In this post, we show you how to calculate the total cost for a Software Engineer, whether you are considering making a full-time hire or bringing in an hourly contractor. Our research is based on our deep dive into industry surveys along with more than 70k data points from sources like Stack Overflow and Pave.
Deciding whether to grow your Software Engineering team in-house or to partner with an external firm can be a daunting and confusing process. We founded APrime Technology on the premise that outsourcing engineering work can help companies grow faster and better. We’ve worked with dozens of startups as contractors and consultants, but we’ve also been CTOs and senior hiring managers at plenty of product-oriented companies – so we have truly examined and lived this question from all angles.
Staffing your team
Do you really need to choose between quality, flexibility, and cost?
Consider a startup trying to do something truly revolutionary, where the founders recognize they need to hire top-talent. Does the following dual mentality ring a bell?
- For internal engineering hires, I want to target the top – e.g., 75th or 90th – percentile.
- For external contractors, I want to minimize cost as much as possible.
In the first case, the founders simply want the highest quality of talent to join their team and build their products (and rightfully so!). In the second, however, the same founders instead optimize for cost. Shouldn’t you be able to hire a flexible engineering team to support your efforts without having to lower your bar on quality – both in terms of the final output and the actual process of working together throughout a project? At APrime, we believe the answer is a resounding yes.
A Surprising “Effective Hourly Rate”
Is your company interested in hiring the best Software Engineers to help you build your product, and are you prepared to offer competitive compensation to do so? Are you interested in creating a culture that allows your team to do their best work while also supporting work-life balance? If you answered yes to both of these questions, consider the following:
Let’s suppose you’re hiring for a senior engineering position that offers a total package (salary, bonus, and benefits) of $200k; how does that translate into an hourly rate? One common “back of the envelope” strategy is to simply divide the annual salary by 52 weeks and then 40 hours, which returns an initial estimate of $96.15 / hour. A slightly more sophisticated approach might tack on an extra 20-30% to cover “extra costs” like benefits and bonus.
It turns out that while the “effective hourly rate” for top-notch full-time engineers will vary across teams and organizations, it is likely to be more than $200 per hour, or double the initial calculation. Surprising, right? If you’re curious how we landed here and want to follow along with your own calculations, keep reading. We’ll walk you through how to quantify the true hourly cost of an engineer along with harder-to-spot overhead costs and productivity considerations.
Hiring vs. Outsourcing
Consider your overhead.
When founders or hiring managers are looking to grow their engineering team, they usually think about salary, bonus, and equity as the main costs. Those numbers are a great starting point – especially as you think about current market rates for the type of talent that you are targeting – but are far from the complete picture.
Some “hidden” – or at least, less obvious at first glance – costs include:
- Benefits: The health, vision, dental, parental, fitness, and other benefits provided to your in-house team are critical to providing a great place to work, but the costs add up. Our insights indicate that these costs are – on average – 5% of salary depending on where a company is located. A typical 401k match adds another 3-7% on top of that number.
- Taxes: Between federal, state, and local requirements, the total amount you have to pay in taxes for employees can represent up to an additional 10% on top of annual salary.
- Time off: Competitive companies typically offer up to 3 weeks PTO, 1-2 weeks of paid sick leave, and 10 federal holidays to full-time employees. That essentially adds up to seven weeks of paid non-working time per year!
- For an outsourced Engineer, on the other hand, you pay only for time actually worked and do not cover any type of time off. At APrime, we value the importance of time off for vacation and personal/family time, so we’ve developed a generous internal policy that facilitates a positive work-life balance without passing that cost on to you.
- Turnover, hiring, and training: The all-in costs for hiring a single employee often fail to include the time spent screening and hiring candidates and onboarding new hires, all within the context of an industry-wide average tenure of 1.75 years. These costs are significant, and recurring.
- Management / Mentorship: As a team grows, it is critical to hire for management roles to handle performance management, career development and day-to-day support, and also to ensure that the right mentors are in place. In particular, we have seen that scaling teams of primarily junior engineers without adequate support from more experienced managers, architects, or mentors often results in an outsized amount of tech debt and inflexibility when it comes to product launches and the overall roadmap. With APrime on your team, you get the benefit of engineers managed by our own experienced senior technologists, without the additional cost.
- Other hidden costs: These include (1) hardware (including laptops) and software license fees; (2) industry- or function-specific trainings, such as compliance and security trainings and cloud certifications; and (3) team-building, including catered lunches, all-hands, offsites, social events and swag.
At APrime, we absorb and reduce all of that overhead so that you only manage and pay for the hours spent designing, building, and launching your new features.
Beyond the direct financial costs involved in hiring a full-time engineer, there are also multiple indirect costs that impact your flexibility and ability to move quickly:
The cost of a “bad” hire
The U.S. Department of Labor estimates the cost of an unsuccessful hire as up to 30% of the employee’s first-year earnings, including the loss of productivity, the dollars spent on multiple rounds of recruiting and onboarding, severance, time spent supervising (coaching, managing a PIP), not to mention the hit to team morale.1
At APrime, we match our engineers to your team based on the specific technologies, languages and industries you need, and proactively adjust assignments to support your evolving needs and ensure optimal fit over the course of the project.
Time Available for Strategy and Sales
The administrative effort and bandwidth required for founders and leaders to deal with the recruiting, onboarding and management of full-time staff is significant, and brings with it a very real opportunity cost. APrime and other consultancies remove that burden, allowing you and your team more time to do what you do best: build your business and transform your industry.
Spend more time writing code and building–not in meetings.
How many hours do typical software engineers spend on meetings or tasks that aren’t directly related to their work and projects? According to a recent Stack Overflow Developer Survey that asked approximately 70K software engineers to list their greatest challenges to productivity, the top 3 answers were “a distracting work environment” (41.8%), “meetings” (36.6%), and “being tasked with non-development work” (36.5%).2 Beyond time spent in this proliferation of non-essential meetings, context switching between activities further impacts productivity.
When comparing the cost of hiring someone for your team with the cost of software engineering consultants, we recommend a direct apples-to-apples calculation of the actual number of hours per day that each type of resource would be spending on your highest priority projects.
To make sure that our team is able to thrive and consistently deliver for you at the highest level of quality, APrime has made a conscious effort as a company to provide an environment in which our team members are able to focus on their important projects with minimal disruption. We minimize time spent in meetings and actively support individuals in creating a setting in which they can focus on deep work.3 We also provide ample opportunity for maker time at APrime so that our team can work on personal improvement via internal R&D projects that are “off the clock” with respect to any of our clients. These efforts allow our team to focus on what we all do best – building for you!
We’d love to be part of your team.
We love solving tough problems, shipping products and code, and being able to see the tremendous impact on both our client companies and their end users. When working with us, you can rest assured knowing that each APrime engineer is focused on your project and has the support they need to produce their best work. Schedule a call with our founders today (here’s our Calendly link!) to talk through your product and hiring goals, and to learn more about how we can help.
3 Computer Science Professor Cal Newport – who coined the term deep work – defines it as “professional activity performed in a state of distraction-free concentration that push your cognitive capabilities to their limit.” Additional reading: , .