Hiring developers in London: In-house Costs vs. Offshore Development Agency Rates

Daniil Kopilevych
Daniil Kopilevych
Marketing Manager
Jun 20, 2018 6 min read
Team Extension
Team Extension Jun 20, 2018 6 min read

Most software development companies sooner or later face the challenge of hiring personnel. At the startup stage, the company needs professional developers to kick off. A more established company may need to extend the team for various reasons – embarking on a new project or enhancing its line of products. The product may become too large and complex and require more people to maintain. Or, the business needs may demand including new features for which some special skills are needed.

Anyway, there will be the day when the company decides to put up the “Help Wanted!” sign. Naturally, you should begin with deciding which hiring model suits you best. Gladly, we now live in the age when there are other ways of hiring people besides having them come to the office five days a week.

The high-speed Internet is available almost everywhere and to everyone, thus, your team members may be anywhere in the world.

We have already researched the possible models of hiring professional developers. We focused on finding Node.js experts for your team, however, the basic recommendations can be used to fill most of the development positions in the team.

You may have noticed that whenever the in-house hiring model is compared to team extension via a development agency, one of the primary criteria is the cost. Usually, the cooperation with a development agency turns out more cost-effective than hiring in-house personnel. However, most researches stop here and expect you to take their claims at face value. We decided to back up this statement with some cold hard facts and figures and compare the actual cost of hiring an in-house team with the cost of contracting a development agency.

We have closely worked with many startups and product development companies in the UK, and we know that it is sometimes very difficult to hire developers in London. Thus, we researched the eventual cost of putting together a software development team in London to see how much it can actually be.

We will compare average software development rates in Ukraine with the costs of hiring developers in the UK to see which model is more cost-effective. Of course, both models have other advantages and disadvantages that need to be considered as well.

Cost structure of in-house and offshore software development models

When choosing between hiring an in-house team and working with a development agency, it is important to remember that the costs consist of different components in each case.

In-house Offshore software development company
Developers’ salaries

Office rent

Other positions

Software licenses

Employee benefits

Hardware cost

Taxes

Hourly rates x number of hours

As you can see, the list of expenses that an in-house team bears is much longer than in the case of hiring a developer or a whole dedicated team from a development agency.

Now, let’s look at the actual figures to estimate what an in-house team is going to cost in London.

In-house team costs

Developers’ salaries

According to Glassdoor, a front-end developer in London makes about £40,600 a year, that is £3,383 a month.

The same resource states that the salary of a back-end developer is £50,000 a year, or £4,167 a month; and the salary of a QA engineer – £24,000 a year, or £2,000 a month.

Here, we should not forget that under the laws of the United Kingdom, full-time workers are entitled to 28 working days of paid leave. This means that for 5.6 weeks each year, you are going to pay each of your developers their salaries while they are absent from work.

If you hire these three professionals full-time, your costs in salaries alone are going to amount to £114,600 a year, or £9,550 a month.

Office rent

The office rent depends on the location you plan to run your operations in. From the office rent calculator, we see that a very basic office with an open space for up to 10 people and the barest minimum of other facilities is going to cost from £41,580.00 to £93,870.00 per year, if we consider the long-term rent.

Image credit: Find a London office

The middle-rank rates are about £62,370 per year, or £5,198 per month.

Other positions

If you plan to run an in-house development company, you cannot avoid filling-in positions other than software developers. You will need an HR manager or a recruiter to find candidates for you; also, your business will definitely require an accountant to do your books. This is the very least you may need at the starting stage. Later, when the company grows, you may also think of hiring a system administrator, an office manager or an additional recruiter.

If we again turn to Glassdoor, we will see that the positions we mentioned have the following average salaries in London:

  • Recruiter – £35,204 a year, or £2,934 a month
  • Accountant  – £42,053 a year, or £3,504 a month
  • System administrator – £39,223 a year, or £3,269 a month

Thus, an accountant and a recruiter are going to add £77,257 a year, or £6,438 a month to your business costs.

