6 October 2022

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

Wayne Burgess
Wayne Burgess

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.

In fact, it’s for these reasons why the contingent workforce is growing so rapidly. A recent study from Staffing Industry Analysts found that contingent staffing continues to increase, with US staffing companies hiring an average of 2.7 million temporary and contract workers per week in the first quarter of 2022, a year-over-year increase of 1.6 percent.

Yet despite this, some businesses don’t touch contingent workers at all. This is largely down to a common contingent workforce myth that is still being peddled. Many organizations believe 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 blog, 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.

Conexis VMS Case Study 
Why many organizations wrongly believe contractors and temps are more expensive than perm employees

When it comes to the contingent workforce, 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. 

Why more calculation needs to be done to get the true cost of contract and temp labor 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 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. 

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. 

Are you interested in learning more about how a vendor management system can help your business improve contingent workforce management, and improve contract/temp labor ROI? Book a demo of Conexis VMS today.

Let's Talk - Contact Conexis VMS

Wayne Burgess

Wayne Burgess

Wayne Burgess is the President of Conexis, a technology company focused on helping orgainizations get control of their Contingent workforce and Staffing agencies. Wayne has over 25 years of global procurement, consulting and operational delivery experience. Prior to founding Conexis, Wayne held senior roles in Accenture’s Procurement division with specific experience across the Services and Contingent Labour spectrum. Wayne has run programs from as small as $5m to as big as $2bn and has a proven track record of driving significant customer value.

Subscribe to the Conexis Blog