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Why Hire a Contractor?

Some companies look at software contractors as overpaid budget-busters. But is this really true? Let's look at the facts.

Employee costs

Assume you have a Sr. Software Engineer full-time permanent employee being paid an annual salary of $70,000 and benefits consisting of 3 weeks vacation, 10 days of paid holidays, 10 days of sick/personal days, medical/dental/health plan costing $8000/yr. (probably low), Social Security and Medicare payroll liability of 6.5% and a profit sharing plan (10% contribution shared 1:1).

First, we compute the hours worked per year:

365 days/yr.
-104 weekend days
-15 vacation days
-10 holidays
-10 sick/personal days
--------
226 working days * 8 hr/day = 1808 hours worked per year.

This equates to a base hourly rate of $38.72.

Now, lets add your company costs:

38.72 /hr - base hourly rate
+4.24 /hr medical/dental/vision benefits ($8000/1808 hrs)
+2.52 /hr Social Security/Medicare company share liability (6.5%)
+3.87 /hr profit sharing ($70000 * .10 / 1808)
---------
$49.35 / hr is the adjusted cost of your employee - not including short/long term disability insurance, life insurance and possibly several additional benefits.

In addition, payroll/benefits administrative costs, non-productive time (superfluous conversations, playing games, extended lunches, late arrivals, early departures, etc.), staff meetings and training costs in material and time will increase this cost further until you are looking at well over $60.00 / hr.

Contracting benefits to you

Now, let's look at the benefits of hiring me as a contractor:

1. As a contractor, I pay for all the above benefits (health, life, retirement, vacation) and government liabilities out of my bill rate to you. I am not paid for hours I am not on the job (sickdays, vacation, etc.)

2. Administration is easy and inexpensive - I bill you as any of your other vendors do for services and products provided. None of the costs of administering payroll/benefits are incurred by you.

3. I am contracted on a project basis. When the project is completed, our working relationship is terminated. No layoffs or reduction-in-force is necessary. Employee morale is not affected.

4. I am contracted / released / recontracted as your business cycles dictate. You're not paying me when business is slow; no need to find "busy-work" to keep me on the payroll as with full-time employees. No need to keep me on the payroll during project "ramp-up", "ramp-down" and between projects.

5. I incur my own training costs to stay current with emerging technologies - you hire me for the expertise I have already acquired. No training lead-time is required. I can start today with the skill sets you require.

Rate justification

You now see that the cost of a full-time employee can easily exceed the cost of a contractor without many of the benefits. Please keep in mind these additional costs that I incur as a contractor that come out of my bill rate:

1. Education/Training - I have to keep my skills current. You are not paying me to train - you are paying me to produce.

2. Down-time - in this market, this cost is substantial. When I am not working, I am not earning. My contract must be sufficient to carry me through my impending "bench" time

3. Equipment, supplies, professional fees, insurance, etc. to run a business

Summary

As you can see, when all the facts are considered, contracting(out-sourcing) your software development projects is surprisingly cost-efficient. Not only is it cheaper than keeping full-time employees on the payroll, but it is more convenient and efficient to contract work as your business cycle dictates due to the ease of acquiring contracting resources on a project-by-project basis.

The figures I have used above are intentionally conservative. I'm sure your employee costs are higher than those I've used. I stayed conservative to demonstrate, without a doubt, how you can save money by contracting your projects. After considering the costs related to full-time permanent employees and the benefits of contracting your software development projects, I am sure you will recognize the overwhelming advantage of hiring me on a contract basis to satisfy your software development needs.