Did You Know about This Hidden Cost of Hiring A Software Development Team?
What is the cost of hiring a software development team? The IT hiring trends in 2023 suggest that tech talent is one of the most sought-after skills today. As a result, the cost of hiring developers is at an all-time high. But along with the regular costs, there are several additional costs that most companies don’t take into account when deciding how to hire a developer. This blog post will break down all these hidden costs to help you make the best hiring decision. Let’s get started.
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Cost of hiring talent—the current scenario
Today, hiring is more expensive and time-consuming than ever. Take a look at these stats:
- It can take a company an average of six months to make back the money spent on a new employee.
- Internal human resources teams can increase a company’s hiring costs by 50 percent or more.
- A bad hire can cost a company up to 300 percent of the employee’s salary.
- Companies can lose up to $15,000 or more on hiring an employee who leaves within one year.
Owing to these factors, the effort and cost of hiring a software development team have soared like never before.
How much does it cost to hire a software developer?
According to Builtin, the average annual salary of a software developer in the U.S. is $127,946 per year ($61.51 per hour).
Note: This is the average base salary in the U.S. Developer salaries can vary depending on their expertise and seniority.
In addition to the average salary, the employer costs for hiring a software developer in the U.S. include
- legally required benefits ( 7.6 percent of average salary) = $9,723.80
- insurance (7.8 percent) = $9,979.70
- paid leave (7.4 percent) = $9,468
- savings and retirement (3.5 percent) = $4,478
- additional compensation premium and overtime (3.3 percent) = $4,222.20
If we take the average annual salary for software developers ($127,946) and calculate the above employer costs based on it, they amount to $37,871.7 So, after adding these costs to the average annual salary, the employer costs for hiring a software developer are $165,817.7 per year.
What costs go into hiring a software developer?
The cost of hiring a software development team is much more than their salary and benefits. Let’s break down these costs one by one.
The first step to hiring a software development team is sourcing. Sourcing includes the following costs:
This cost will depend on the job boards you’re posting on. For example, LinkedIn allows you to post one free job posting at a time. This posting is visible in your network and search results. To attract good talent from job boards, you need to write a good posting.
You can also promote your job posting by setting up a daily or total budget. The higher the daily budget, the further up your job post will appear in job searches and the longer it will be marketed to LinkedIn members. The minimum daily budget for these postings is $10, whereas the minimum total budget is $100. Most job postings stay up for at least 30 days. And thus, you need to spend at least $100 to promote a job opening on LinkedIn.
Other job boards like Indeed allow you to place ads without charge and increase visibility for $5 and up daily. In other words, Indeed can charge you up to $150 for promoting a job opening for 30 days.
Applicant tracking system
An applicant tracking system (ATS) is vital for a smooth recruitment process. A few ATS vendors charge a minimum flat fee between $200 and $350 per month. Apart from the flat fee, the ATS vendors usually offer three pricing models:
- Pay-Per-Recruiter ($60–$150 per month)
- Pay-Per-Job-Opening ($5–$20 per month)
- Pay-Per-Employee ($4–$7)
As your company grows, you may need to spend thousands of dollars annually on your ATS.
External recruiter costs
These costs make up a significant chunk of the total cost of hiring a software development tea. External recruiters usually charge 15–40 percent of the initial compensation of the new hire. Let’s consider an average of that range—25 percent. If you apply a recruitment fee of 25 percent to a developer’s average annual salary of $127,946, your external recruiter costs will amount to $31,986.
Internal recruiter costs
As per Glassdoor, the typical compensation for a Human Resources Manager in the U.S. is $82,260 ($39.55 per hour). Research states that HR professionals spend a minimum of 30 hours per week on sourcing candidates.
Considering this number, your internal recruiter costs would be
- HR manager’s hourly salary ✕ number of sourcing hours
- $39.55 ✕ 30 hours = $1,186.50
And thus, your total internal recruiter costs for sourcing candidates would be $1,186.50 per week.
Once you have a list of suitable candidates, you need to assess, interview, and select the best ones. Let’s break down these costs one by one,
Assessment cost is also an important part of the total cost of hiring a software development team. Let’s assume you have 10 submissions, and you ask one of your internal developers to review them, and it takes approximately one hour to review each submission.
If you’re paying them the average developer salary in the U.S., $127,946, the price of this review would be
- developer’s hourly salary ✕ number of review hours ✕ number of candidates
- $61.51 ✕ 1 ✕ 10 = $615.
So, your total assessment costs for reviewing candidate submissions would amount to $615.
As per Indeed, in-person interviews last between 45 and 90 minutes. Most companies conduct a short pre-screen call followed by two in-person interviews. Using the average interview time, these interviews would last for about two hours.
You’d likely involve your in-house developer and technical hiring manager to ask interview questions. To better understand the costs involved, we’ll calculate the interview time based on the HR manager’s and developer’s average salaries.
- HR manager’s hourly salary ✕ number of interview hours ✕ number of candidates
- $39.55 ✕ 2 ✕ 10 = $791
- developer’s hourly salary ✕ number of interview hours ✕ number of candidates
- $61.51 ✕ 2 ✕ 10 = $1230.20
Collectively, your interviews would cost $202.12 per candidate or $2,021 for all 10 candidates.
