The True Costs of Contractors

The decision to meet staffing needs by either hiring someone as a contract employee (CE) or hiring someone else as a direct employee (DE) depends on far more than how well each candidate's qualifications meet the need. Unfortunately for those who make decisions "purely by the numbers," there are some factors that affect the decision, that have significant effects on financial results, nd that are difficult to quantify. Consequently, in a clear example of the McNamara Fallacy, [Muller 2019] [Brenner 2023] some decision-makers consider only the quantifiable factors that affect the DE/CE decision. They focus on factors such as fully loaded salaries for DEs, or hourly rates for CEs. But because of those non-quantifiable factors, the DE/CE decision is often one that depends on judgment. In this post I provide some illumination of the true costs of contractors.

Example: Indirect costs of differentials in levels of perks and benefits

In "White-Collar Contractor Sabotage," Point Lookout for June 4, 2025, I sketched some of the consequences of preferentially providing perks and benefits to some categories of employees. Problems arise when work groups and teams consist of mixtures of employees (DEs and CEs) who have different levels of privilege, perks, and benefits. For example, an experienced and talented CE project team member who feels resentful about the higher levels of perks and benefits afforded to a much-less-capable DE project manager might withhold contributions to the team effort rather than see those contributions generate a success in which the DE project manager receives credit for the CE's contributions.

The CE's Only when hiring decisions take into account
indirect consequences of hiring contractors
can we be confident that our decisions are
consistent with organizational objectives act of withholding can delay a project, pushing revenue into the future, and thereby depressing current-quarter results. Whatever expense might have been avoided by hiring a CE is lost in terms of net income by delaying revenue. Only when we make hiring decisions that take into account indirect consequences of hiring contractors can we be confident that our decisions are consistent with organizational objectives. In this example, hiring a DE instead of the CE might actually improve financial results even if that DE is only 50% utilized.

Two more examples

Below are two more examples of factors that can affect the choice between a new team member who is a direct employee (DE) and a new team member who is a contractor (CE). I'll refer to the new team member as Neal (N for New).

When there are other contractors already on board

If Neal joins a team as a CE, and if that team already includes CEs, issues can arise between the incumbent CEs and Neal if the incumbents are unsure about their status. Team performance might be affected (not in a good way) if the incumbents have concerns that Neal might displace one of them at contract-renewal time. These concerns might be intensified if Neal's privileges exceed the privileges of the incumbents, or if one of the incumbents has been serving as team Lead.

Compare the above situation to one in which Neal is a direct employee. Any difficulty between Neal and incumbent CEs is unlikely to be traceable to the concerns of the CEs regarding contract renewal. Incumbent CEs would most likely interpret arrival of a new DE as indicating a change of organizational direction in favor of DEs. Instead of incumbents viewing Neal as a threat, they're more likely to view the change in organizational staffing policy as the threat. Team performance would be difficult to predict, because some CEs would head for the exits, while others might elevate their performance as part of campaign to remain on the team.

When the task is in trouble

Typically, when choosing between a CE and a DE for assignment to task T, decision makers consider only the direct costs of the individual to be assigned, all other factors being equal. Apart from scheduling issues, resource contention issues, and the like, decision makers rarely consider the cost of any consequent effects on T or any other task. Suppose, though, that T is a troubled task — it is over budget and late, and riddled with internal team conflicts. Consider what happens after Neal joins the team.

In the social hierarchy that is the organization, CEs generally rank below DEs of similar capability. If Neal is a contractor (CE), some will interpret Neal's assignment to T as a sign that T is unimportant, doomed, or near cancellation. This perception has effects on T:

• Some team members might begin searching for what they believe to be more secure positions on other tasks or in other organizations. This elevated turnover rate can create problems for T's attracting and retaining talent.
• For T's Lead, securing the cooperation of other task leads to meet T's priorities can become more difficult, because T's status is now viewed as less reliable.
• These effects tend to increase T's troubles, and delay T reaching its objective.

Compare these effects to the effects of Neal joining the team when Neal is a direct employee. In that case, a common interpretation of the move is more likely to be that the firm has decided to invest in T, rather than cancel it. Both DEs and CEs whose qualifications are relevant to T's mission are likely to take notice, and if offered an opportunity, are more likely to join T's team. T's objective is thus more achievable, and its troubles more manageable.

