"£600 a day is way too expensive. I can hire a permanent senior engineer for £95k."
This is the most common — and most misleading — cost comparison in engineering hiring. The day rate vs annual salary comparison misses most of what matters. When you look at the full picture, the cost differential between contractors and permanent engineers is smaller than it appears, and in many situations, contractors are the more economically rational choice.
Why is comparing contractor day rates to permanent salaries misleading?
Comparing a contractor day rate to a permanent salary is comparing two fundamentally different cost structures. To do it properly, you need to convert both to the same basis.
Converting permanent salary to day rate equivalent:
Take a senior engineer on £95,000 base. Add employer NIC (~£11,500), pension at 5% (£4,750), benefits (£2,500), tooling (£3,500), recruiting amortised (£3,000), management overhead (£8,000), office overhead (£4,000). Fully-loaded annual cost: ~£132,000. Divide by ~230 working days: £574/day effective cost.
A contractor billing at £600/day suddenly looks very different.
What is the true cost comparison between a contractor and a permanent engineer?
| Cost Component | Permanent (£95k base) | Contractor (£600/day) | |---|---|---| | Direct cost | £95,000/yr | £138,000/yr (230 days) | | Employer NIC | £11,500 | £0 | | Pension | £4,750 | £0 | | Benefits | £2,500 | £0 | | Tooling / hardware | £3,500 | £500 | | Recruiting cost | £3,000 | £2,000 | | Management overhead | £8,000 | £8,000 | | Office / overhead | £4,000 | £2,000 | | Holiday / sick pay | £10,000 | £0 | | Total annual cost | ~£142,250 | ~£150,500 |
The gap is approximately £8,000 per year — far smaller than the headline comparison suggests.
When do contractors provide more value than permanent engineers?
Speed to productivity
Experienced contractors can hit the ground running — productive within 1–2 weeks, where a permanent hire might take 8–12 weeks to reach full contribution. For a six-month engagement, that difference in ramp time is worth tens of thousands of pounds in effective output.
No long-term obligation
If your roadmap changes or you over-hired, contractors can be released without redundancy costs, notice periods, or employment tribunal exposure. This flexibility has significant option value.
No recruiting cycle
Hiring a permanent senior engineer typically takes 12–20 weeks. A contractor through a specialist agency can be placed in 1–3 weeks.
No benefits administration
Contractors handle their own pension, insurance, and tax. No HR overhead.
When are permanent employees cheaper than contractors?
Long-term knowledge accumulation: Contractors leave, and they take contextual knowledge with them. For core systems and deep domain expertise, retention of that knowledge in permanent employees is valuable.
Culture and mission alignment: The best permanent employees build your culture, mentor others, and care about the product beyond their immediate remit.
Cost at scale: A contractor at £600/day for three years costs £414,000. A permanent equivalent fully loaded costs around £420,000. At this time horizon, permanent is slightly cheaper — and you've built institutional knowledge.
What is IR35 and how does it affect contractor costs?
Since April 2021, medium and large businesses are responsible for determining whether a contractor engagement falls inside or outside IR35.
- Inside IR35: The contractor is treated as an employee for tax purposes. PAYE tax and NIC must be deducted — significantly increasing cost. Many contractors won't engage on inside-IR35 terms.
- Outside IR35: Genuine business-to-business engagement. The contractor operates through their own limited company.
IR35 status is determined by the nature of the working relationship. Getting this wrong exposes you to HMRC liability.
When should I use a contractor vs hire permanently?
| Scenario | Better Choice | |---|---| | Short-term project with defined scope | Contractor | | Filling an urgent skills gap | Contractor | | Capacity bridging during a hiring cycle | Contractor | | Core product engineering, long-term | Permanent | | Founding team / culture-critical roles | Permanent | | Staff augmentation in a specialist domain | Contractor |
Modelling the Decision in TeamCalc
TeamCalc lets you model the cost of the same role across different employment types — permanent, contractor, or offshore — and compare them side by side with all on-costs calculated. Rather than working through the arithmetic manually, you see the fully-loaded comparison instantly.