Contract Vs FTE FACTS

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For the hiring managers who tell me, "We only hire perm employees because it saves us money." YOU NEED TO SEE FACTS!

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Contract Vs FTE FACTS

  1. 1. 1/10
  2. 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. 2/10
  3. 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? Answer: 3 YEARS PLUS 3/10
  4. 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 contractor/employee salary paid to an employee. benefits packages offered (varies 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 Underperformer site, staffing firm will replace quickly. extensive costs, in terms of exiting 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. 4/10
  5. 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 5/10
  6. 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: o 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 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 6/10
  7. 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. 7/10
  8. 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 8/10
  9. 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. 9/10
  10. 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 10/10

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