Contractor Vs Perm – Who is more expensive? you may be surprised!

As a contractor i get pretty pissed off when i’m constantly told that i’m not committed to the company i work for, and that i’m more expensive than a permanent employee. Anecdotally i know at least the first part of that isn’t true, because i really do care about the companies i work for and always try my best for the them, my teams and my projects (as do most contractors I know) but what about the second part, the costs.

This is where things get complicated, most companies when calculating the relative costs of a permanent employee versus a contract will do something like the following:

They will take the employee salary add costs, and divide it by the total number of available working days (261 days) to get a day rate and compare that with the contractors day rate. Voila, there it is in black and white, in my example a contractor costs almost twice as much as a permanent employee.

However, if you dig a little deeper you will see that this only half the story. Due to holidays, sick days, bank holidays, maternity/paternity leave, non-productive/chargeable days the actual number of ‘work’ days available is less. Using a standardised set of figures I’ve calculated that the number of available work days for an employee is actually 206 days, we minus the following from our available working days:

  • Holidays  – 25 days (assumed average holiday entitlement)
  • Bank holidays – 8 days (Gov.uk website)
  • Sick days – 6.7 days (2008 CBI/AXA Survey average)
  • Training days – 10 days (assumed average training days per year)
  • Maternity/Paternity Leave – 5 days (assumed average leave days per employee p. a.)

If you  divide the cost of employment (£65,772.48) over the actual number of working days (206) the headline figures start to align.

  • A employee has to earn the company £319.26 (per available working day) to cover their costs

Where as a contractor has to earn the company £477.52 (per available working day) to cover their costs. So contractors are still more expensive than a permanent employee per day!

No, if we dig a little deeper (again) we see that contractors aren’t paid for holidays, sick days, training days and maternity/paternity leave, so the company doesn’t need to cover the cost of the contractor, I calculate this as 226 chargeable days (i’m excluding training because most contractors aren’t funded to undertake training).

The best way to see this is by multiplying the permanent employees day rate, by 365 days (this is the total amount the business needs to earn to cover the cost of employing the person over 1 year) and multiplying the day rate of the contractor by the number of chargeable days (again, this is the total amount the business needs to earn to cover the cost of employing a contractor over 1 year)

  • A business has to earn £116,530.54 per year to cover the cost of a permanent employee.
  • A business has to earn £107,926.00 per year to cover the cost if a contractor.

So, there we are. Over a 1 year period it is as, if not a little more, expensive to hire a permanent employee then to hire a contractor over the same period.

(the full spreadsheet can be viewed here http://sdrv.ms/1gq84oL )

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One thought on “Contractor Vs Perm – Who is more expensive? you may be surprised!

  1. Your first column states that for a salaried-employee at £49,500 a year, that costs you £72,322.98 once you add in tax, training, pro-rata office costs, etc. So far, so with you.

    I really can’t follow the gymnastics that follow where you somehow state that, because of productivity-reasons, I have to recoup £114,407.32 to “break even” on someone that costs me £72k.

    Here’s the thing – if my employee that costs me £72k does Absolutely No Work At All, it *still* only costs me £72k to keep them for a year. Right?

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