Hire or Subcontract Out? Finding the Break-Even Workload
The decision isn't the wage against the invoice — it's a fixed annual cost against hours that actually exist. How to find the workload where hiring starts to pay.
The tempting comparison is the employee's wage against the subcontractor's hourly invoice, and it's the wrong one. It compares a number that doesn't exist — nobody costs you their bare wage — with a number that only applies when the work is there. The two options have different shapes of cost, and the shape is what decides.
Fixed cost against variable cost
- An employee's cost is a commitment. Wages, payroll taxes, workers' comp and benefits are paid for the year, whether the work exists or not. Spread that annual number across the hours actually sold and you get the real cost per billable hour — which rises whenever the work gets quiet.
- A subcontractor's cost is an option. You buy hours when hours exist, at a higher rate and with no commitment. When the phone stops ringing, the cost stops too.
Neither is better in the abstract. Which one wins depends on one input: how many billable hours you can point at the role over the next year.
The break-even workload
Divide the employee's fully burdened annual cost by the subcontractor's hourly rate. Above that many billable hours a year, the employee is cheaper; below it, subcontracting is. A worked example, using the burdened cost from the labor burden guide:
| Line | Calculation | Result |
|---|---|---|
| Employee annual cost | wages + taxes + comp + benefits | $65,160 |
| Billable hours the role can deliver | 1,764 a year | 1,764 |
| Billable hours you actually have | the work available this year | 1,400 |
| Subcontractor rate | as invoiced to you | $55/hr |
| Employee cost per billable hour | $65,160 ÷ 1,400 | $46.54 |
| Employee cost at full capacity | $65,160 ÷ 1,764 | $36.94 |
| Subcontractor cost for the same hours | 1,400 × $55 | $77,000 |
| Break-even billable hours | $65,160 ÷ $55 | 1,185 |
At 1,400 billable hours of demand, the employee is cheaper — by about $11,840 a year. Drop the workload and the answer flips: at 1,000 billable hours the same employee costs $65.16 per billable hour, and a subcontractor at $55 would be cheaper by more than $10,000. Nothing about the wage changed. Only the work did.
Utilisation is the whole argument
The same $65,160 employee produces a completely different hourly cost depending on how busy they are. That's the calculation most hiring decisions skip:
| Billable hours a year | Cost per billable hour | Utilisation of 1,764 hrs |
|---|---|---|
| 1,000 | $65.16 | 56.7% |
| 1,200 | $54.30 | 68.0% |
| 1,400 | $46.54 | 79.4% |
| 1,600 | $40.73 | 90.7% |
| 1,764 | $36.94 | 100% |
Read the top row again. A quiet year doesn't lower your costs — it raises the cost of every hour you do sell, and it raises it on all the other work too, because overhead per hour climbs when fewer hours carry it. Under-utilised labor is one of the ways a business with a full schedule can still lose money.
What the arithmetic leaves out
- Control and consistency. You can train, direct and schedule an employee. A subcontractor sets their own methods and hours, and their quality standard is their own.
- Where the customer relationship sits. Subcontracted work often builds the sub's relationship with your customer, not yours.
- Availability and loyalty. A good subcontractor may also work for competitors, and their rate rises with their reputation — you're renting capacity, not owning it.
- Classification rules. Whether the arrangement is employment or contracting depends on how much control you exercise, and getting it wrong is expensive. That's a question for your accountant or attorney, not a calculator.
- Overhead knock-ons. An extra employee usually adds insurance, vehicle, phone or software costs that the burdened rate doesn't include if you built it for one person.
How to decide, practically
- Compute the break-even hours with the employee's real burdened cost — not the wage.
- Compare it with the workload you can commit to for the next twelve months, discounting the current peak. Peaks pass; payroll doesn't.
- Below the line, subcontract — and revisit the calculation quarterly, because a sub's rate and your workload both move.
- Above the line, hire — and write down the utilisation you're hiring against, so a quiet quarter is a known risk rather than a surprise.
- For lumpy demand, consider both: one employee for the core volume, subcontractors for peaks. The hybrid usually beats optimising either extreme.
Find your break-even workload in the hire vs. subcontract calculator →
Build the employee's true annual cost first →
Frequently asked questions
Is it cheaper to hire an employee or subcontract the work?
It depends entirely on the workload, and it's a solvable calculation. Divide the employee's fully burdened annual cost by the subcontractor's hourly rate: that's the break-even. If you have fewer billable hours a year than the break-even, subcontracting is cheaper; more, and the employee wins. At $65,160 a year and a $55/hr sub, break-even is about 1,185 billable hours — and if the work actually available is 1,400 hours, the employee is cheaper by roughly $11,840 a year.
What counts in the employee's annual cost?
Everything the employment relationship costs: wages, payroll taxes, workers' compensation, benefits, paid time off, training, licensing and the gear they need. The Labor Burden Calculator totals it and divides it by billable hours, which is the number this comparison needs. If you compare the bare wage with the subcontractor's invoice, you're comparing a number that doesn't exist against one that does.
What utilisation should I assume for a new hire?
Plan it, don't hope for it. A useful planning heuristic in trades businesses is 80–85% of paid hours after holidays and PTO — roughly 1,700–1,850 billable hours for a full-time field role — but that's a rule of thumb, not a benchmark, and it moves with your mix of service, project and admin work. What matters more than the exact figure is that you know the workload you're hiring against, because unused capacity raises the effective cost of every hour the employee does sell.
Does this replace advice on employee versus contractor classification?
No, and it isn't trying to. This is a cash-cost comparison. Whether a given arrangement is legally employment or contracting depends on control, direction, tools and other tests that vary by jurisdiction, and getting it wrong has consequences well beyond cost. Use this page for the workload answer and your accountant or attorney for the classification one.
Tools for this
- Hire vs. Subcontract Calculator
- Labor Burden Calculator
- Contractor Overhead Calculator
- Contractor Hourly Rate Calculator
Ready to run the numbers?
Open the Hire vs. Subcontract Calculator and apply this guide with your own figures.
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