The real cost of hiring a new software developer

All companies whether they are well-established or a new start-up, are facing the hiring challenge. As a company’s growth is followed by the need for extension of the IT department and the market needs more and more software apps, the demand for software developers remains high and continues to grow.

Of course, certain skills and expertise of developers are the main objects in search of appropriate candidates. But what comes after skills? Definitely, costs.

Everyone wants to find a perfect candidate with excellent technical skills for a favorable cost. But what do we actually mean by the word “cost”?

Firstly, we usually think about the amount of money compensation foIn r a new employee. But do you consider accompanying expenses including hidden costs?

Different sources of information note that the real costs of hiring in-house developers can range from 25% to 200% of annual compensation per employee.

Can you imagine that? It means that many companies significantly underestimate the costs when they equate the cost of hiring a developer exclusively to the salary of a new employee.

In fact, there are numerous, sizable costs (many of them are not so obvious) that are involved in the process of hiring, maintaining, and terminating permanent staff. We want to explore some of the obvious (and not so obvious) costs incurred by employers throughout the entire process of pursuing, maintaining, and losing permanent IT staff in an attempt to consistently produce valuable software in a cost-effective manner.

For the start, we want to show which components of the real cost of hiring a new developer. Just take a look at the picture below.

So, if the statement about real cost (25% to 200% of annual compensation per employee) is right, you’ll spend about 134 260–322 224 USD for 1 software developer with an annual salary 107 408 USD. Impressive, isn’t it?

*Basic salary in the USA according to www.indeed.com

In order not to be groundless, we want to calculate all direct and indirect costs in money equivalent. According to the report on indeed.com from the 3rd of December 2020 — in the USA the average salary of a software developer is about 107 408 USD. So for our research, we’ll consider 107 408 USD as a basic salary (approximately 50–55 USD/hour).

Let’s continue on this subject and focus on initial hiring, maintaining permanent staff, and terminations. Therefore, I will be covering the hiring process in detail and the expenses associated with it.

Of course, the process of searching for and hiring candidates can be unpredictable in terms of how much money will need to be invested. But that doesn’t mean it’s impossible to determine how much your company invests in new developers at this stage.

First of all, direct costs. Depending on your company’s size, structure, and recruiting policy, your method of finding new candidates may vary. Let’s compare possible costs at this stage:

Talent acquisition

Recruitment Agencies: Many companies resort to using recruitment agencies for hiring as it can make the process easier. Agencies, on average, charge a fee of ~15–25% of an employee’s annual salary. In our case, this equates to about 21 481,6 USD for 20% of the annual salary.

Referral System: It is not uncommon for companies to encourage current employees to provide recommendations for potential hires and help to secure new positions. Many employees earn $1000 — $3000 per successful hire depending on the type of position filled). Source: http://www.hr.com/

Internal HR Department: Utilizing your own HR department initially appears to be the most cost-effective way of attaining new hires, but it doesn’t work for small companies that haven’t internal human resources. It ends up requiring a significant time investment from management. Here is a breakdown of the approximate time needed for a single position:

• Developing a job description: 1 hour;
• Placing calls to people within the staff members’ professional networks in search of suitable candidates: 5 hours;
• Posting the position internally and on the company website: 30 minutes;
• Reviewing and responding to the 20 resumes received and conducting 5 phone interviews: 3 hours;
• Inputting resumes into the company’s database: 2 hours;
• Time spent on holding 2 interviews for each of the 5 candidates: 8 hours;

Total: 19.5 hours * 21,5 USD/hour (average rate of HR managers in the US) = 419,25 USD

Many times, HR management also has a bonus system where monetary rewards are given for successful hires. The standard reward is about 10% of the monthly salary of the new employee. In our case, it’s about 895 USD

Also, we need to mention such a thing as a job posting. Yes, it’s posting your open positions on different portals, networks, etc. In general, it requires an investment of time and money without any guarantee on results. Thus the cost of posting a single job on portals such as https://www.indeed.com/ is about 5 USD per post. Posting on Linkedin costs about 495 USD for a 30-day listing. Therefore we’ll assume that you will spend approximately 500 USD for posting new vacancies on three channels (one will be free, like Glassdoor, for example).

Another one case — relocation expenses. Sometimes viable candidates cannot be found locally and an offer is extended to someone who requires relocation. Of course, the cost of relocation may vary depending on company size, location, and so on. However, according to the Allied Van Lines’ Mobility Survey, this amount varies between 14000 and 38000 USD (26 000 USD average). Standard packages cover house hunting, moving, temporary housing, and an allowance for miscellaneous expenses.

Secondly, indirect costs. While direct costs are simple to gauge, indirect costs are much more complicated. They may be difficult to quantify, but we’ll try to shine some light on the more common expenses:

• Loss of Time for Key Employees

Interviewing software developers, especially when looking to acquire senior developers, often requires the participation of your internal technical specialists and key employees such as CTOs and technical leads. Outside of participating in the interview process, key employees must verify testing tasks and write reviews on the technical skills of candidates. This, in turn, impacts the normal work functions and time capacity of these highly paid employees.

Even if we assume that each tech lead spends about one hour interviewing each candidate and we only have five candidates, five hours will be used for interviews while 10 hours are needed for checking tests. This equates to 15 hours at 65 USD/hour (average salary of a CTO — 152 775 USD*, product manager — 105 899 USD*. We use the average of those salaries and counting their hourly rate).

*According to a basic salary in the USA. Source: www.indeed.com

Your eventual total for this becomes 975 USD. This sum doesn’t include any alternative costs of not spending this time on core business activities.

• Loss of Time and Opportunities

It generally takes nearly 30 days on average to close a single position. Hiring developers with specific skill sets and expertise can take even more time. Additionally, according to Allied Van Lines’ Mobility Survey report, companies expect to lose about 25% of their top candidates during the hiring process. Add to this the time lost for all involved in the hiring process and alternative costs for projects that may be in progress during this period and you should begin to see the impact.

Unfortunately, we couldn’t determine an exact figure in terms of loss in terms of monetary loss as it may vary significantly depending on the situation, but with the given information you should understand that these expenses become quite significant.

To summarize, we know that the minimum amount of extra expenses during the hiring process is 2 789,25 USD (1 314,25 USD HR department spends + 500 USD on advertisement + 975 USD for key employees’ time). On the higher end of the spectrum, expenses that include the help of an agency and relocation costs equate to 48 456,6 USD (21 481,6 USD agency fees + 26 000 USD for relocation + 975 USD key for employees’ time). Thus, we spend about 2,6–45% from the basic salary of an employee.

In conclusion, we need to mention that this is only the hiring process. In our next article, we are going to cover the costs associated with maintaining and terminating staff members.

By the way, Developex can build a dedicated development team of Software and Firmware engineers, QA specialists, UI/UX designers, and also allocate a Project Manager/Business Analyst/Delivery Manager exactly for your specific need!

Also, for more information about Developex team as a service check the link below: https://medium.com/dev-genius/developex-6178088a77bb

Hope you enjoyed reading this article. We will highly appreciate any comments regarding it. If you struggle to find a perfect match for your development team — don’t hesitate to contact us: contact@developex.com

Developex will always be there for you whenever you search for the right development team.