Most managers perform overly simplistic and highly flawed financial analysis regarding employees versus consultants. The reality is that hiring costs per employee is often higher than when engaging a consultant. And the differences are always beyond the hourly rates and salaries.
Very few businesses factor in the actual labor costs. If yours is a product company, these mistakes can significantly reduce your bottom line. These errors can lead to expenditures being more than what you’re charging for a service company.
Well, this is an old-age issue. So industries have fine-tuned tried and tested methods for more accurate labor costs calculations. You can now analyze the costs realistically and make an informed decision when dealing with a consultant vs employee dilemma.
It’s More Than Benefits
When you are factoring in employee benefits, things become complicated. Some of the employee benefits that typically eat into your profits include payroll taxes, annual bonus, and insurance.
Even after taking care of the benefits, you’ll realize that it’s only the tip of the iceberg. An employee costs much more than that.
Running a business require infrastructures like payroll services, office space, phone systems, computer equipment, and many others. Indirect costs may even go higher for most companies. And your employees benefit from them without paying a coin.
A corresponding fraction of the expenses is attributable to each of the full-time employees. Collectively, a company may inadvertently incur losses on hiring employees due to these indirect costs.
Factoring it all in
The general thumb of rule is to appropriate seniority using salary. The seniority then approximates the infrastructure’s portion that the employee used.
However, some employee’s salaries (CFO, COO, administrative staff etc.) form part of the infrastructure expenses. As you delve deeper, you’ll need to categorize the costs to ensure proper distribution. The categories include overhead, fringe benefits, general and administrative.
So things get sophisticated rapidly.
The Actual Cost of Consultants
Indeed, consultants may also need some infrastructure, too. However, the amount is significantly less than what an employee uses. Remember, the company doesn’t give any benefits to the consultant. Therefore, only the General & Administrative costs affect a consultant’s actual costs.
More Cost Comparisons
A consultant vs employee apple-to-apple comparisons will prove that things are not always as they appear. Other things to consider include:
- Potential financial risks
Consultants come with less financial risks. For example, companies tend to hire and fire less rapidly with employees. Underperforming employees tend to stay on the payroll for months to avoid a potential worker-filed lawsuit.
On the other hand, you can easily dismiss consultants when their results don’t satisfy or improve your business bottom-line.
- Recruiting fees
Whenever you pay recruiting fees for each employee, the cumulative cost goes up. So your overhead costs increase, leading to higher overhead rate multiplier.
Calculating each worker’s actual cost relies on the overhead multiplier. Therefore, high multiplier translates to an increased effective price for each employee.
All these hefty recruiting fees are a thing of the past when you involve a consultant.
You’ll always encounter the consultant vs employee issue whenever you’re making a hiring decision, especially when it comes to labor costs. It calls for critically considering all the indirect costs of every employee and cost per consultant involved to ensure your business decision is sound.
Your situation and company are unique. So “one size fits all” solutions don’t exist. However, be aware of the factors and challenges highlighted in this article. That way, you’ll be able to make the best business decisions for your company.
Are you looking to hire a consultant developer? DevReady is more than ready to take on your next big project at favorable labor costs. Schedule a call now to get started.