Hiring and Managing Contractors

Every founder and manager should be comfortable hiring contractors. It's a skill that can help you solve problems faster, stay flexible, save money, and bring in new ideas.

When to use contractors

You should probably use contractors over full-time hires if:

• You need flexibility. You are making a bet and need to hire for roles that might not be needed in a few months.
• You are hiring for low-skilled roles with high turnover.
• You need a specialist for a new project or hard problem. You need someone with a fresh perspective that has done similar work at other companies.
• You want to work with someone on a project before you hire them as a full-time employee.
• You have an important, ongoing role that doesn't require full-time. In situations like this you can work with fractional executives.
• You want to expand quickly without lowering your hiring bar for full-time employees.

But consider the downsides before you change your hiring strategy:

• Contractors will feel less ownership in your business and the outcomes.
• You will pay more per hour worked, especially when an agency or marketplace is also taking a cut.
• You are limited in what you can ask of a contractor. If you misclassify your contractors and treat them like employees you can risk fines and headaches.
• You will have less stability. You usually cannot expect contractors to be in the same role for a long period of time.
• Time is wasted in training and onboarding.

Companies should give managers a small budget to hire contractors without formal approval. This can unblock your teams and help them deliver on projects faster.

Freelancers, agencies, and productized services

Hire freelancers and independent contractors over agencies whenever possible. This can be challenging at first, but will save you money and give you more control over quality.

Use agencies when you are willing to pay a premium for convenience and speed. Or you have a project that needs to be completed by a specialized team. I've found that it's usually a mistake to bring in agencies for long, ongoing staff augmentation. It's a lazy and inefficent way to deploy your capital.

You can also consider productized services, which offer packaged solutions with clearly defined parameters, pricing, and deliverables. This can sound appealing but has issues in practice. If it’s a recurring service, you can end up paying for hours you don’t need. There can also be high variance in the quality of work from month to month as the actual people assigned to your projects can change regularly.

Sourcing independent contractors

When hiring for long-term contracts, source the same ways you would for a full-time role. Post jobs or do some form of outbound recruiting. It will require more work than using a freelancer platform and you will have less information on candidates, like ratings and reviews. But you will save a significant amount of money if the engagement lasts for months and it will be easuer to convert good people to full-time.

When hiring for short-term projects, use a freelancer platform. There are several advantages: you get reviews and ratings, there are safeguards if a contractor doesn’t deliver, and there is less administrative overhead. The downside is that you end up paying more per hour and it’s harder to convert good people to full-time roles.

Consider hiring internationally in locations that have at least a 50% overlap in working hours. You will often pay significantly less and find people that are highly motived to do good work. Personally I’ve had a lot of success hiring in Latin America (Argentina, Brazil, Colombia, etc) for a all sorts of roles (engineering, product, operations, recruiting, customer support).

Sourcing agencies

I've found that the only reliable way to hire agencies is through your network.

If you struggle to find recommendations through your network, try joining communities of operators with similar needs as yours and ask around.

Interviewing contractors

Evaluate independent contractors and freelancers using paid work samples. Give each candidate the same small, contained task. Make it very similar to the job they would be doing and assess them the same way you would assess them on the job.

Bias towards hiring fast and firing fast. You don't need to be as rigorous in your decision making as you do with full-time hires.

When evaluating agencies, go deep on some of their past projects. Reference check with at least one previous customer.

Contractor agreements

It's a good idea to have an independent contractor agreement in place for expectation setting, legal protection, and compliance with tax and labor laws. Without an agreement in place it can be challenging to manage the relationship.

A good independent contractor agreement clearly defines project scope, payment, ownership rights, termination conditions, confidentiality, competitive engagements, revisions, and indemnity to protect both parties' interests.

Avoid long-term commitments whenever possible. One of the major advantages of using contractors is the ability to be flexible, don't take away that advantage.

Be careful not to misclassify a contractor by treating them like a full-time employee. This can lead to expensive and time-consuming legal trouble and fines. Know your local laws and the laws in the country where are you are hiring.

I recommend having your lawyer draft a contractor agreement. If you don’t have easy access to a lawyer you can find templates that will address the most common and important concerns.

Managing contractors

Best practices for managing contractors are very similar to best practices for managing employees:

• Set really good expectations. Be clear about responsibilities, the outcomes you want, and how they will be evaluated.
• Regularly sample their work and give detailed feedback.
• Be direct and specific with your feedback. Don't avoid awkward conversations if you are unhappy with the work.

Treat contractors with the same level of respect as full-time employees. Have 1:1 interactions, care about their goals, and integrate them into the company's mission. This approach can lead to better performance and loyalty from contractors over the long run. It will also make it easier to convert your best contractors into employees if they are great.

Fire quickly. If a few weeks have passed, you’ve provided detailed feedback, and you are still unhappy with the work, it’s probably time to move on.

If you don't have the time or desire to manage contractors, you should use an agency. They will handle hiring and day-to-day management for you. Just be aware that you will be paying a premium and losing some control over quality.

Paying contractors

Pay hourly if the scope is unclear or you want to have a lot of control and oversight of the work being done.

Pay by project when you have well-defined scope with clear deliverables and you don't care exactly how the work gets done. If you are hiring for project work, you should be getting bids from at least 2 to 3 agencies/contractors.

For smaller projects, 50% upfront and 50% at the completion of the project is common. For larger projects I would try to negotiate 25% upfront, 2 milestones with 25% payments, and 25% at completion. Make sure you have milestones with very clear acceptance criteria before the project starts.

If you are hiring contractors through a platform it will handle most of the administrative headache of payments for you, but you will to pay a fee for the convenience. For example, Upwork takes 10% from freelancers and charges employers 5%.

If you are hiring outside of a platform like Upwork, you need to handle taxes, compliance, and other figuring out the best way to send payment. I recommend finding a service that can help with that.

If you are paying hourly and don’t have a strong relationship with the contractor, I recommend asking them to use a time tracking tool. You should regularly audit the timesheets and ask questions to show that you are paying attention.