The True Hourly Cost of Inhouse vs Outsourced Software Development Team

16 Nov, 2023 |

Deciding between inhouse and outsourced development teams often comes down to perceived hourly costs. At first glance, inhouse seems cheaper based on salary alone.

But is this telling the whole story?

There are a wide range of additional costs and overhead factors that significantly impact the real hourly rate of an internal team. When you account for these hidden expenses, the hourly cost difference between inhouse and outsourced development starts to look very different.
In this post, we'll uncover the true costs of managing an inhouse development team vs leveraging an outsourced partner. You'll learn:

  • How to calculate the comprehensive hourly rate for an inhouse developer
  • Why overhead costs often double the base salary expense
  • How outsourced teams can provide specialized skills without added hiring and management costs
  • When outsourcing becomes clearly more cost-effective

By examining the full picture, you'll be equipped to determine when inhouse, outsourced, or a blended model makes the most financial sense for your software projects.

Calculating the True Hourly Cost of an Inhouse Developer

Calculating the True Hourly Cost of an Inhouse Developer

At first glance, determining the base hourly rate of an inhouse developer seems straightforward - take their annual salary and divide it by the number of working hours. However, this overlooks substantial indirect and overhead costs.

Some major factors that bump up the actual hourly rate include:

  • Benefits like healthcare, payroll tax, and paid time off (~25% of base salary)
  • Ongoing training and education
  • Recruiting costs
  • Technology infrastructure and equipment
  • Office space and supplies
  • Management time
  • Productivity lost to meetings and distractions

These overhead costs quickly add up. For a developer earning a base salary of $80,000, the real hourly cost after including 50% in overhead expenses comes to around $55/hour.


The Flexibility and Specialisation of Outsourced Teams

The Flexibility and Specialisation of Outsourced Teams

While inhouse teams come with large overhead expenses attached, outsourced providers deliver specialised talent and expertise without the associated hiring, infrastructure, and management costs.

This gives you access to skills like:

  • Niche technical capabilities
  • Deep experience with legacy systems
  • Scalability to ramp up or down as needed

Outsourced teams also offer greater flexibility around budget and scheduling, as you pay only for the actual time required. The expanded talent pool and targeted specialisations enable you to perfectly match each project's needs.


When Outsourcing Becomes the More Cost-Effective Choice

When Outsourcing Becomes the More Cost-Effective Choice
While inhouse development seems less expensive on the surface, the reduced overhead and increased flexibility of outsourced teams make them clearly more cost-effective in many scenarios:

  • Short-term or one-off projects - The high overhead costs of inhouse make outsourcing ideal for these use cases. No need to hire and ramp up staff for temporary needs.
  • Dynamically changing requirements - It's easier and less costly to pivot with an outsourced provider that has bench strength. Inhouse requires downsizing and hiring cycles.
  • Hyper-specialised skills - Access niche talent without bearing the ongoing expense of full-time specialised staff.
  • Smaller overall budgets - The lower hourly rates of outsourced talent accommodate tighter budgets. 




Focusing on Value Over Simple Cost Comparisons

Focusing on Value Over Simple Cost Comparisons
At the end of the day, the cost per hour is just one metric. The real value comes from choosing the team that can deliver the highest quality outcomes, user experience, and long-term maintainability on each project.

By taking a holistic view encompassing overhead, flexibility, skills, and other factors, you can make the optimal choice between inhouse, outsourced, and hybrid models for powering innovation. With the full context, hourly rates become just one data point rather than the sole deciding factor.






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