Cost Per Hire: What's More Expensive, Contract or Permanent Labor?

In this article, we will tackle the misconception that contract employees cost more than permanent ones. We will explore why many companies hold this belief, examine the reasons it is incorrect, and discuss how an effective contingent workforce management strategy can help your business meet its hiring goals and reduce expenses.

The Benefits of a Contingent Workforce

There are a number of business benefits to utilizing the contingent workforce, including improved access to expertise, greater business flexibility, better ability to fill company-wide skills gaps, faster hiring processes and the freedom to trial new approaches.

Yet despite this, some businesses don’t touch contingent workers at all. This is largely down to a contingent workforce myth that hiring contractors and temps is more expensive than hiring permanent employees.

Due to this common misconception, many organizations have wrongly set a “no contractor” policy across the entire business, believing that this will help them save money.

In this article, we’re going to address this common contingent workforce misconception. We will dive into why many businesses believe that contractors and temps are more expensive than permanent employees, look at the reasons why this is untrue, as well as explore how a robust contingent workforce management strategy can both help your business both better achieve its hiring objectives and save money.

Why many organizations wrongly believe contractors and temps are more expensive than perm employees

When it comes to contingent workforce staffing, many organizations are making the mistake of comparing the gross wage cost of contractors and temporary workers with that of a permanent employee.

When looking at the gross cost, contractors and temporary workers will almost always be more expensive than a permanent employee. However, that’s only a small portion of the total cost and isn’t representative of how much these workers will cost the business in total.

It’s down to this small point that many businesses wrongly set a no-contractor policy for their hiring managers.

Assessing the true cost of contract & temp vs perm employees

When a business only compares the wage cost of a permanent employee to a contractor or temp workers then the permanent hire wage cost will almost always be lower, but there’s a lot more that the business needs to calculate to get a true, accurate representation of the overall cost per hire to the company.

When a business does the full math, they’ll find that a contractor or temp is either equal to or, quite often, lower than the cost of hiring a permanent employee.

Of course, we are not claiming that there aren’t circumstances where a business should hire a permanent employee over contract or temp labor, but if the company’s need is short-term or not a core skill requirement then using contract/temp labor is a fantastic way to rapidly access skills, get work done and keep costs down.

How to break down the cost

To help your business calculate the full cost of both workers, we’ve listed two examples of the cost breakdown of both contract/temp labor and permanent employees below:

Permanent employee cost breakdown

Assuming a $75,000 hire ($37.50/hour)
Salary: $37.50/hour, which is typically lower on a per hour basis than a temp.
Employee onboarding: $2,000 to $3,000 (based on an estimate of $2-$3/hour)
IT, HW and SW: $5,000 to $10,000 per worker (based on an estimate of $5-$10/hour)
Training: $2,000 to $5,000 per worker (based on an estimate of $1-$5/hour)
Operational support and company overheads (HR/Finance/legal/management etc, which is usually equal to ½ to 1X the salary of a worker): $18.75 to $37.50/hour
Total cost of a permanent hire: $60/hour - $100/hour.

Contract/temp labor cost breakdown

Wage rate: $41.25
Staffing agency markup: $16.50 (based on the average rate of 40 percent)
Contractor onboarding: $1,000 (based on an estimate of $1/hour)
IT, HW and SW: $2,000 to $3,000 (based on an estimate of $2-$3/hour)
Total cost of contract/temp labor: $60/hour

Where using contract or temp labor makes sense, organizations can feel comfortable that the total cost of ownership is at worst equal to the cost of a permanent hire and, at best, less expensive. And that’s not taking into account all the additional benefits that an organization can realize from proper utilization of contingent workers.

Why a strategic contingent workforce management program is a critical aspect of reducing labor spend

The vast majority of organizations that are overspending on contract and temp labor are doing so because they have ineffective processes in place to successfully manage their contingent workforce program.

The implementation of a vendor management system (VMS) resolves this issue. A VMS centralizes a contingent workforce program (and all of the data associated with it) in one place, giving businesses clear visibility into how much they are spending and what they are spending their money on.

In addition, a VMS also helps streamline and automate processes so that hiring teams can spend less time managing workers, and more time working on valuable tasks that drive real value to their organizations.

Getting Started with a Vendor Management System

Learn more about the Benefits of a Vendor Management System and how to choose the right one for your organization. Download our Free VMS Buyer's Guide here:

Discover the Power of Conexis VMS

Conexis VMS is purpose-built for organizations seeking to manage their contingent labor spend effectively. Here’s why we're the right choice:

Fast Deployment: Get up and running in weeks, not months
Transparent Pricing: Flexible pricing with no hidden costs
White-Label Ready: Customize the platform with your brand
Real-Time Insights: Make faster decisions with built-in analytics
Audit-Ready Compliance: Store contracts, worker data, and rates in one secure hub

About Conexis VMS

Conexis is an award-winning Vendor Management System built for organizations that want the power of enterprise software without the complexity or cost.

Leveraging the latest technology, Conexis delivers the expertise, reliability and security of enterprise systems, while offering the flexibility, user friendliness and tailored, personal service you require. Learn more about our Company and why organizations Choose Conexis VMS.

Looking to Switch Your VMS or Just Getting Started?

Whether you are looking to Switch your VMS, or just Getting Started, we are here to help. Contact Us for a Free No-Obligation Consultation, See how Easy Conexis is to use by taking a quick 2 minute Self-Guided Online Demo, or Book a Personal Demo Today!