Contract-to-Hire or Direct Hire?

April 22, 2021

The Most Important Factor

The Terms for Each

When you use an outside firm to hire skills that are hard to find, like Software Development and Database Administration, you’ll have to decide on the placement terms you use. It’s common for agencies to offer both Contract-to-Hire and Direct Hire services. 

Here’s a breakdown of common terms:

Contract-to-Hire 

  • Talent is hired by the staffing firm to work for you
  • You pay for each hour worked
  • You can hire them directly after 6 months
  • Guarantee period of a week or less
  • You can end the contract at any time

Direct Hire

  • Talent is hired directly by you
  • You pay a fee of 20% of the new-hire salary
  • Guarantee period of a month or more

How to Decide

A risk/cost analysis is the common approach. Use the example of a Software Developer with a salary of $100K plus an overhead cost of 30%. You’ll pay a $20K fee for a Direct Hire, making the total first year cost of their work $150K.

The local bill rate for the same person in a Contract-to-Hire might be around $100/hr. So you’ll pay $100K for the first six months before converting the contractor to an FTE. Salary and overhead for the second half of the year will bring the total cost of their work to $165K

When the job qualifications are known, and they fit a single person long term, a Direct Hire is smart. So why spend the extra $15K? You may have heard employers citing the “try before you buy” philosophy. But a sound vetting process and a well-administered probationary period are better mitigations for bad hires. The best use for the Contract-to-Hire model is when the long term job requirements are unknown. If they are likely to change a lot, committing to the person doing the work is just not appropriate. 

The Big Variable

Before you opt to grab those savings or pay a little extra to mitigate the unknown, there’s one more question to answer. Who will want the job? To answer this question, it helps to see behind the curtain. 

When you use a placement firm, whether for a Direct Hire or a Contract-to-Hire, you’re often enlisting them to solicit dozens or hundreds of prospects on your behalf. They comb their database of past candidates, LinkedIn, or resume boards searching for profiles with the right keywords. They send InMails, emails, voicemails and texts trying to entice in-demand people to take interest in your job. Automation helps get the word out. The response rate is low! (Recless Tech exclusively uses a peer-to-peer referral model with zero recruiter solicitations for this reason).

People who are in high demand, like Systems Architects and Cloud Engineers, get recruiter solicitations every week. With a recent update on an online profile, they get multiple per day. Filtering is important. If they are employed full time and like it that way, the most common way to sift the barrage of messages is to cut out contract offers. You’re just not going to appeal to them with a six month commitment. Independent contractors who prefer more control over the work they take on often filter FTE offers. 

They are very different pools of people. Targeting the appropriate prospects with fitting placement terms is critical. Yes, there’s some overlap, but definitely don’t go the Contract-to-Hire route if you’re fairly confident of the long-term requirements. You’ll miss your best candidate!

 

Submitted by:

Aaron Davis is the founder and CEO of Recless Tech, an external referral platform that uses a peer-to-peer sourcing model to provide staffing services for technology positions. He has previously served as the COO for a software services firm, the Talent Acquisition Director for a large health plan, and an account executive for a large tech staffing firm. He is a Senior Professional in Human Resources, a Certified Scrum Master and holds an MBA from Wright State University.

[email protected] 

937.672.4598

 

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