Topaz Publications Blog

The discussion of labor cost provides a natural segue into the discussion of captive vs. contract labor. For one thing, when a vendor tells you their labor cost is $80 an hour, you won’t be tempted to say “But we’re only paying $30 an hour for captive labor.” On the other hand, the $80 number is not what you are really going to pay. Your company’s accounting department will probably treat outside labor as a material expense and will therefore apply a tax to cover administrative costs. Someone in the purchasing department will have to act as the subcontract administrator; the accounting department will have to process the vendor’s invoices and send out the checks to pay the invoices, so there is added cost. Some companies apply a 30% “ME” adder, which would bring the $80 rate to $104.

Dollar for dollar, in-house vs. captive labor roughly trades off, so when is contracting a good idea? Outsourcing is effective on short-term projects when you don’t have enough resources in house. Outsourcing may also be necessary when your in-house writers lack the necessary technical background for a particular project. The biggest advantage of outsourcing is in the ability to manage your operating costs. You have to pay for captive labor whether there’s work or not, but contract labor is on the “payroll” only as long as you need them.