FTE Pricing Outsourcing
Definition
FTE Pricing Outsourcing
FTE pricing outsourcing charges a monthly amount for each full-time equivalent (FTE) assigned to a client, regardless of how much work passes through them. You are buying capacity, priced per head, which is only sensible when demand is genuinely steady.
It remains the most common offshore pricing model, because it is easy to budget and easy to compare between providers — one number, multiplied by a headcount, gives a monthly cost.
The simplicity is also the problem — two providers quoting an identical rate can deliver materially different productive hours, and the rate card never shows it.
Productive capacity is where the real comparison sits — leave, training, breaks, system downtime and unfilled vacancies all reduce what an FTE actually produces in a month.
Key takeaways
- The rate buys a person-month of capacity, not a quantity of output.
- Productive hours vary widely between providers quoting the same headline rate.
- Shift coverage multiplies headcount, exactly as it does with seat pricing.
- Vacancy and backfill terms decide what happens when an FTE is not there.
How it works
An FTE rate is built the same way an hourly rate is. Federal rules describe fixed hourly rates as those that “include wages, overhead, general and administrative expenses, and profit”, and a monthly FTE rate is the same build-up over a longer period.
The hours behind the rate are worth checking. The US Office of Personnel Management converts annual salary to hourly pay using a 2,087-hour divisor, derived from a study showing “there are, on average, 2,087 work hours per calendar year”.
That is the gross figure. Productive hours are always lower, and the gap between gross and productive is where two identical-looking quotes diverge.
| Deduction | Typical range | Question for the provider |
|---|---|---|
| Annual and public holiday leave | 8% to 12% | Is cover included or extra? |
| Training and coaching | 3% to 6% | Ongoing or only at onboarding? |
| Breaks and non-production time | 8% to 15% | What occupancy is assumed? |
| System downtime | 1% to 3% | Who absorbs it commercially? |
| Vacancy between leavers | 2% to 5% | What is the backfill window? |
Those ranges are indicative rather than benchmarked, but the questions are not. A provider who cannot answer all five has not modelled its own delivery.
Shift patterns multiply the headcount just as they do with seats. Continuous coverage of one role needs roughly three FTEs plus relief, and a quote that ignores this is quoting for something else.
Examples
FTE pricing rewards steady demand and penalises variability, and providers with better productive-hour discipline win quietly. These four cases show what that looks like in practice.
A payer buys 60 FTEs for steady claims processing. Volume varies by under a tenth monthly, so paid capacity closely matches work available and utilisation stays high.
A software firm compares two quotes at the same rate. One assumes 82% productive time and the other 74%, so the cheaper effective price is the one that looked identical.
A retailer buys FTEs for a workload that triples in the fourth quarter. It funds surplus capacity for nine months rather than metering the variable portion.
A logistics operator writes a fifteen-day backfill window with charges suspended beyond it. Vacancy duration halves, because the cost of a slow replacement now sits with the provider.
Related terms
Headcount-based buying uses several measures that are easy to confuse, particularly where one is a price and another a ratio. The entries below separate them.
- Full-time equivalent (FTE): the unit this model prices.
- Full-time employee (FTE): a person, as against the capacity unit.
- Full-time equivalent utilization: how much of the paid capacity is actually used.
- Staff utilization rate: the operational measure behind productive hours.
- Revenue per full-time employee: the buyer-side test of whether the capacity earns its cost.
- Headcount to revenue ratio: the planning measure that sets how many FTEs are needed.
- Labor cost: the largest component inside the rate.
FAQ
What does an FTE rate actually buy?
A person-month of dedicated capacity, including the provider’s overhead, supervision and margin. It does not buy a quantity of output or a service level.
Why do identical rates deliver different value?
Because productive hours differ. Leave policy, training load, occupancy assumptions and backfill speed all change what the same rate produces.
How does FTE pricing compare with seat pricing?
An FTE is a person; a seat is a staffed position for a shift. Continuous coverage needs about three FTEs per seat position plus relief.
What should the contract say about vacancies?
A backfill window with a stated number of days, and suspended or reduced charges beyond it. Without that clause, a slow replacement costs the buyer nothing to tolerate.
When is FTE pricing the wrong model?
When volume swings sharply or is genuinely unpredictable. Paid capacity that sits idle is the most expensive form of outsourcing there is.
Can FTE rates include a productivity commitment?
Yes, and they often should. Agreeing an annual output improvement per FTE keeps the model honest as processes mature.
Compare providers who will state their productive-hour assumptions in the Outsource Accelerator directory.
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