What are the real costs of hiring and firing Contractors vs. Full Time Employees? This question is frequently asked by hiring managers, HR, procurement, recruiting departments and finance. Greythorn has carried out extensive research to compare the cost of Contractors vs. Full Time Employees across a variety of scenarios; this document helps companies weigh all of the factors and make an informed hiring decision.

1. The real cost of contractors
Compared to full-time employees

2. What are the real costs of hiring and firing Contractors vs. Full Time Employees?
This question is frequently asked by hiring managers, HR, procurement, recruiting departments and finance. Greythorn has
carried out extensive research to compare the cost of Contractors vs. Full Time Employees across a variety of scenarios;
this document 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 potentially other variable costs, 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.
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 month 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) $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 or 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

3. Scenario 3: 3 years and 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
You need an FTE to work for the company for 3 years to make this method of hiring more cost effective than a contractor.
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, contractors
are a preferable option due to faster time to
hire. Short hire time. Cost: $10,000
For positions or projects that are a few
months off and time is not critical. Longer
hire time, higher risk. Cost: $40,000
Cost to hire Recruitment agency has already invested
the time and money to find candidates. Only
cost is time spent interviewing candidates.
Zero cost to hire, minimal risk. Cost: $5,000
Potential high cost in terms of time and
dollars if internal resources or search firm
fees are used. High cost to hire, minimal risk.
Cost: $36,000
Running contractor Bill rate is typically higher than the salary
paid to a full time employee. Higher cost,
low risk. Cost: $129,090
Subject to cost of headcount and benefits
packages offered (caries considerably), but
typically cost less than a contractor. Min
package used for this calculation (no 401K
match, etc.) Lower cost, medium to high risk.
Cost: $102,800
Cost of Separation A major benefit of contractors is the ease of
separation, acall to the recruitment firm who
will then handle the exit. Zero cost, low risk.
Cost: $0
Can be high, in terms of performance
management or redundancy costs/severance
packages. Medium cost, medium to high risk.
Cost: $8,000-$16,000
Cost to replace an
underperformer
Easy to remove underperformer from site,
staffing firm will replace quickly. Low cost,
low risk. Cost: $10,000
Cost of a poor hire can have extensive
effects, in terms of exiting the employee,
damage to team morale and credibility of
management. This also opens up the need to
embark on a new search to replace the
employee. High cost, higher risk. Cost:
$76,000
Total potential cost $159,090 $262,800
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.

4. 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.
The cost of an open position during a 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
A typical contract can be filled in 2 weeks; a typical FTE role takes 8-12 weeks to fill.
Cost of hiring
Direct costs
How is it possible that the cost of hiring and hiring poorly can be so high?
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
 Cost of advertisement
 Organizing and assessing resumes
 Phone time to arrange interviews
 Interviewing
 Testing
 Reference checking
 Letters to unsuitable applicants
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.

5. 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
Cost of a running contractor
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 medium.
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.
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

6. Cost of a bad hire
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:
 Managers/supervisors/owners spend hours wading through resumes and references, calling applicants, and
interviewing top choices over several rounds
 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
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.
Lastly, research by Staffing Industry Analysts found that:
86% of buyers reported that the use of contingent labor saved their organization money.
For more information please contact:
Ben Weber, Managing Director
Greythorn North America
+1 425 460 4285
ben.weber@greythorn.com