How to know when it’s time to grow your team
Your business is doing great - in fact, you have more work than your team can handle. Having too much work is a great problem to have. It’s a good sign that you should grow your team and hire.
The only question is: should you hire a contractor or a full-time employee?
Hiring a contractor first
You should first hire a contractor to help you with the extra work. For example, you might have a project that's due next week that requires more hours than you can squeeze from your team; so instead of requiring everyone to work 12 hours/day, find a freelancer to help you out.
Once you find a good and reliable freelancer, you can regularly outsource work to them. You can even have them on a monthly retainer. By prepaying a certain number of hours each month for their services, you can make sure you can count on them whenever you have extra work.
Retainers are great for both you and the contractor. You’ll know how many billable hours you can count on when taking on new projects and the contractor will appreciate the financial security of steady cash flow.
Advantages of hiring a contractor
You don't have to worry about running out of work and having idle employees you have to pay even when there’s no work. With contractors, it’s very simple: if you don't have enough work, you don't hire them; when things pick up, you hire as needed. Also, when you decide to hire a full-time employee, you can ask a contractor you know is good to come and work for you.
Maybe you have a project that requires coding in a framework none of your employees are familiar with or you need some other obscure skill. Instead of wasting billable hours on getting your team up to speed, you can hire a specialist who'll get it done 3x faster. You're also not confined to your geographical region and can hire from anywhere in the world. This is especially important when you need very specialized knowledge that's very hard to find.
When you see a contractor's hourly rate, you may think they cost much more than your full-time employees. But contractors actually cost you 20-30% less. For example, a $45/hour contractor cost less than a $30/hour employee. This is because an employee incurs a lot of additional costs (like benefits, unemployment insurance, retirement, overhead, administration, etc.). Folks at Toptal made a really useful calculator that can show you the real costs of employee vs contractors.
Because they’re not employees, you have fewer legal obligations. If a contractor is not good at what they do, you can easily replace them. Be careful not to treat contractors as employees, which is illegal: if you control what the contractor does and how, and you're supervising them, they are an employee in the eyes of the IRS and you should be paying for all the benefits an employee gets.
Disadvantages of hiring a contractor
Contractors work with several clients and they have their own schedule. If you plan to hire them, you'll need to plan in advance and make sure they're available. In case they're not available, you must have a plan B. This is especially risky if you’re looking to hire a contractor when a project is already running behind schedule.
Training and Onboarding
A contractor needs time to get to know your business and your client's needs, which costs both yours and their billable hours. Then, you need to make sure they follow your shop standards (coding style, workflow, etc.) and you need to set up various accounts for them (like inviting them to ActiveCollab and Slack, giving them credentials, etc.). Plus, your team's productivity will suffer if they don't know each other that well.
A contractor's only job is to successfully finish the job they're hired for. They don't care much about your company's success and you can't expect a high level of commitment. Don't expect them to improve your business or work extra hard to finish a project on time.
Because they won't stick around for long, there's no reason for them to build a relationship with your clients. Or the opposite - the client might like them so much they’ll hire the contractor instead of you next time.
Hiring a full-time employee
Hire a full-time employee when you're sure there's already enough work for them. Before hiring, ask yourself:
"Are we really dying for extra help?"
If you're thinking "Oh, it would be nice to take the load off", don’t hire, it's not worth the risk. But if you find yourself regularly needing an extra 10-15 hours/week, definitely hire a contractor.
Then, when you’re regularly paying the contractor 20-25 hours/week, it’s time to hire a full-time employee.
Now, if the work you're hiring a contractor is your business's core competency, you should hire a full-time employee even earlier, regardless of the "20-25 h/week" rule. For example, if you're a branding agency, having an extra designer around will pay off very soon.
Once you hire a full-time employee, you'll have a bigger pool of available hours and you'll start looking for more projects to justify the extra worker and grow your company. Just keep in mind that as you grow, you'll need to hire your first project manager too.
You should only hire full time when there's a real demand and when hiring will generate more revenue than the new employee will cost. Hire a contractor first and when you regularly have plenty of work for them, hire a full-time employee.