What Does It Really Cost to Fill an Open Role?

Hiring software engineers is expensive, but how expensive is it? If you’re trying to figure this out, you can use this calculator, which is located here. The models that drive the calculator are, by necessity, incomplete. Countless variables go into hiring a software engineer. To be useful, though, a calculator needs to hide much of that complexity and offer approximations of what it might cost and what you could save by implementing some process improvements. 

Also, we’re using direct and indirect costs in a somewhat non-standard way. Think of direct costs as the easily calculated ones, like recruiting fees. They’re tied directly to a role and have a discrete value. Indirect costs are values that are a bit softer and more difficult to quantify directly, like lost productivity. 

Finally, we refer to anyone who has submitted an application as an applicant and anyone selected to interview as a candidate. 

What’s Not Included in the Calculator

First, not all of the costs associated with hiring are included in the calculator. Many direct and indirect costs are omitted from the model for the sake of simplicity and ease of use. 

Direct Costs Omitted

• ATS Subscriptions. These are typically used across all roles, are reoccurring, and vary widely in cost. In addition, the costs are easy to calculate and add to your total cost however you’d like.

• Other Subscriptions. Same with these. There are tools like Fetcher and LinkedIn Recruiter that contribute to the cost of hiring, but it’s difficult to know who uses what, and the costs are easy enough to add to the totals. 

• Assessment Tools. Platforms like HackerRank and Codility aren’t included in the costs, largely because they’re only used by some folks and not others, plus they vary widely in cost. If you use these, you can manually add them to the total. 

• Retained Agency Fees. We honestly don’t know enough about these to include them in the model, but we guess that they’d be applied over a wide range of roles, not just engineering.

• Signing Bonuses. These are used intermittently and vary widely from role to role, so including them would be difficult. 

• Onboarding. There are hard costs to onboarding a new employee, but they typically happen after filling the role. The calculator looks at the time from when the job is posted to the day the decision is made to hire a candidate. 

• Training. Same here. Because they happen after the decision is made, these costs are excluded from the model. 

• Other Direct Costs. You might hire a contractor to cover the period when the role is vacant or incur other costs not listed here. If so, we don’t know what those costs are, so we can’t include them in the model. 

Indirect Costs Omitted

• Other Internal Recruiter Responsibilities. Sourcing, maintaining client relationships, scheduling candidates and applicants, and other time spent by internal recruiters. This is all important to filling the open roles, but it’s difficult to pin down how much time is spent on engineering candidates versus others, how many recruiters are involved in the process, and more. 

• Re-hires for Employees Who Didn’t Work Out. Bad hires are a huge cost and definitely add to the cost of hiring, but it would be really difficult to include all of those costs in this calculator. I’ll save the costs of a bad hire for a future calculator. 

• Lower Productivity for New Hires. New hires are only about 25% effective during their first twelve weeks while they learn new processes and tools. That percentage increases as time goes on, but modeling those costs would be difficult. 

• Lower Productivity for Mentors and Hiring Managers After Hire. The onboarding buddies and the hiring manager are going to spend more time getting the new hire up to speed, so they’ll be less productive during the first few weeks and months of onboarding the employee. 

• Other Indirect Costs. We can’t include anything we don’t know about, but if you have a suggestion for something that should go into the model, please let us know. You’ll find our contact info in a bunch of places on this site. 

What Is Included In the Cost of Hiring Calculator

Direct Costs

• Marketing Costs. The cost per day of promoting job advertisements on sites like LinkedIn and Indeed. 

• Reviewing Costs. The amount of hours an internal recruiter spends looking at résumés multiplied by their hourly rate.

• Screening Costs. The amount of hours spent by the hiring manager on screening calls with applicants multiplied by their hourly rate. 

• Interviewing Costs. The amount of time spent by engineers and the hiring manager in interviews multiplied by their hourly rates. 

• Recruitment Fees. Retained agency fees or external recruiter commissions (typically 25% of the hire’s salary).

Indirect Costs

• Lost Productivity. Engineers in the organization will need to cover the responsibilities of the open role. Overloading engineers means more context switching and less productivity. See this study for more information. This might be mitigated by changing deadlines or eliminating items from the roadmap when a role is open, but… who honestly believes that’s going to happen?

• Revenue Loss. Each open role impacts the organization’s daily revenue. We calculate this using revenue per employee per day.

