“Contractors are cheaper.”

I hear this constantly. It’s wrong more often than it’s right.

Let me show you the real math.

The Surface Numbers

Employee developer

• Salary: $120,000
• Super: $13,800 (11.5%)
• Leave loading: ~$5,000
• Other costs (insurance, equipment, training): ~$8,000
• Total: ~$147,000/year

Contractor developer

• Day rate: $800
• 230 working days: $184,000/year
• No other costs
• Total: $184,000/year

Contractor is 25% more expensive on paper.

But wait. The contractor doesn’t get sick leave. Doesn’t take holidays. No ramp-up time. Pure output.

So contractors are better value, right?

The Hidden Costs

Context switching

Contractors work on multiple clients. You’re not their only priority.

When they switch to your project, there’s ramp-up. When they switch away, knowledge leaks.

Employees live in your codebase. No switching costs.

Knowledge retention

Contractors leave. They take knowledge with them.

Documentation helps but never captures everything. The next person rebuilds understanding.

Loyalty and commitment

Employees have stake in outcomes. Their job depends on company success.

Contractors deliver scope. They don’t own outcomes.

When things get hard, employees push through. Contractors check the contract.

When Contractors Win

Defined projects

Build X feature. Fix Y problem. Clear scope. Clear end.

If you can spec it completely upfront, contractors can execute.

Specialized skills

You need machine learning expertise for one project. Or iOS development for a single app.

Hiring a specialist full-time doesn’t make sense. Contract for the project.

Uncertain workload

Early-stage startups with variable needs. Not sure if you need 20 hours or 40 hours per week.

Contractors scale with demand. Employees cost the same regardless.

Testing before hiring

Trial period through contract. See how they work. Convert to employee if it fits.

Lower risk than direct hire.

When Employees Win

Core product development

The thing that makes you money. The thing that needs continuous improvement.

Employee knowledge compounds. Contractor knowledge resets.

Long-term work

If you know you need someone for 12+ months, employee math usually wins.

Break-even is typically around 9-12 months depending on rates.

Culture and team

Employees build culture. They mentor juniors. They make decisions.

Contractors do tasks. That’s not a criticism—it’s the relationship.

Security and IP

Employees have clearer legal obligations. Cleaner IP assignments.

Contractors can work for competitors next month.

The Calculation I Use

Annual employee cost: Salary x 1.25 (for super, leave, overheads)

Annual contractor cost: Day rate x expected days

Compare the numbers. If contractor is more than 20% cheaper, contractor wins. If within 20%, employee wins due to hidden value.

But also consider:

• Duration: Under 6 months = contractor. Over 12 months = employee. In between = depends.
• Criticality: Core product = employee. Support function = contractor.
• Availability: Good contractors are booked months out. Good employees are hard to find. Factor lead time.

The Mistake I Made

Early on, I used contractors for everything. Flexibility! Lower commitment!

Two years in, I had:

• No institutional knowledge
• Constant re-onboarding
• No one who cared about outcomes
• Higher total costs than if I’d hired

Now I use contractors for specific needs and employees for core functions.

The “flexibility” of contractors was actually instability. The “expense” of employees was actually investment.

My Current Split

Employees: Core product development, customer success, operations

Contractors: Design projects, specialized development, overflow capacity

Roughly 70% employee, 30% contractor by cost.

Find what works for your situation. But do the real math. Not the fake math that ignores hidden costs.