Deep-dive guide
Full-Time vs Contractor Simulator: The True Cost of an Employee Against a Day Rate
Executive industry analysis
A contractor quote of eighty an hour can look like a bargain next to a salary of sixty thousand. It can also be the opposite. The comparison goes wrong when it is made between a rate and a salary instead of between two total costs for the same useful work. An employee costs a salary plus taxes, benefits, equipment, recruiting and management. A contractor costs an hourly rate, but only for the hours that are used. The cheaper option depends on how many useful hours the role really contains.
The structure of the problem is the gap between paid hours and productive hours. A full-time employee is paid for every hour in the month, including leave and days without enough work. A contractor is paid for the hours worked. When demand is steady and the role is full, the employee is cheaper per productive hour, because the contractor's rate includes their own profit, benefits and idle time. When demand is patchy, the employee's idle hours drive their true hourly cost above the contractor's rate.
The domino cascade starts with utilisation. Lower utilisation means fewer productive hours from the same paid month. With fewer hours, the cost per productive hour rises, and the multiple of base salary the business pays rises with the on-costs. The value created per unit of cost falls and the net value of the role shrinks toward zero. The final stage is the monthly result, and the point where it reaches zero is the minimum utilisation needed to justify a permanent hire.
The iceberg shows what a salary figure hides. Above the waterline sits the base salary, the number in the offer letter. Below it sit four costs that rarely appear in the comparison: employer taxes and benefits, paid hours with no work behind them, equipment, software and workspace, and the recruiting and management time that goes into every hire. Together these often add a third or more to the visible salary, which is why a quote that looks high can still be the cheaper choice.
Formula and methodology blueprint
The model works per month on one role. The employee costs the monthly salary plus employer on-costs, equipment, recruiting spread over an expected tenure of two years, and management time. Productive hours are paid hours less leave, times utilisation. The value created is productive hours times the value per hour. The alternative plan prices the same productive hours at the contractor's hourly rate, with no leave, a minimal on-cost and equipment, while the recruiting and management terms still apply to the invoice.
- Productive hours
- H = 160 × (1 − 10%) × utilisation
- Paid hours less leave, multiplied by the share of time that has real work.
- Total employee cost
- C = salary ÷ 12 × (1 + on-costs) + equipment + salary × 15% ÷ 24 + salary ÷ 12 × 6%
- Salary with on-costs, equipment, recruiting spread over a two-year tenure and management time.
- Value created
- V = H × value per hour
- What the productive hours are worth to the business.
- Net value
- Net = V − C
- The monthly result. The breaking point is the utilisation or value per hour at which it reaches zero.
- Contractor alternative
- Billed = H × contractor rate
- The contractor is paid only for productive hours; sourcing and management cost are still added.
Cascading elasticity
Utilisation and value per hour are the most elastic inputs because both multiply the productive output of a fixed monthly cost. Salary and on-costs are linear and set the break-even bar. The contractor rate only matters in the alternative plan, where it plays the role that salary plays here, so the best way to read the result is to compare the two scenarios at your real utilisation.
Three real-world case studies
Bootstrapped starter
A first hire at a modest salary
A small business hires an assistant at forty-two thousand with light on-costs and modest equipment. There is steady work most of the time. The role pays for itself with some margin. Load it to see how quickly a thin margin disappears when demand drops.
Scaling mid-market
A high-value specialist who is always busy
A specialist paid ninety-five thousand is booked for work worth a high hourly value almost every day. On-costs and equipment are higher but are spread over many valuable hours. Load it to see why full utilisation makes a salary the better choice.
Black-swan crisis
An expensive hire with too little work
A business hires on a high salary for a role with work for less than half the month. Paid hours sit idle and value per hour is modest. Load it to see why a contractor billed only for useful hours would have been cheaper.
Industry benchmark matrix
| Metric | Danger zone | Industry average | Top 10% elite |
|---|---|---|---|
| Employer on-costs as share of salary | Above 35% | 18–28% | Below 15% |
| Utilisation of a permanent role | Below 50% | 65–80% | Above 85% |
| Contractor rate versus equivalent salary hour | Above 2.5 × | 1.5–2 × | Below 1.3 × |
| Recruiting cost as share of annual salary | Above 25% | 12–18% | Below 8% |
| Value per hour versus loaded cost per hour | Below 1.1 × | 1.5–2 × | Above 2.5 × |
Variables and levers
Annual salary
Gross base salary of the full-time role, before employer on-costs.
Lever: Benchmark the pay band against the market and avoid paying for seniority the work does not need.
Employer taxes and benefits
Employer social contributions, insurance, pension and paid benefits as a share of salary. Check current rules.
Lever: Check which on-costs are fixed and which are optional, and review benefits yearly rather than adding them by habit.
Equipment and software per month
Laptop, licences, workspace and tools provided to an employee.
Lever: Provide only the equipment the role needs and reuse hardware between hires.
Utilisation
Share of available working hours for which there is real, valuable work.
Lever: Match headcount to steady demand and cover peaks with contractors, so paid hours are not idle.
Value per productive hour
What an hour of finished work is worth to the business.
Lever: Point the role at the highest-value work and remove tasks that anyone could do.
Contractor hourly rate
What the contractor charges per hour worked. Used in the alternative plan.
Lever: Negotiate volume rates or a retainer and compare at least three quotes before committing.
How to use this simulator
- 1Start from the realistic preset or enter the salary, on-costs and equipment cost of the role.
- 2Estimate utilisation honestly from the work that is really waiting for the person.
- 3Set the value of an hour of finished work and the contractor's hourly rate.
- 4Press Find my breaking point to see the utilisation at which the role stops paying for itself.
- 5Compare the employee with the contractor plan over 24 months in the Parallel universe tab.
Mistakes to avoid
- Comparing a salary with a contractor's rate directly. The salary is only the start of the cost of an employee, and the rate covers only the hours worked.
- Assuming full utilisation. Few roles have productive work for every paid hour, and the gap is exactly what makes a contractor competitive.
- Ignoring the cost of switching. Contracts, handover and the knowledge a contractor takes with them have a price that is easy to miss.
- Using the contractor option to avoid obligations. If the person works like an employee, the arrangement may be treated as employment, so check local rules before you choose.
Frequently asked questions
Is a contractor always more expensive per hour?
Yes on the invoice, but not always on the total. A contractor is paid only for the hours used, so at low utilisation the employee's idle hours can push their true hourly cost above the contractor's rate.
Why is leave included?
An employee is paid for holidays and sick days, but no work is produced. The model removes ten percent of paid hours to reflect that. Replace it with your country's norm.
What about legal classification?
Whether a person can be treated as a contractor depends on local employment rules and on how the work is organised. Check current rules or ask a qualified adviser before relying on this comparison.
Does the model include culture and loyalty?
No. Knowledge retention, culture, and long-term development are real benefits of employment but hard to price. Treat them as a qualitative factor beside the numbers.
How do I find the breaking point?
Press Find my breaking point. The tool pushes each input to its worse end in small steps and reports the value at which the net value of the role reaches zero.
How accurate is this?
It is an educational planning model with the assumptions stated above, not human resources, tax or legal advice. Replace the inputs with your own figures and check employment rules in your country.
This is an educational planning model with stated assumptions. It is not financial, tax or legal advice. Replace the inputs with your own figures and verify important decisions with a qualified professional.