The Assumptions and Formulas

To model the true cost of hiring, we use the following assumptions:

Basic Assumptions

Working Days per Year. 261. No vacations or holidays for these guys.
Hours Worked per Day.  8. They only have to work 9-5, though.
Screening Calls. Thirty minutes per call.
Interviews. One hour each

Direct Costs

Revenue per Employee. We assume that each employee contributes the same amount to the company's overall revenue.
Revenue per Employee = Annual Company Revenue / Total Number of Employees

Hourly Salaries. We use the working days per year and the hours per day to calculate these. Whatever compensation you’ve included in the Recruiter, Engineer, and Hiring Manager salaries are reflected here. If you’ve added the loaded salary and total compensation, it will be reflected in the hourly salary.
Hourly Salary =Annual Salary / Working Days per Year / Hours Worked per Day

Hours Spent Reviewing Résumés. We assume that each résumé takes 30 seconds to review. 
Hours Spent Reviewing Résumés = Number of Résumés per Role * Positions to Hire * 0.5 Minutes / 60 Minutes

Reviewing Cost. The dollar cost of reviewing résumés. We’re using the internal recruiter to review all the résumés for us.
Reviewing Cost = Hours Spent Reviewing Résumés * Hourly Internal Recruiter Salary * Positions to Fill

Hours Spent Screening Applicants. We assume that each applicant takes 30 minutes to screen and that you’ll screen five applicants for every candidate you interview. 
Hours Spent Screening Applicants = Number of Candidates per Role * 5 * Positions to Hire * 0.5 Hours

Screening Cost. The dollar cost of screening applicants. We’re going to use the hiring manager to conduct all of the screening calls.
Screening Cost = Hours Spent Screening Applicants * Hourly Hiring Manager Salary * Positions to Fill

Engineering Hours Spent Interviewing Candidates. We assume that the interview process is primarily done by engineers and that each interview takes one hour. For example, if you have a five-round interview process, four of those will be conducted by engineers for one hour each. 
Engineering Hours Spent Interviewing Candidates = Number of Candidates per Role * (Number of Interview Rounds -1) * 1 Hour * Positions to Fill

Engineering Cost of Interviewing Candidates. This is the average hourly rate of the engineers multiplied by the number of hours spent interviewing candidates.
Engineering Cost = Hourly Engineering Salary * Engineering Hours Spent Interviewing Candidates

Hiring Manager Hours Spent Interviewing Candidates. We assume that the hiring manager will conduct one interview for each candidate. 
HM Hours Spent Interviewing Candidates = Number of Candidates per Role * 1 Interview Round * 1 Hour * Positions to Fill

Hiring Manager Cost of Interviewing Candidates. This is the average hourly rate of the hiring manager multiplied by the number of hours spent interviewing candidates.
HM Cost of Interviewing = Hourly HM Salary * HM Hours Spent Interviewing Candidates

Total Hiring Manager Time Spent. The hiring manager is doing both the screening and one round of interviewing.
HM Total Time Spent = Hours Spent Screening Applicants + HM House Spent Interviewing Candidates

Recruiting Cost. This assumes that you’re using recruiters either for all of your open roles or none of your open roles, depending on the state of the switch in the calculator. We also assume that the fee will be 25% of the annual salary of an average engineer. (We may make that configurable in the future, though.)
Recruiting Cost = Average Engineer Salary * 0.25 * Positions to Fill

Marketing Cost. The amount spent on advertising per day times the number of days the role is open. If you typically promote your roles for only a few days, you can adjust the cost per day accordingly. For example, if you have a role that’s open for 100 days, and you set a budget of $10 per day, that would work out to be $1,000 in the calculator. If you only promote those roles for 50 days of the 100 that the role is open, reduce the budget per day to $5 to reflect your total spend. 
Marketing Cost = Marketing Spend per Day * Number of Days to Fill

Productivity Cost. The amount of money lost due to the increased workload on engineers covering an open position. We’re using a figure of 20% based on a study done by Slack (referenced above) about reduced productivity in overworked employees. 
Productivity Cost = Average Engineer Salary / Working Days per Year * 0.2 * Positions to Fill * Number of Days to Fill

Revenue Loss. The amount of revenue lost due to the lack of productivity in the role. 
Revenue Loss = Revenue per Employee / Working Days per Year * Number of Days to Fill * Positions to Fill 

Total Cost. The sum of all the costs listed above.

Default Values

A little bit about where the default values come from. 

Annual Revenue. Just a random number I picked. 

Number of Employees. Calculated according to the average revenue per employee of SaaS companies. For example, if the average revenue per employee is $125,000, you’d get 80 employees in a $10M company. 

Positions to Hire. Assumes that 30 of those 80 employees are engineers and that you have a 15%-ish turnover rate. 