Software licenses

Certainly, your product will define your technology stack, and you will purchase the tools and frameworks that will help you develop your software better and easier. However, for our estimation, we can include the basic tools that you are very likely to use regardless of what you are developing. These tools belong rather to administration and collaboration tools, thus they will fit any project:

  • Confluence (documentation storage tool) – £7.42 ($10) per month, or £89.04 per year. This flat fee is for small teams (up to 10 users)
  • Jira (project management tool) – £7.42 ($10) per month, or £89.04 per year. Again, Atlassian uses the same pricing policy and charges a flat fee for a team up to 10 users
  • GitHub (product development tool) – £155.82 ($210) per month, or £1068.48 per year for 10 users. This is the price of the Business package where GitHub offers enhanced functionality including access management and support. There are less expensive options, but their functionality is rather limited.
  • Slack (instant messaging and communication tool) – free for small teams, however, you can get many more options with the paid version (£49.49 ($66.70) per month, or £593.88 per year for 10 users)
  • Google Drive (documentation tool) – free with 15 Gb of cloud storage per user.

Simple calculations show that the basic set of tools for your in-house team is going to cost you £220.15 per month, or £2641.80 per year.

Employee benefits, hardware costs, taxes

Each in-house software company will face these expenses, while they are rather difficult to estimate on the average. For example, employee benefits can vary greatly depending on the size of the company and the stage it is currently at.

Usually, companies use benefits as additional attractions for their staff, and each company has its own vision of what it may offer to its team:

  • Medical insurance
  • Gym subscriptions
  • Free lunches
  • Educational opportunities
  • Mobile phones paid by the company
  • Prolonged sick leaves
  • Team-building activities

Of course, in each particular case, the total cost of the benefits that the company offers will be different. The same concerns the hardware expenses, as the hardware requirements depend heavily on the kind of project that you develop.

And, if we quote Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes”, thus, you should take into account the taxes that should be paid by your company. The actual amount of taxes is not easy to estimate, though.

Total in-house team costs

Let’s use the figures we calculated to estimate the costs of an in-house development company for 1 month, 6 months and 12 months (excluding taxes, employee benefits and hardware costs from our calculations).

1 month 6 months 12 months
Developer salaries (front-end developer, back-end developer, QA engineer) £9,550 £57,300 £114,600
Office rent £5,198 £31,188 £62,370
Other positions (only accountant and recruiter) £6,438 £38,628 £77,257
Software licenses £220.15 £1,320.90 £2,641.80
Total £21,406.15 £128,436.90 £256,868.80

Offshore development team costs

If you use the outstaffing model, your only expense is the hourly rate of each developer you engage. Of course, the development agency has all administrative and other related expenses, but they should not bother you in the slightest.

In Ukraine, the average front-end or back-end developer hourly rates are about £22, which makes £3,520 a month if you contract a developer for 160 hours. The hourly rate of a QA engineer is £18, or £2,880 a month. Therefore, a team of the same three professionals will cost you approximately the following amounts:

1 month 6 months 12 months
Developer hiring costs (front-end developer, back-end developer, QA engineer £9,920 £59,520 £119,040

These are the only costs you are going to have. Although the offshore software development rates may seem slightly higher (appr. 4% a month) than the costs of hiring app developers in London, i.e. paying the salaries to in-house developers in London, there are no other associated expenses (and no effort to arrange the office, either!).

Conclusion

On a final note, we would like to say that both in-house and outsourcing models have their advantages and disadvantages. For example, with an in-house team, hiring is a rather lengthy process, as it requires your candidate to quit the previous job with a proper notice. On the other hand, you may also find it difficult to dismiss a person who is not up to the task, for the legal considerations.

With outsourcing, you get a full team almost immediately, and you can expand or reduce it as your project requires. You will only pay for the actual number of hours each developer worked on your project, not a penny more. Moreover, if you need a particular skill for a short-term task, such as UX/UI Design or QA, you can get them for as many hours as needed. See our research on the advantages of outsourcing for more details.

We hope our study of the in-house and outsourcing costs will help you choose the best option for your project!