevue WA 98005
joel.hides@greythorninc.com
425 635 0300
MIDWEST
Doug Zieleniewski
203 North LaSalle
21st Floor
Chicago IL 60601
doug.zieleniewski@greythorninc.com
312 853 6100
NORTHEAST
Damon Stagliano
630 Freedom Business Center
3rd Floor
King of Prussia PA 19406
damon.stagliano@greythorninc.com
484 690 1106
BAY AREA
Stefanie Tomlinson
1255 Treat Blvd
Suite 300
Walnut Creek CA 94597
stefanie.tomlinson@greythorninc.com
925 287 0700
www.greythorn.com
www.fivetengroup.com
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