Contractors are the New ‘Employees’—Only They Cost More

Back when I started work, which was about 45 years ago now, everybody who worked on the mine was an employee. Everyone. The truck drivers, the shovel drivers, the lube-truck operators, all the people in the workshops, the crusher team, all the electricians, the train drivers, all the administration workers, the surveyors, mining engineers, everyone. I know this because for a while I was the site Timekeeper and then later became the Paymaster. I kept the payroll books—and we had no computers then, they literally were books.

Everyone got four weeks paid annual leave (with a 17.5 percent holiday loading), accrued long service leave, paid sick leave of up to 10 days a year, were in the company’s prescribed benefits superannuation scheme, and participated in the annual tax-paid production bonus.

Forty five years later I am still working at a mining site. Whereas the one I started at was a four hour drive north of Perth, the one I work at now is a two hour drive south.

The big difference now in relation to the workforce is that, at best, only about a half of the people who work in the IM department are employees—the rest of us are contractors. When it comes to the actual mine workforce about 90 percent of the workers are contractors.

The theory is that contractors are ‘cheaper’ and provide a more flexible workforce (which is code for ‘they are easier to let go when they are no longer required’). Contractors are supposed to be cheaper because they don’t get paid annual leave, don’t accrue long service leave, don’t get paid if they are off work sick (unless they have their own sickness insurance), don’t participate in production bonuses (which these days seems to be paid twice yearly), don’t participate in stock issues, etc., etc.

To balance up for all the entitlements and payments that they don’t get contractors are generally paid about 30 percent more than employees for the same job function. The theory being that this 30 percent loading covers the employee benefits that they don’t get. Hence an IM Application Management Specialist as an employee would get about $85,000 per annum. For the same work a contractor would be paid about $430 per day (on a daily rate), which works out to about $112,000 per year if the contractor worked every working day.

This probably seems about right.

But then there is this other non-trivial layer of cost that has crept in over the last ten years or so when it comes to contractors. Most, if not all, contractors these days come through an agency or other company. This agency or company adds in a profit margin so they can make some money too. Depending on who is providing the contractor service this ‘margin’ (great term) can be anything from about 30 percent to 90 percent. Taking a mid-point of 60 percent that makes the $430 per day contractor loaded cost $690 per day or around $180,000 per annum.

Then you have super-contractors, otherwise known as consultants. In my line of work ‘consultants’ come from companies with names like Price Waterhouse, Accenture, IBM, Avanade, CSC, or Microsoft. With consultants the normal margin loading is up around 200 percent. So an IM Application Management Specialist Consultant would cost something like $1,300 per day made up of $430 going to the person doing the work and $870 going to the company or agency providing them.

The theory behind the massive loading charged for ‘consultants’ is that they have the combined knowledge and expertise of their company behind them. The view is that this back-up expertise that can be called upon by the consultant has a value associated with it. It is like you are not only paying for the consultant but you are also paying a percentage of the value of the ten or so experts he can call upon back at the ‘mother’ company; should they need to.

This is a great theory. The reality it that this virtual back-up expertise team rarely exists and in those few cases where it does it is rarely of any use.

My closing thoughts on this are that while using contractors in the workforce once seemed like a good idea I can see this turning around over the next few years. Especially in the white-collar and skilled workforce. Due to all the add-on costs contractors are generally now more expensive than they once were. In most cases they are now more expensive than having an entitled employee doing that job. In addition the contractor model has brought about workforces that are highly transient and a transient workforce brings with it added cost. Companies are now trying to keep workers with acquired knowledge, which is contrary to the contractor model.