Cost-of-Vacancy Explained: How to Calculate the Cost of Open Tech Roles

Your unfilled positions are costing you — find out how much
January 7, 2020
Updated: January 14, 2020
Written by Kate Heinz

According to the Society for Human Resource Management, the average cost-per-hire is $4,425, which seems like an extremely reasonable amount to pay for high-demand roles like a full stack engineer or software developer. However, there’s a key difference between cost-per-hire and cost-of-vacancy (COV), the latter being the amount of money lost due to an unfilled position. 

It’s important to note that cost-of-vacancy merely provides a baseline for the financial impact of an open role; it’s difficult to accurately measure the negative impact a vacancy will have on productivity, employee engagement and team morale, and even harder to tie monetary values to these metrics.

Still, COV is hugely beneficial in communicating the importance of an efficient recruitment strategy as well as its impact on your organization’s top and bottom lines. If leadership understands that an unfilled tech role is costing the company tens of thousands of dollars each month, they’ll be quick to grant recruiters a seat at the strategy table

This article breaks down each step in calculating the cost-of-vacancy to better equip tech recruiters with tangible business metrics they can leverage for C-suite buy-in. 

 

USE OUR TEMPLATE TO SEAMLESSLY CALCULATE YOUR OWN COST-OF-VACANCY.

*This document was built using Google Sheets. It will be best used with a Google account.

 

How to Calculate Cost-of-Vacancy

cost-of-vacancy
Image via Shutterstock

For unfilled revenue-generating roles like sales positions, calculating cost-of-vacancy is relatively straight-forward — simply determine the quota that’s not being met while the role remains unfilled. 

On the other hand, determining COV for non-revenue-generating vacancies is incredibly complex; you can’t easily quantify the hit to productivity, team morale and project deadlines. Because of this, cost-of-vacancy should be interpreted as a baseline metric for the minimum amount of revenue lost due to a vacant position. 

We’ll use the following example to explain how to calculate cost-of-vacancy:

Example

ABC Tech — a Chicago-based tech company — just lost one of its top software developers. The individual was compensated $130,000 annually, and the company anticipates the time-to-fill will be 65 days. ABC Tech has 125 employees and brings in $14M in revenue. 

 

1. Determine Revenue Lost 

cost-of-vacancy
Image via Shutterstock

First, calculate the amount of revenue lost as a result of the unfilled position. 

 

Step 1: Calculate Average Employee Revenue

Determine the average employee (EE) revenue by dividing the company’s annual revenue by the total number of employees in the organization. Then, multiply that number by 260*, the average number of working days per year, to determine the daily employee revenue. 

  • (Annual revenue) / (Number of EE) = Average EE revenue
  • (Average EE revenue) / (260 working days/year) = Daily EE revenue

*260 working days per year is calculated by dividing the number of working hours per year (2,080 hours) by the number of working hours per day (8 hours). (2,080 hours/year) / (8 hours/day) = 260 days/year.

 

Example

The average employee revenue for ABC Tech is $430.77 per day.

14,000,000 / 125 = $112,000

112,000 / 260 = $430.77/day

 

cost-of-vacancy-calculator

 

Step 2: Calculate Role-Specific Revenue

Then, estimate a specific role’s revenue by utilizing a predetermined multiplier, which helps quantify revenue based on the role’s level of impact in the company. Multiply the daily salary by one for a vacant entry-level role such as a coordinator or junior-level contributor. Use two for high-impact roles like sales persons, tech employees and product developers. Multiply the daily salary by three for executive and leadership roles. 

These are general guidelines, so talk to your finance and people teams to determine the exact level of impact for a specific role. For example, an enterprise account executive may generate revenue similar to that of a senior leadership team member and require a multiplier of three. In the case of ABC Tech, the unfilled software developer role likely has a significant impact on the product roadmap, which translates to a revenue loss of three times the employee’s salary.

  • (Avg. daily EE revenue) x (Revenue-impact multiplier) = Daily role-specific revenue

 

Example

A software developer at ABC Tech’s average daily revenue is $1,292.31 per day.

430.77 x 3 = $1,292.31/day

 

Step 3: Calculate Revenue Lost to Vacant Role 

Multiply the daily role-specific revenue by the estimated time-to-fill, which is the time elapsed between the first job posting and having an offer accepted. 

  • (Daily role-specific revenue) x (Estimated time-to-fill) = Revenue lost to vacant role

 

Example

ABC Tech will lose $84,000 in revenue over the course of time spent (65 days) trying to fill the vacant software developer role.

1,292.31 x 65 = $84,000


SHRM estimates the average time-to-fill as 36 days. Below are industry-specific estimates of time-to-fill to use in your calculations:

 

cost-of-vacancy-time-to-fill-by-industry
Source: Workable; Image: Built In

 

2. Determine Payroll and Benefits Savings

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Image via Shutterstock

Your company will experience some payroll savings due to not paying employee salary and benefits while the role is vacant. 

 

Step 1: Calculate Cost of Employee

Calculate the cost of the employee by adding the employee’s salary and cost of benefits. According to the Bureau of Labor Statistics, benefits cost 31.4% of annual salary.

  • (EE salary) x (.314) = Cost of benefits
  • (EE salary) + (Cost of benefits) = Cost of employee

 

Example

The ABC Tech software developer’s benefits cost the company $40,820 annually. In total, the software developer costs ABC tech $170,820 per year.

130,000 x (.314) = $40,820

130,000 + 40,820 = $170,820

 

Step 2: Calculate Payroll and Benefits Savings

Calculate the payroll and benefits savings during the period of vacancy. First, determine the daily cost of the employee by dividing the cost of employee by 260. Then, multiply that value by the estimated time-to-fill, or the number of days the role is expected to remain open.

  • (Cost of employee) / 260 = Daily cost of EE
  • (Daily cost of EE) x (Estimated time-to-fill) = Payroll and benefits savings

 

Example

The software developer costs ABC Tech $657 per day. While the role remains unfilled (65 days), ABC Tech will save $42,705 in payroll and benefits expenses. 

170,820 / 260 = $657

657 x 65 = $42,705

 

3. Calculate the Cost-of-Vacancy

cost-of-vacancy
Image via Shutterstock

Now, calculate the cost-of-vacancy by subtracting the revenue lost from the payroll and benefits savings. 

  • (Payroll and benefits savings) - (Revenue lost to vacant role) = Cost-of-vacancy

 

Example

A vacant software developer role will save ABC Tech $42,705, but cost them $84,000. In the end, ABC Tech will lose $41,295 due to the unfilled role.

42,705 - 84,000 = -$41,295

 

Again, this value is simply a baseline — the actual cost-of-vacancy will also account for productivity loss, project delays, declining employee morale, employee burnout due to increased workloads and more. The above formula and our COV calculator can be used to accurately estimate the minimum amount of revenue lost to an open role. Do not get comfortable with the cost-of-vacancy you calculate; you’re losing a lot more than that.

 

USE OUR TEMPLATE TO SEAMLESSLY CALCULATE YOUR OWN COST-OF-VACANCY.

*This document was built using Google Sheets. It will be best used with a Google account.

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