A US contractor at $120/hr looks 90% more expensive than a $130,000 full-time engineer. Run both through a full cost model and the gap is closer to 15% — and it inverts entirely if the work is under nine months or the project can pause.
Most contract-vs-permanent comparisons fail because they compare a contractor's bill rate to an employee's base salary. Those two numbers measure different things. This is the model that compares them properly, with the break-even point worked out.
TL;DR
- Fully loaded employee cost is 1.25–1.4× base salary — benefits (15–20%), payroll tax (~7.65% US), equipment, software seats, and recruiter fees (20–25% of first-year salary).
- A $130,000 US engineer costs roughly $180,000 in year one. A senior at $200,000 base runs $250,000–$350,000 fully loaded.
- At full-time hours, a US contractor is not cheaper than a US employee. The hourly premium roughly cancels the benefits load. Contractors win on flexibility, speed and reversibility — not on rate.
- The break-even is duration. Under about 9 months, contract wins on cost in almost every scenario. Past 18 months, permanent wins clearly.
- Offshore contract changes the arithmetic entirely — 40–55% below onshore permanent after loaded cost, which is a different decision from contract-vs-permanent onshore.
What a full-time developer actually costs
Base salary is roughly 70–80% of the real number. The rest:
| Cost component | Typical | Notes |
|---|---|---|
| Base salary | 100% | The number on the offer letter |
| Payroll tax (US FICA) | +7.65% | Employer side, up to the wage cap |
| Benefits (health, retirement, insurance) | +15–20% | Largest single add-on in the US |
| Equipment and software seats | +$3,000–$6,000/yr | Laptop, IDE, cloud, SaaS |
| Recruiting | +20–25% of year-one salary | Agency fee, or internal recruiter cost |
| Onboarding productivity loss | 4–12 weeks at reduced output | Real, and usually uncounted |
| Paid time off | Already in salary, but reduces delivered days | ~10% fewer working days than billed contractor days |
| Year-one total | 1.45–1.65× base | Falls to 1.25–1.4× in year two onward |
Worked example, US mid-level engineer at $130,000 base:
- Payroll tax: $9,945
- Benefits at 17%: $22,100
- Equipment and software: $4,500
- Recruiting at 22%: $28,600
- Year one: ~$195,000. Year two onward: ~$166,000.
What a contractor actually costs
| Cost component | Typical | Notes |
|---|---|---|
| Bill rate | 100% | What you're invoiced, margin included |
| Recruiting | $0 | Carried by the staffing partner |
| Benefits, payroll tax | $0 | Carried by the contractor or the partner |
| Equipment | Usually $0 | Contractor supplies; confirm in the SOW |
| Onboarding ramp | 2–6 weeks reduced output | Same as an employee, sometimes shorter |
| Management time | 1–6 hrs/week of an internal senior | Higher for distributed contractors |
| Idle time | $0 | The structural advantage — you pay for hours worked |
Worked example, US mid-level contractor at $95/hr, 40 hrs/week:
- 12 months at 47 billable weeks (allowing for holidays): ~$178,600
- 6 months: ~$91,200
- 3 months: ~$45,600
Against the $195,000 year-one employee, a 12-month contractor costs about 8% less. That is much closer than the rate comparison suggests, and it is the correct comparison.
The break-even: it's about duration, not rate
| Engagement length | Cheaper option | Margin |
|---|---|---|
| Under 3 months | Contract | Large — permanent recruiting cost alone exceeds the whole engagement |
| 3–9 months | Contract | Clear — recruiting and benefits load never amortise |
| 9–18 months | Roughly level | Decide on continuity, not cost |
| Over 18 months | Permanent | Clear — recruiting cost amortises, no vendor margin |
| Indefinite / core product | Permanent | Large — plus retention of domain knowledge |
The reason the crossover sits near a year is recruiting cost. A 22% agency fee on a $130,000 hire is $28,600 that you spend once. Spread over three years it's $9,500/year; spread over five months it dominates the engagement.
The four things that aren't in either column
Cost models miss these, and they decide more engagements than the arithmetic does.
