Direct hire and contract staffing are priced in completely different ways. Direct hire involves a one-time placement fee (often 15% to 30% of first-year salary). Contract staffing involves an ongoing hourly bill-rate markup (typically 25% to 75% above the worker's pay) for as long as the assignment runs. Neither is universally cheaper — the answer depends on how long the person stays and what you are hiring for.
How direct hire pricing works
With direct hire, a placement agency charges a one-time fee when you hire a permanent employee:
- Contingency: 15% to 30% of first-year base salary, paid on hire
- Retained: 25% to 35%, paid in stages for senior or executive roles
- Flat fee: a fixed price for some recruitment-as-a-service models
The fee is a one-off. Once paid, you carry the normal costs of a permanent employee: salary, benefits, employer taxes, and onboarding. There is no ongoing markup.
How contract staffing pricing works
With contract or temp staffing, the agency employs the worker and bills you hourly:
- Bill rate = worker pay × (1 + markup)
- Typical markup: 25% to 75% above pay, depending on role complexity
- Costs continue for every hour the worker is on assignment
You avoid the direct-hire placement fee and some benefit obligations, but the markup is ongoing. The longer the assignment runs, the more the contract model costs relative to a one-time fee.
The break-even math
The deciding number is how long the person stays. Compare:
- Direct hire cost: one-time fee (plus normal employee costs)
- Contract cost: hourly markup × hours worked (ongoing)
For a senior engineer on a high markup, the contract model may only be cheaper in the first few months. For a short project or a trial period, contract staffing often costs less overall; for a long-term hire, direct hire is usually cheaper once the break-even point passes.
Before choosing, model both scenarios for the expected duration. A common rule of thumb: short fixed-term assignments favor contract; long-term or permanent needs favor direct hire.
Other differences that affect the decision
Beyond cost, the two models differ in:
- Speed: contract staffing can fill a role faster than a permanent search
- Flexibility: end a contract with notice; direct hires need termination management
- Commitment: direct hire carries hiring risk; contract is a trial
- Availability: some niche skills are only available on a contract basis
- Compliance: contract workers shift some employment obligations to the agency
- Temp-to-hire: a hybrid where you contract first, then convert with a conversion fee
Temp-to-perm gives you the speed of contract staffing and the flexibility to convert if the person works out.
Hidden costs to watch for
- Conversion fees: if a contract worker becomes permanent, the agency may charge a separate fee
- Rate increases: contract bill rates can escalate during an assignment
- Onboarding extras: drug screens, background checks, and training fees
- Non-compete or buyout terms: some contracts restrict hiring the worker directly for a period
Ask for a written quote that lists the markup, conversion fee, and all extras before comparing the two models.
How to choose the right model
- Hire contract when: you need speed, the role is short-term or seasonal, you want a trial, or the skill is only available on contract
- Choose direct hire when: the role is permanent, you can invest in a longer search, and you want lower long-term cost
- Use temp-to-perm when: you are unsure about fit but want to convert quickly if it works
Key takeaways
- Direct hire = one-time fee (15% to 30% of salary); contract = ongoing hourly markup (25% to 75% above pay)
- The break-even point is driven by how long the person stays
- Short assignments favor contract; long-term roles usually favor direct hire
- Model both scenarios and confirm conversion fees and extras in writing before signing
For AI-powered candidate sourcing across agencies and direct channels, explore intelligent talent sourcing.