The Economics of Contract Software Development

As you’re building your tech product, you’re at some point going to have the opportunity to hire contract developers to either augment your current team or perhaps even to be your primary team.

Before you jump in to a relationship with a contracting firm, you need to understand the economics of the relationship. For this article, we’ll focus specifically on US-based contract software shops, not freelancers or offshore companies.

Economics 101

When you first start looking for contractors to work with, you’ll no doubt have some initial sticker shock. Here’s a typical rate structure:

Architect: $200+ per hour ($400k annualized)
Senior Developer: $150+ per hour ($300k annualized)
Junior Developer: $125+ per hour ($250k annualized)

Stop for a second and read that again. How many people do you know who make that kind of money? And yet, this is the norm (if not even a bit low) for US-based firms. Where is all that money going?

  1. Hiring and carrying costs.
  2. Office space (maybe)
  3. Their pockets

Breaking It Down

Let’s take the Junior Developer mentioned above. A good junior developer in an area that’s not Silicon Valley makes probably $80-90k a year, maybe up to $100k. At the high end, that’s $62 per hour with all benefits, fully loaded.

The junior developer you’re hiring is costing them $122k a year, plus or minus. They’re billing you at $250k a year, or markup of 100%.

When you actually do the math, it seems almost absurd for a startup or small company of any kind to pay these kinds of rates.

When To Pay The Premium

There’s only one reason to pay the kinds of premiums we’ve talked about in this article, and that’s when you’ve got a very specific need for a very specific period of time. For example, let’s say that you have a problem with your application performance that your team can’t seem to crack.

If you’re losing customers because your application is slow, that’s a death sentence for your business. Paying someone $200/hour to spend a day or two with you to find the problem is well worth it if, and only if, you’re very confident in their ability to actually deliver.

Just Remember

  1. Contract software shops are the most expensive way to get your product built
  2. Markups are typically anywhere from 75-100%
  3. Pay up for targeted expertise that’s not needed full time

Your Assignment

If you’re using a contract software shop to build your product, there’s almost certainly a more economic way to get the work done. Contact us today and we’ll be happy to help you work through the alternatives.