Last words

As plausible as these example scenarios might sound, they're not proof of anything. And when presented with any one of them, or myriads of similar scenarios, making a financial model of these effects would be difficult indeed. Too much depends on squishy human factors. But that's the way it is when people are involved. Sometimes we must depend on sound judgment. Considering exclusively the factors to which we can attach numbers is turning a blind eye to everything else.  Top  

Occasionally we have the experience of belonging to a great team. Thrilling as it is, the experience is rare. In part, it's rare because we usually strive only for adequacy, not for greatness. We do this because we don't fully appreciate the returns on greatness. Not only does it feel good to be part of great team — it pays off. Check out my Great Teams Workshop to lead your team onto the path toward greatness. More info

Footnotes

Your comments are welcome

About Point Lookout

Thank you for reading this article. I hope you enjoyed it and found it useful, and that you'll consider recommending it to a friend.

This article in its entirety was written by a human being. No machine intelligence was involved in any way.

Point Lookout is a free weekly email newsletter. Browse the archive of past issues. Subscribe for free.

Support Point Lookout by joining the Friends of Point Lookout, as an individual or as an organization.

Do you face a complex interpersonal situation? Send it in, anonymously if you like, and I'll give you my two cents.

Related articles

More articles on Critical Thinking at Work:

Forward Backtracking

The nastiest part about solving complex problems isn't their complexity. It's the feeling of being overwhelmed when we realize we haven't a clue about how to get from where we are to where we need to be. Here's one way to get a clue.

Call in the Right Expert

When solving a problem is beyond us, we turn to experts, but sometimes we turn to the wrong experts. That can make the problem even worse. Why? How does this happen? What can we do about it?

Patterns of Conflict Escalation: II

When simple workplace disagreements evolve into workplace warfare, they often do so following recognizable patterns. If we can recognize the patterns early, we can intervene to prevent serious damage to relationships. Here's Part II of a catalog of some of those patterns.

Disjoint Concept Vocabularies

In disputes or in problem-solving sessions, when we can't come to agreement, we often attribute the difficulty to miscommunication, histories of disagreements, hidden agendas, or "personality clashes." Sometimes the cause is much simpler. Sometimes the concept vocabularies of the parties have too little in common.

Motivated Reasoning

When we prefer a certain outcome of a decision process, we risk falling into a pattern of motivated reasoning. That can cause us to gather data and construct arguments that erroneously lead to the outcome we prefer, often outside our awareness. And it can happen even when the outcome we prefer is known to threaten our safety and security.

See also Critical Thinking at Work for more related articles.

Forthcoming issues of Point Lookout

Coming July 9: On Being Seriously Funny at Work

Humor is such a valuable tool at work that it ought to be recognized as an official contribution by team members who provide the laughs that keep some teams from auto-destructing. Even if you're not known for bringing the funny, there are a few simple techniques that can change your image. Available here and by RSS on July 9.

And on July 16: Responding to Unwelcome Events

Unwelcome events have two kinds of effects on decision-makers. One set of effects appears as we respond to events that have actually occurred. Another set manifests itself as we prepare for unwelcome events that haven't yet occurred, but which might occur. Making a wrong decision in either case can be costly. Available here and by RSS on July 16.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenaXXxGCwVgbgLZDuRner@ChacDjdMAATPdDNJnrSwoCanyon.com or (650) 787-6475, or toll-free in the continental US at (866) 378-5470.

Get the ebook!

Past issues of Point Lookout are available in six ebooks:

• Get 2001-2 in Geese Don't Land on Twigs (PDF, )
• Get 2003-4 in Why Dogs Wag (PDF, )
• Get 2005-6 in Loopy Things We Do (PDF, )
• Get 2007-8 in Things We Believe That Maybe Aren't So True (PDF, )
• Get 2009-10 in The Questions Not Asked (PDF, )
• Get all of the first twelve years (2001-2012) in The Collected Issues of Point Lookout (PDF, )

Are you a writer, editor or publisher on deadline? Are you looking for an article that will get people talking and get compliments flying your way? You can have 500-1000 words in your inbox in one hour. License any article from this Web site. More info