Résumés per Role. Not a lot of great data on this, so I went with what seemed like a reasonable number based on the anecdotal evidence I have. 

Internal Recruiter Salary. From Glassdoor. See the data here: https://www.glassdoor.com/Salaries/internal-recruiter-salary-SRCH_KO0,18.htm

Average Engineer Salary. From Glassdoor. See the data here: https://www.glassdoor.com/Salaries/software-engineer-salary-SRCH_KO0,17.htm

Hiring Manager Salary. From Glassdoor. See the data here: https://www.glassdoor.com/Salaries/software-engineering-manager-salary-SRCH_KO0,28.htm

Marketing Spend per Day. An estimate. 

Number of Days to Fill. Used an upper estimate from an older LinkedIn article. See it here: https://www.linkedin.com/business/talent/blog/talent-acquisition/how-linkedins-product-team-cut-its-time-to-hire-in-half

Number of Interview Rounds. Most available data claim that the average number of interviews is somewhere between four and six. I went with the upper estimate, as I’m guessing that the processes are currently inefficient. 

Number of Candidates per Role. Assumes an interview-to-offer ratio of 10:1, which is on the higher side. 

Use Recruiters? Yes. Many people rely on them, so this switch is on by default. 

The Savings Opportunity

Here’s where we get to the good part. How you can save money. When you add up all those costs using the default values, you get a total cost to hire of $514,760. That’s for five engineers or $102,968 per engineer.

However, that assumes an inefficient process that relies on unstructured interviews conducted by untrained engineers. In order to get the benefits of the savings, you’d need to implement a few new processes: 

Clearer Role Analyses. Taking the time to really understand the hard and soft skills needed for the role, along with studying the culture of the team to identify what sort of soft skills they need to round out their skillsets, is critical to creating both a great job advertisement and a good structured interview process.
Structured Interviews. These are more than twice as predictive of role success as unstructured interviews. Writing the questions out beforehand, knowing what makes a great question and what doesn’t, and ensuring that you have a rubric to grade answers fairly and objectively can dramatically reduce your time to hire by giving you more confidence in your decisions. 
Interview Training. Structured interviews only work well when your interviewers are trained to use them properly, to listen effectively, and to put aside their biases.
Continuous Improvement. No one is great at something on the first try. You’ll need to keep working with your interviewers to get them to use their training effectively. 

Implementing all of that helps to drive up your confidence in your decisions, which leads to a bunch of benefits:

Reduced Time to Fill. When you implement a structured interview process, you can be confident in a decision earlier and make an offer more quickly, saving time and money. We’re assuming that there’s a minimum time to fill of about ten days. We calculate a factor based on the following formula: 

Reduced Time to Fill = (.005(Number of Days To Fill - 10)^2 + 10) / Number of Days To Fill

So, if your process currently takes 70 days, an improved process could reduce that time to 28 days, and a process that currently takes 50 days could be reduced to 18. If your process is much shorter than that, you’ll see diminishing returns. For example, a process that takes 12 days could only be reduced to about ten days.

We’re reasoning that there are more inefficiencies in longer processes, so the savings will be larger. 

Reduced Candidates to Interview. When you’re reducing your time to hire and increasing your confidence in hires, you’ll be interviewing fewer candidates. Good candidates can often get passed over in interviews. If you’ve established a strong process that you can trust, you’ll get to the right candidate faster, and you won’t need to interview as many. We’re estimating that you can reduce the number of candidates interviewed by 20%.

Reduced Candidates per Role = Candidates per Role * 0.8

Reduced Interview Rounds. When you’ve sped up the process and are more confident in your decisions, you don’t need to spend hours in interviews with candidates. LinkedIn reduced the time it took to hire while cutting nearly half of its interview rounds. Some candidates had been going through twelve rounds and they standardized it and reduced it to six. We don’t think everyone can chop their interview rounds in half, so we’re assuming a 25% savings here to make it simple. 

Reduced Number of Interview Rounds = Number of Interview Rounds * 0.75

Using our examples above, that works out to a savings of $164,081 per year just by implementing some new processes.

Conclusion

Understanding the true cost of hiring isn’t just a theoretical exercise; it’s a business imperative. Consider all the costs that are involved in hiring, and find ways you can make the process more efficient, predictive, and fast, and you could save thousands of dollars. It’s not easy, though, and bringing change to an organization can be hard. If you want to talk more about what Gordian Knot can do to help train engineers and build efficient hiring processes, reach out to us at info@gordianknot.company

If you’re curious about what your hiring process is costing you and what you might be able to save, then give our True Cost of Hiring Calculator a try.