Reversibility. A contractor's cost drops to zero on 30 days' notice. An employee's does not — severance, notice periods, and the human cost of a layoff are all real. If there is genuine uncertainty about whether the work continues past Q2, that optionality has a price, and contract is how you buy it.
Speed to start. 7–14 days through a staffing partner with a bench, versus 6–12 weeks for a permanent hire from opening the role to first day. On a deadline-bound project, eight weeks of earlier delivery is often worth more than the entire cost difference.
Knowledge retention. The permanent column's real advantage. A contractor takes the domain context with them at roll-off unless you buy knowledge transfer explicitly in the SOW. On core product systems this compounds against you, which is why the right answer for a core platform is usually permanent even when the arithmetic is level.
Utilisation. Employees are paid for 100% of the year and deliver on maybe 80% of it after PTO, meetings and internal work. Contractors bill what they work. On a like-for-like delivered days comparison, contract looks better than the annual-cost comparison shows.
When each option is genuinely right
Hire a contractor when:
- The work has a defined end (migration, integration, launch, a specific backlog).
- You need to start in weeks, not months.
- The skill is needed intensely now and rarely later — a data migration, an accessibility audit, a performance remediation.
- Headcount is frozen but project budget is not. Common, and a legitimate use of contract.
- You're unsure the work continues past two quarters.
Hire permanently when:
- The system is core product and the domain knowledge compounds.
- The role includes mentoring, hiring, or architectural continuity.
- The work is indefinite and the budget is stable.
- On-call and long-term operational ownership are part of the job.
The hybrid that usually wins: permanent engineers own the core and the architecture; contractors deliver bounded workstreams alongside them. This keeps knowledge in-house where it compounds and buys elasticity where it doesn't. Most teams over 15 engineers converge on some version of this.
Where offshore changes the answer
Everything above compares onshore contract to onshore permanent, where rate is roughly neutral. Offshore contract is a different question: after the loaded-cost multiplier, offshore senior contractors land 40–55% below onshore permanent on total cost.
That's a large enough gap to change decisions the onshore model wouldn't. It comes with the management overhead, timezone friction and knowledge-retention costs set out in offshore developer rates by country. The mistake is applying offshore savings to an onshore contract decision, or assuming a 70% rate saving nets 70%.
FAQ
Is a contractor cheaper than a full-time developer? At the same location and full-time hours, only modestly — around 5–10% over twelve months, and substantially over shorter engagements. Contractors win decisively on speed to start and on reversibility, not on rate. Offshore contract is a separate and much larger saving.
What multiplier should I use for fully loaded employee cost? 1.45–1.65× base in year one including recruiting, and 1.25–1.4× in subsequent years. Higher in the US than in most of Europe, where the payroll-tax and benefits split differs but the total lands in a similar band.
How do I convert a salary to a fair contractor rate? Multiply the base hourly equivalent by 1.5–2.0. A $130,000 salary is about $62.50/hr base, which maps to a $95–$125/hr contractor rate. The multiplier covers benefits, downtime between contracts, and the contractor's own overhead.
Does the answer change for offshore contractors? Substantially. Offshore contract runs 40–55% below onshore permanent on total cost after management overhead. That is a different decision from onshore contract-vs-permanent, and should be modelled separately.
What's the hidden cost of contractors? Knowledge walking out at roll-off. Fix it contractually: documented decisions, recorded walkthroughs, and a two-week shadow period with the receiving engineer, with 10% of the final invoice withheld against acceptance.
Can we convert a contractor to permanent? Usually, and it's the lowest-risk hiring path available — you've seen the work for months. Expect a conversion fee from the staffing partner, typically 15–25% of first-year salary, often reducing to zero after 6–12 months on contract. Negotiate this at contract signature, not at conversion.
Modelling contract vs permanent for a 2026 project? First Bridge Consulting places contract developers and permanent engineers, and will tell you plainly which one your project actually needs. Get a staffing proposal in 48 hours →
Related reading: Offshore Developer Rates by Country 2026 · How to Hire a Contract Developer · Contract Staffing services