There are many advantages and disadvantages to each classification of worker that need to be carefully weighed up – while a contractor will bring a specialist skill set and flexibility to a role, a permanent employee will possess a clear understanding of the company’s culture, industry and products, for example.

One cornerstone of the decision-making process is often the cost of a permanent employee compared to a contractor. Contractor rates can seem, at first glance, to be bordering on the outrageous – but it does make financial sense to opt for a contractor as opposed to a permanent employee.

“The hourly or daily rates of most IT contractors can seem high but, with careful cost analysis and the right financial advice, a contractor can save an employer money in the long term, compared with the cost of hiring and maintaining a permanent employee,” said Simon Curry, CEO from specialist contractor accountancy firm Nixon Williams.

Do the maths

One third of IT contractors command daily rates of between £400 and £499, according to the Nixon Williams Contractor Survey 2015. Half of the 500 IT contractor respondents also reported that their daily rates had remained the same over the last 12 months.

Let’s crunch some numbers here. If we assume an hourly rate of £35 for a contractor and a total of 2,080 working hours in the year (where 40×52 = 2,080), the contractor will cost the company £72,800.

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That’s quite a high wage packet and most IT managers would rule out hiring a contractor based purely on this rough calculation – but there are a couple more issues to consider to build up a more representative figure for contractor cost.

Expenses

Do not overlook the cost of benefits that must be paid to permanent employees. Training, insurance, holiday pay, sick leave, profit sharing and other such expenses, depending on what your company offers, must all be factored into the analysis. But how do you calculate these costs?

A first step is to take annual leave into account – employees often benefit from 25 days annual leave and a one hour lunch break – if we factor this assumption into the £72,800 figure, a contractor now has an annual wage of £57,575 (that’s for 47 weeks work at £35 per hour for a 35 hour working week).

Most companies have an idea of the cost associated with the other fringe benefits enjoyed by a permanent employee – your finance department should be able to provide additional guidance here.

As a rule of thumb, fringe benefits costs could make up as much as between 20 and 50 per cent of a salary. Let’s factor this in with an average of 30 per cent, bringing our contractor salary down to just over £40,000 – a much more reasonable rate.

These estimates are just that – estimations. Some contractors will charge at a higher rate if their skill set is in demand, they work longer than the assumed 7 hour day or require a basic level of training, for example. Make sure you do the math for the specifics of your company.

Flexibility

Putting the figures to one side, IT contractors can provide a great deal of flexibility to a company, which is especially useful if a project is suddenly altered.

Joe Osgood, contracts team leader at recruitment consultancy ReThink Recruitment, said: “There are numerous benefits to working with IT contractors, not least that you’ll be able to obtain specialist skills that often aren’t readily available in the permanent market. In addition, you get these attributes without the financial commitment of offering a full time contract, which can be particularly valuable for smaller firms.”

For example, if the company changes direction and a project gets dropped then there is no employee to fire or unemployment paperwork to process. Or, if a project steps up a gear, one phone call can bring in a new contractor. There is no costly recruitment process, saving a company money in personnel costs in the long run.

“Contractors are also able to work on a flexible basis and can be ready when called upon meaning they’re perfect for working on important, time sensitive projects,” Osgood added.

>Related: Tech apprentices – five myths busted

Contractors can also take on workloads that your internal staff may not be able to manage. Ian Mottashed, marketing director at media asset management company Cambridge Imaging Systems, said: “We decided to outsource web development because our internal software development team were too busy servicing our own customer base – it meant we could see results almost immediately without having to negotiate resource allocation with our own in-house team.”

There’s also the possibility that a person is not performing to the expected level – this is an easy situation to resolve with a contractor, you can easily dispense of the services of one contractor and hire a new one in. It is rarely as easy to send a permanent employee home for good.

The bottom line

When deciding between a permanent employee or a contractor, keep in mind the hidden costs of hiring and maintaining an employee. Such cost analysis can be difficult to carry out precisely, but an estimate can help you make a more informed decision.

You must also consider the intangible benefits of bringing in outside help to the company. If the flexibility and specialist skill sets of a contractor are more important than a small difference in cost – look beyond the hourly rates and hire the contractor.

Further reading: Maintaining company brand with self-employed staff