Note: Not all candidates will reach the final round. But on the other hand, you are likely to interview more candidates in the initial stages.
Employers often tend to overlook additional costs. These usually include the following:
This is yet another major contributor to the cost of hiring a software development team. As per Investopedia, new employees function at about 25 percent productivity in the first month. This figure means that the cost of lost productivity is 75 percent of the employee’s salary. In our case, productivity loss would amount to 75 percent of the new developer’s monthly salary—$7,996.60.
Onboarding and training expense
The Association of Talent Development shares that the training cost for a new employee is around $1,252. Similarly, a study by SHRM notes that the average onboarding cost per employee is a whopping $4,100. Together, these costs amount to $5,352. And so, companies should never overlook these expenses while calculating the total cost of hiring a software development team.
The total cost of hiring a software developer
So considering all the costs mentioned above, our total cost of hiring a software developer comes down to the following.
Cost of hiring a software development team based on the model of engagement
The cost of hiring a software development team depends on whether you’re looking to hire an in-house developer, hire a freelance developer, or partner with an IT service provider or talent cloud.
Hiring an in-house software development team
If you’re looking to hire in-house developers, you must start from scratch. Hiring in-house developers involves everything from creating job descriptions, pushing out job postings, reviewing job applications, and scheduling and conducting interviews to assessing and shortlisting candidates. Since the process involves several steps, hiring in-house developers can cost you a fortune.
Note: The cost of hiring an in-house developer depends on the developer’s location. Generally, software development costs are higher in developed countries than in developing countries.
How much does hiring in-house developers cost?
Consider these numbers.
If you add the associated costs mentioned in the earlier section, hiring an in-house developer in the U.S. can cost several hundred thousand dollars. Therefore, the massive cost is a significant disadvantage of in-house development teams.
Hiring a software development team through an IT service provider
A popular alternative to in-house development teams is IT firms. Based in regions like India, China, Eastern Europe, and South America, these providers employ thousands of developers. Owing to their size, they mostly take up enterprise-level projects for corporate giants. However, most corporate clients understand this and know what they’re getting into.
How much does hiring software developers through an IT service provider cost?
An enterprise-level agency can charge between $250 and $850 per hour and will often require massive budgets above $500,000 before they start working on a project. Next, we have agencies charging around $200–$300 per hour with contracts around six figures and up. Agencies accepting smaller contracts can cost between $75 and $180 per hour. Owing to the high costs, many companies prefer the alternative to IT service firms for hiring software development teams
When should you hire an agency? An agency can be a good option when you have big projects and not enough in-house talent.
Note: Hiring an agency does not mean you no longer have to manage your developers. This approach does, however, come with less management compared to outsourcing a team of freelance developers.
Hiring freelance developers
Another popular alternative to in-house development teams is freelancers. Hiring a freelance software developer comes with different costs than hiring an in-house developer. With freelance developers, you need to take into account the sourcing, assessment, and communication costs. The two common costing models for hiring freelance developers are
- Project-based compensation
- Time-based compensation
How much does hiring freelance developers cost?
The cost of hiring a freelancer will depend on where they are located. Freelancers charge a higher hourly rate than in-house developers to cover their own benefits and other costs. Take a look at these costs.
According to UpWork, the median hourly rate of software developers is $20. Ultimately, a freelancer’s fee depends on where and how you hire them and the expertise/skills you are looking for.
Hiring a software development team through a Talent Cloud
Talent Clouds use software to automatically source, vet, and manage talent worldwide. Turing is a leader in this new category with its intelligent Talent Cloud of developers, tech leads, and other engineering talent. Owing to its benefits, the Talent Cloud is rapidly becoming the most preferred alternative to IT service firms and freelance marketplaces for hiring software developers.
How much does hiring software developers through a Talent Cloud cost?
With a Talent Cloud like Turing, you don’t have to worry about the cost of hiring a software development team, You can hire software developers starting from $40 per hour and up depending on seniority. But that’s not all. You can also:
Hire developers at half the cost in no time
With Turing, you pay less but don’t compromise on quality. You can access the world’s most deeply vetted developers and teams, matched by AI. The best part? You can hire these developers in less than four days!
Enjoy a 2-week, risk-free trial
Turing gives you a 2-week, risk-free trial for your first developer. If you’re not happy with their work and decide to stop within two weeks, you pay nothing.
Say goodbye to associated hiring costs
A Talent Cloud like Turing can help you save costs for 40+ hours of hiring time. You don’t have to worry about sourcing, vetting, and recruiting candidates as Turing does that for you.
Comparing the cost of hiring developers: Hiring in-house vs. hiring freelancers vs. hiring through an IT service firm vs. hiring through a Talent Cloud
The cost of hiring a software development team depends on your engagement model and project goals. But considering the sourcing, recruitment, and additional costs, hiring software developers through a Talent Cloud like Turing is significantly cheaper than building an in-house team, hiring through an IT service firm, or hiring freelance developers. Learn more about building a dedicated software development team via a talent cloud like Turing.
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