Hiring Technical Contractors or Full Time Employees?
November 22, 2016
The way we work is changing. From Amazon’s dream of a drone delivery service to Uber’s planned fleet of self-driving cars, new technologies and new applications of technologies are emerging at an unprecedented rate.
New tech is bringing opportunities to companies, but it is also presenting new challenges. Consumer demands for ease of use, sleekness of design, and tech integration of products, are forcing new, unfamiliar demands on organizations across industry lines. These demands, in turn, are forcing more and more companies to invest in acquiring the best tech talent available to them.
This is especially true in the fast-paced, innovation-driven tech industry, where the demand for specialized talent has never been higher. This demand is also growing far faster than in any other industry. According to an infographic from Modis, there is projected to be a 12% growth in tech employment by 2024, compared to 6.5% projected growth in all other industries.
New demands, combined with tech talent shortages, have made tech contractors a solution that many companies turn to when challenges or projects fall beyond the skills of their employees. However, many other companies choose rely on full-time hires to tackle these challenges and own these projects. There are trade-offs to both contractors and FTE’s, and many companies choose to use a combination of internal and outsourced talent, creating teams on a per-project basis based on their demands.
Before making any decisions, however, you should always consider the demands of the work you need accomplished, the scope of this work, your resources, and the demand for this work in the future.
When deciding whether to hire contract labor or an FTE, the first thing you should consider is the function that this person will serve in your company.
There is probably a whole lot of work for the hire or the contractor to complete, but you should delve into the nature of this work and its ultimate role in the success of your company. You should also define the ways in which the talent will support and/or supervise employees and leaders within your company.
For instance, if you want to build cloud functionality into your product, but have no resident cloud computing expert, completing this would require the skills of either a contractor or an FTE. However, this new cloud functionality will present your company with additional maintenance requirements. If the scope of this maintenance was minimal, then having a full-time employee would be an over-investment following the completion of the project. But, if you project maintenance demands to be extensive and/or ongoing, then an FTE would be the right choice.
It’s all about understanding the work that must be done, and what functionality you need from the person who does it.
What is the work that must be accomplished?
Which skills will be used to accomplish it?
What are the deadlines associated with this work?
When initial work is completed, will there be other work that demands the same skills? How often?
Which stakeholders will the talent be interacting with? Which customers?
How will this worker support the work of other employees and leaders at your company?
The next thing to consider is the budget you’re working with. Technology workers are some of the most highly paid in any industry, and this is especially true for experts in niche and emerging technologies.
No matter what tech role you’re hiring for, whether it’s contract or full-time, the general trend of salaries has been increasing over the past 10 years and it shows no sign of slowing. According to a recent Dice survey, 7.7% increase in tech salaries in 2015, up from a 1.9% growth rate in 2014.
While all tech talent is coming with a larger price tag, skills related to emerging technologies are even more generously compensated. These are the most highly paid tech skills on the market right now, with the corresponding salaries that they draw.
Top Paying Skills
Unfortunately for employers, the survey also found that the rates of contractors are going up as well,
“Contractors saw their average wages rise to more than $70 an hour, a more than 5 percent increase.”
When determining whether a contractor or an FTE will be best for your budget, knowing of the scope of their work will be invaluable. Contractors will be generally paid by the hour, so you need to have an accurate estimate of the time requirements of your impending projects.
Let’s say that you need of one of these “top paying skills” to develop a new product, CloudStack for example, which draws an average salary of 138,095. Let’s say that you’ve projected that your CloudStack hire would be working on the development this product for the entire first year of their employment, and that meeting this deadline could possibly (definitely) require a substantial time commitment beyond the typical 40-hour work week.
If you choose to hire a full-time employee, you should let them know what they’re in for, but the cost of this year’s worth of work will be their salary plus the cost of benefits and training they receive.
A contractor developing this product, on the other hand, presents a variable cost. Let’s say that product development required a 50-hour work week, on average, and their hourly rate was the average 70/hour. Assuming everything stays on schedule, the total cost of a yearlong engagement with the contractor would be 168,000, tens of thousands above the salary of an FTE hire.
However, when calculating the total cost of an FTE, you need to factor in the benefits that come with full time employment (healthcare, training, stock options, bonuses, paid time off, etc.). Benefits account for an average of 30.3 of total compensation provided to private sector workers, so this would adjust the total compensation for your FTE CloudStack expert to 179,523.
If this 30% average benefits cost reflects your company’s policy, and the hypothetical project ran on schedule, then a contractor would still be the cheaper option. If, however, the project was more demanding than expected, and requires a 55-hour work week on average, then your contractor would end up costing 184,800 to complete said project.
Making the right choice will require you to understand the work that will be done by the FTE or contractor. Hiring a full-time employee is a huge investment, but this cost is fixed. Hiring a contractor can save you money, but it can also result in spending just as much or more if your time-to-completion estimates are wrong.
When it comes to flexibility, contractors have FTEs beaten soundly.
One of the main advantages of contractors is that they can be called upon to do as much or as little work as you need them to do, making them perfect for completing 1-off projects like creating a company website.
It is also much easier to replace contractors than it is to replace full-time employees. While an underperforming hourly contractor can be dismissed easily, an underperforming employee must be handled according to company policy. This usually involves documenting poor performance, coaching, advising and reprimanding the employee and this process can drag on for months as an employee struggles to tread water. If you need this employee to be pulling a boat with their teeth, metaphorically speaking, then this leaves you with quite a problem indeed.
However, flexibility is one of the main reasons that professionals get into contract work, both in the way work is done and who it’s done for. Though your contractor may love working for you, they also have other clients to think about and you need to account for this. They can be available one minute, and working in another country the next, so staying up-to date with contractors you rely on is highly important.
Full time employees will always have more accountability than contractors when it comes to the work that they do for you. Unlike contractors, full time hires applied to your open job and you can hold them accountable to what they signed up for. While you should measure the performance of contractors, you cannot (and shouldn’t have to) benchmark and/or motivate that performance like you can with an FTE. Unlike a contractor, you can always rely on an FTE to give you their full attention, or else face the consequences.
This is not to say that contractors aren’t responsible, professional or accountable for the work they do. Contractors base their living off of their high level of skill and the reputation they hold within their agency and/or their industry. Doing bad work harms a contractor’s ability to find more work in the future, and this motivates them to earn those ridiculous hourly rates with ridiculously good work.
However, contractors are only loyal as long as they are contracted, and you need to take steps to protect your company’s most valuable assets. Creating an air tight Non-Disclosure Agreement (NDA) for contractors to sign will protect your company’s secrets and the products/technologies you are developing. The last thing you want is for the principal contractor on your new product working for the competition, so an NDA will help to protect your company from this possibility.
Ronny Cheng is one of the Co-Founder’s of Digital Astronauts and has helped drive lead generation in the software industry for organizations of all sizes — from start-ups to Fortune 500’s. He helped build one of the first online software review websites, specializing in CRM, ERP, and HR software. He’s a nationally published author with extensive experience working with the HR/Recruiting industries largest brands. In his spare time, you can catch him on Instagram doing his best food blogger impersonation.