Maximize the Value of External Recruiters, Minimize the Cost

Occasionally, the need to bring in new IT talent arises. When internal referrals and candidates presented by your internal recruiter haven’t yielded the desired results, engaging an external recruiting expert seems like an appealing option. However, budget constraints may nip that in the bud.

A much more cost-effective option is contract-to-hire.

You collaborate with an outside recruiter but don’t pay the expensive permanent placement fees. Another upside is that the candidate is hired by the recruitment agency for several months before being converted to a full-time employee — without any conversion fees. The recruitment agency also assumes the responsibility of compensating the employee and subsequently bills the company an hourly rate for all approved hours.

Recruitment Search Is Not Cheap

Typically, a direct hire search entails a fee of approximately 20% or more of the candidate’s annual compensation. For instance, if a candidate is seeking a $150,000 salary, the placement fee could amount to a staggering $30,000. While this investment might be justified for a highly skilled professional who can serve as a pivotal member of your team, obtaining approval or allocating the necessary budget may prove challenging.

In contrast, the hourly rate paid for a contract-to-hire candidate is generally comparable to the cost of employing the candidate directly. This is primarily due to the comprehensive benefits and paid time off provided by corporate employers, which typically exceed those offered by recruitment firms. 

To better understand the cost comparison, let’s examine the expenses involved:

Corporate Employment Costs

These costs, which include everything from recruiting and HR management to benefits and paid time off, range from 50% to 100% of the candidate’s salary. When employing a contractor, not all these costs are incurred, as the company retains the responsibility for managing them, providing assets and support. Therefore, the actual cost is positioned towards the lower end of the range, with 45% being a common approximation. In our example, $150,000 multiplied by 45% equates to $217,500.

Recruiting Firm Costs

On average, the total cost and profit for a candidate amounts to 45% over their pay rate for recruiting firms. However, their costs are lower than corporate employment as they provide relatively fewer comprehensive benefits and paid time off.

Candidate Pay Rate

Working 40 hours per week, a candidate will total 2,080 hours in a year. Accounting for holidays, vacations, sick days, and personal days, we can deduct four weeks, or 160 hours, leaving us with 1,920 yearly hours. Assuming the annual salary of $150,000, we can offer them an hourly rate of $78.13 ($150,000 divided by 1,920). Considering the contractual nature of the arrangement and the inherent risk of not being converted or being let go, most candidates will negotiate for a slightly higher rate. Therefore, paying the candidate $80 per hour in this scenario is reasonable.

Consequently, the hourly cost to the company should be calculated as follows: $80 multiplied by 1.45 equals $116 per hour. If the candidate were to work the entire year, the total cost would amount to $116 multiplied by 1,920, resulting in $222,720.

Using this model, engaging an external recruiter to source and place your candidate while employing them for a year would cost $5,220 less compared to hiring them directly — and only represent a 17% portion of a permanent hire fee, which can be spread out over time.

Contract-To-Hire: An Appealing Solution

An increasing number of firms are going the contract-to-hire route to discover talented individuals who can propel their initiatives to new heights. That’s due to its many advantages, such as:

  • Access to the expertise of an external recruitment agency to find the ideal resource
  • Comparable costs to employing the candidate directly
  • Opportunity to evaluate the candidate’s suitability before offering them full-time employment
  • Flexibility to address any issues promptly, without the need for performance plans, documentation, or severance

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