Contract engineer vs. full-time hire: the real cost math

When teams compare a contractor's monthly rate against a salary, the salary often appears cheaper. However, this comparison is inaccurate on both sides. In this article, we'll explore the true costs of hiring a full-time senior engineer versus a contract engineer.

To understand the real cost of a full-time senior engineer, consider a US or Western European professional with a headline salary of $150–200k. The actual expense is higher due to employment overhead, including payroll taxes, health insurance, pension contributions, equipment, software licenses, and office stipends. Finance teams typically use a fully-loaded cost multiplier of 1.25–1.4× the salary. Therefore, an $180k engineer would cost the company between $230–250k annually before any coding takes place.

Hiring a contractor involves different expenses. An agency fee, typically 20–25% of the first-year salary, ranges from $35–45k for a single hire. Additionally, internal recruiters consume the recruiter's salary and your engineers' interview hours, which are valuable resources that could otherwise be dedicated to software development.

Lastly, there's the vacancy cost, as time-to-hire for senior engineers often takes two to three months, including a notice period. This extended period can delay projects or burden other team members, a cost that typically goes unrecorded.

Contrastingly, a contract engineer's monthly rate is all that's required once the project begins. There's no recruiting fee, payroll overhead, or severance exposure. However, the contractor onboarding process takes days instead of months, and when the project concludes, scaling down the workforce is easier. The contract model also comes with its own set of costs, such as the time needed to integrate the engineer into your codebase, maintain the management relationship, and capture the knowledge that leaves when the contract ends.

The decision to hire full-time or contract hinges on the project's horizon. If the role is expected to persist for three years or more, the fixed costs of full-time employment tend to amortize, making employment the more cost-effective choice. However, if the need is for a temporary project, a migration, or a temporary spike in the roadmap, the fixed costs of full-time employment never amortize, making contract engineers a more suitable option.

Moreover, the certainty of hiring plays a role in the decision-making process. Hiring involves a two-to-three-month commitment to a guess about your future roadmap. Contracting, on the other hand, converts this guess into a monthly decision, providing more flexibility.

Finally, the type of knowledge required should be considered. Core product architecture and specialized skills, like building specific pipelines or setting up consoles, compound in a long-tenured employee's memory. These skills are transferable, and hiring a contract engineer may not necessarily negate the value of the knowledge they bring.

In summary, if the work forms your core product and the project's horizon is years, hiring a full-time engineer is the better choice. However, contract engineers are ideal for projects with an end date, skills that are needed now but not indefinitely, and teams that require senior capacity immediately rather than in the next quarter. It's essential to run the fully-loaded numbers for your specific case before making a decision.