100K is not really 100K when it comes to hiring software developers locally, if you know what I mean… and even experienced hiring managers don’t always crunch all the numbers.
Direct costs are straightforward and should be taken into account first. Depending on if you are in the US or Canada, in addition to salaries and bonuses, employers are also confronted with the costs associated with providing benefits to their employees. These may include holiday money, health insurance, pension contributions, paid time off, stock options, and other perks. (If you are in Canada, for example, think of contributions to Canada Pension Plan and Employee Insurance, as well as vacation pay.) You should account for 1.2 to 1.4 times your employee’s base salary when calculating their actual direct cost. Assuming you are not the stingiest employer out there, that $100K turns into $130K right there, but we are not quite done yet. You’ve guessed it – indirect costs.
Recruitment and onboarding costs can include expenses related to job postings, recruitment agency fees, candidate assessment tools, and the time spent by hiring managers and HR personnel throughout the recruitment process. Fun fact, these costs don’t really depend on the market cycle. When the market is hot and candidates are tough to find – recruitment time is spent on headhunting and sorting out all the fake profiles; when jobs are scarce but candidates are abundant, time is spent on sifting through applications. Think 500+ applications per LinkedIn job post – somebody has to narrow those down to three suitable resumes for you to review. Assuming you are using a recruitment agency, you can easily add 20% of the first-year base salary to the cost of your hire – that’s $20K on top of $130K.
Some other indirect costs of in-house developers include expenses related to office space and utilities, equipment, software, training and professional development. Let’s bring our rough calculation further by looking at the costs which represent expenses that are often overlooked when comparing a gross salary to team augmentation invoices. A developer needs equipment to do their job. Unfortunately, this equipment deteriorates over time, as do office furniture and computer accessories. Furthermore, yearly subscriptions to services, tools and suites also count towards the ultimate cost. To keep developers up to date and happy most companies also invest in training programs for employees.
For example, Macbook/Laptop $2300 depreciated over 36 months – $64/month
Office furniture/peripherals depreciated over 60 months – $27/month
Office rent space (based on open space/standard density; 100 sq.ft. per employee at $40/square foot/ yearly) – $333/month
Electricity, Heating, Water – $100/month
Coffee, tea, lunch and snacks – $150/month
HR costs (Assuming 1 HR employee of ± $50k gross annual salary for every 20 employees) – $200/month
Administrative costs – $50/month
Additional insurance – (Employee liability insurance or professional indemnity insurance) – $225/month
Additional costs – Gym subscriptions, company dinners & parties, Christmas presents, relocation costs, etc… – $100/month
So – without offering any outrageous perks – we see an additional $1,249 cost per month for setting up a workspace and employing a developer on your own payroll locally. That’s $14,988 annually. In a nutshell, somewhat rough but still rather accurate calculation of all-in costs for your $100,000 base-salary local in-house software engineer sourced through a recruitment agency is a whooping $164,988 per year.
Going back to the start of our conversation, 100K is really 165K when it comes to hiring software developers locally in North America. If you are looking to quickly convert this to an hourly rate equivalent, I’d recommend thinking about it this way: fixed cost plus agency placement fee divided by 1850 (which is the number of hours a typical developer works per year after taking into account vacation, stat holidays and sick days). So, a 100K gross salary-level engineer will cost you $81.00/hr, depending on how good of a negotiator you are and where the market is at the time of hiring. I hope, after reading this blog, when you come across a well-vetted developer profile from South America via DevEngine, priced at a comprehensive rate of $50-60/hr, the inherent value and savings will stand out with greater clarity.
N.B: Keep in mind that agency placement fee will not apply during the second year of employment for permanent placements, and you can also deduct any sort of government grants (like SR&ED tax incentives in Canada, for example) from your total cost to make your calculations more precise, but overall, you’ve got the idea. Meanwhile, we are putting together a simple comprehensive calculator everybody can use to compare costs of hiring locally in-house vs hiring remote software engineers in LATAM through DevEngine. Once it’s ready, I’ll include the link here and will also add it to our website.