The True Cost of Employees

Author: Ben B. 12/20/17

I’ve been heads down, fingers coding, energetically building Buink for over a year with no time for writing. In truth, I’ve been barely keeping my head above water! We keep adding new clients and we keep delivering great solutions; all the while, I’m getting even more busy.

About a month ago, I decided it was time to hire employee #1 and I started the search. I’ve long had several contractors working for me, but it was time to bring someone in-house (although not really “in-house” because Buink is a remote-friendly company). During the search, I had Makency (my HR representative) research everything that comes with being an employer, like benefits, taxes, and all other costs. Her deliverable was an employee cost calculator that I could use to plug in an estimated salary and understand what I need to charge per hour for their time. My findings were interesting, to say the least.

I’ve written in the past about the benefits of using contractors over employees for web development but now I have some numbers to back it up. I’m confident that both employers and employees underestimate the true cost of an employee.

Both employers and employees underestimate the true cost of an employee.

Let’s take for instance an entry level software developer. estimates the average starting salary for this position would be $88,863 / year. Yes, I am even a little surprised by this number. If you do a quick back-of-the-napkin calculation on this salary (salary / 40 work hours / 52 weeks) you’ll find that this is $42.72 / hour; not a bad wage for coming right out of school and seemingly a bargain compared to a contractor rate.

But is that the true cost? No.

Do they really work 52 weeks? No, you’re still paying their hourly rate even when they’re out sick, on holiday, or living it up on the beach with Buink’s unlimited paid time off. At Buink (at the time of writing this), we offer unlimited paid time off, 9 holidays, and 2 weeks of sick leave. This leaves on average about 46 weeks of actual value to the employer.

Do you really get 40 hours of value from an employee every week? No! People are only really productive with portion of their time at work. Having painstakingly tracked all my work time for 5 years now, I’ve realized that even the best employees can only bill about 80% of the time they’re at work, so if you estimate a 40 hour work week, then you’re lucky if you get 32 hours of productivity.

So, the back-of-the-napkin calculation that many people unwisely use is wrong! The true cost of the entry level software developer is really $60.37 / hour or $125,567 using a more accurate back of the napkin formula: salary / 46 weeks / 32 hours.

Keep in mind, that isn’t including taxes, medical/dental/vision insurance, equipment costs, workers compensation, office space, retirement matching, and administrative costs. Not to mention bonuses (we don’t offer them at Buink because we’d rather just pay a fair salary then offer a phantom carrot).

When all is said and done, you barely break even on this entry level employee at $77.14 / hour or $160,442.

Unfortunately, this break even number doesn’t take into account the risk associated with hiring, the risk associated with the economy in general, and the ubiquitous need get a rate of return on your investment (in this case, their salary and benefits).

Adjusted for risk and return, my estimate is that this entry level developer is costing about $93 / hour or $193,440.

In light of this, I can’t help but chuckle a bit when I see the irrational bias to “bring people in-house” that permeates startups, tech companies, and businesses in general. There are good reasons to bring developers in-house, like gaining more control over their work schedule, enticing a particular person to stay long-term, or security concerns; but I’ve said it before and I’ll say it again, hiring contractors should still be part of your over all strategy.

I think this is why Buink is growing so quickly. We’re not only gaining the expertise to find and engage high quality developer resources wherever they may be (contractor/employee/remote/local), but our processes and practices allow us to even out compete in-house resources.

About The Author

Ben currently works as a senior developer and technical business consultant outside of Boulder, Colorado.

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About Buink

Buink Web Development is a website development company founded in 2009. Although we still focus on web development, we now offer digital marketing services, web design, local SEO services, ecommerce website design, and custom logo design

Our value proposition: Buink can help you unleash the power of the internet and help your business scale with superior quality code at a competitive price and in a transparent, honest way. 

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