Brexit: Is it time to rethink ‘sky-high’ contractor rates?

“But contractor rates are daylight robbery! £400 a day equates to £100k A YEAR!” Said by about 30% of hiring managers. Every. Single. Day.
And it’s fair enough. It’s hard not to look at a contractor’s day rate, multiply it by the number of working days in a year and wonder how they can get away with charging such rates.

However, if your business feels like you’re staring into a Brexit-fuelled skills gap black hole and your main objection to considering contractors is cost, then it pays to think again.

Contractors are not the answer for every hiring challenge but they are certainly worth considering in a post-Brexit world. (Read our blog on the pros and cons of contract v permanent hires. And to discover if your organisation is ready to face Brexit recruitment challenges that may arise with our Brexit Recruitment Checklist.

This blog is about one consideration: cost. So, how do the costs really compare?

The REAL cost calculation for comparing contractor rates to salaries

Let’s take an average annual salary for a Supply Chain Manager of £48,000 compared with a corresponding average of around £350 a day for a contractor.

(Note: Job titles are not always reflective of the skills and experience required for a role and salaries and contractor rates also vary by region. We always recommend that you undertake a salary and benefits benchmarking exercise specific to your organisation and roles.)

If we divide a basic salary of 48k by the total number of working days in a year (253 for 2019), we arrive at a contractor day rate of £189.72. So comparing that with a £350 day rate understandably seems alarming. It’s more nearly double.

However, there are a number of factors to consider.

And you’d be surprised to learn that the difference amounts to just £13.21 A DAY for ‘average employers’ - but contractors are £14.94 less expensive than an employee working for an employer of choice!

Here’s how the figures stack up:

These figures are all based on research and third-party data on costs. For more on how these figures are calculated, see the corresponding footnotes following the table.

	Contractor	Permanent member of staff on £48,000	Permanent member of staff on £48,000 working for an ‘employer of choice’
Wages	£350	£189.72	£189.72
NI Contributions	0	£29.44	£29.44
Pension	0	£6.40 (3%)	£11.25 (5%)
Onboarding & training	0	£4.75	£4.75
Bonuses & profit share	0	£19.20 (9% of salary)	£32.00 (15% of salary)
Private Healthcare & Life Assurance/Death-in-Service	0	£0	£7.67
Holidays	0	£23.61 (20 holidays)	£34.27 (25 holidays)
Sick days (average 4 days)	0	£3.46	£3.46
Additional cost to business from planned/unplanned absenteeism (20% of base salary)	0	£37.95 a day	£37.95 a day
Time-to-hire: lost productivity/sales/income and time (average difference of one month)	0	£18.98	£18.98
Tools and equipment E.g. Laptops phones licences	0	£0.88 a day £1.60 a day £0.80	£0.88 a day £1.60 a day £0.80
TOTAL	£350	£336.79	£365.10
Extras Expenses e.g. travel? Socials? e.g. travel to meetings	0	Varies	Varies

However, the above table only shows the tangible costs. It doesn’t show the value of a contractor who can bring a wealth of experience and a different perspective. It doesn’t account for the reality of an escalating skills-gap where there may be no choice but to hire a contractor (unless you want to wait 1 to 3  months for the permanent employee). Contractors are not the answer for every hiring challenge but they are certainly worth considering in a post-Brexit world.

How the figures are calculated:

If you’re wondering how we got to the above figures, here’s how:

National Insurance contributions

Class 1 National Insurance Contribution are 13.8% = £6,624

£6,624 / 225 working days = £29.44

Pension

From April 2019, employers must contribute a minimum of 3% to their employees’ pensions unless their employees opt out.

3% of £48,000 = £1,400

Taking the minimum number of holidays, £1,440 / 225 working days = £6.40

A pension at a competitive contribution rate of 5%, would increase the figure to £2,400, meaning an additional £10.66 a day

Onboarding and training costs

According to The HR Director, Bersin & Associates (Deloitte’s HR research organisation) estimates that the average UK company spends £1,068 per employee a year on training.

£1,068 / 225 working days = £4.75 extra a day

Bonuses

Average bonuses for Supply Chain Managers are 9% of their total salary. However, some are paid as much as 15%.

9% of £48,000 = £4,320

£4,320 / 225 = £19.20 extra a day (this increases to £19.66 if you offer 25 days’ holiday)

Private Healthcare & Life Assurance/Death In Service

Typical yearly cost for private healthcare amount to £1,450 per annum (see), whilst a death-in-service policy of three times annual salary would cost approximately £172.50. A 5x annual salary death-in-service policy would cost around £276. (See here.)

£1,000 / 225 = £4.44 extra a day

Holidays

253 working days in a year  – 20 (minimum holidays) – 8 (bank holidays) = 225 total working days

Holidays at a competitive 25 days would mean an increase of £4.85 a day

Sick days

ONS data for 2018/18 that the average UK worker takes 4.1 days off sick each year.

(£189.72 x 4) / 225 working days = £3.46  extra a day

Additional costs of absenteeism

As reported by The HR Director, CBI/Pfizer’s recent Absence and Workplace Health Survey, estimates that the TRUE cost of absenteeism is 35% of a person’s base salary.

There are holidays, sick time, late arrivals and early departures, extended breaks, statutory leave (e.g. paternity/maternity) and union-negotiated leave…

But the compensation paid for work not done doesn’t reflect the overall cost.

There are additional expenses such: filling the gaps with overtime or temporary staff, the drain on managers’ time and lost productivity.

Taking a £48,000 salary, that equals an additional £14,800. If you deduct the compensation amount for planned holidays, that’s:

32 days (28 days minimum holidays and 4 days average sickness) = 12.65% of total working days

37 days (33 days’ holiday and 4 days average sickness) = 14.62% of total working days

So additional costs are a minimum of 20.38% of base salary = £9,600 a year

Or...£37.95 extra a day

Time-to-hire: the true cost of waiting for a replacement And what of the gaping hole left whilst waiting for a replacement permanent member of staff. How do those hours of lost productivity translate to business gains or losses? If we assume that the overall number of ‘days’ lost to absenteeism is 44 a year (and that is generous), then that’s the equivalent of two months’ of working days. Permanent hires come with notice periods of 1 to 3 months, whilst contractors can be available immediately or on a month’s notice. If you call it a difference of 1 month (the bare minimum, in reality), then that’s £18.98 a day.

Tools and equipment

Laptops: It is recommended that businesses replace their laptops every 3 to 5 years (see here). A business laptop typically costs a minimum of £600, so that’s £200 a year.

£200 / 225 working days = 88p a day

Phones: Many employees at a senior level are provided with a work phone. Typical contracts cost around £30 a month per employee.

£360 / 225 working days = £1.60  a day

Licences: Do you have to pay for licences e.g. Microsoft Office, Customer Relationship Management systems, telematics or Transport Management Software. Many contractors come equipped with their own licences.

Software licences for Microsoft Office costs £7.90 a month and software such as CRMs/TMS typically cost £15-20 per user a month. If we assume a cost of even just £15 a month, then:

£180 / 225 = £0.80 a day

Expenses

Do you pay for employees’ train travel to meetings often?  

Socials

Do you pay for work nights out? Christmas dos? Summer barbeques? If so, do you pay for any contractors to join you, or is it strictly ‘employees only’? Social costs per employee at our business typically cost around £50 a month (but we’re BIG on culture!).

Do you know the true cost of a hire? Check out the true cost with our Cost To Hire Calculator below.

Cost To Hire Calculator