Does contracting a Fractional CTO make fiscal sense

Comparing the costs of FTE and Fractional CTO

Mike Conley

12/18/20235 min read

a man sitting at a table with a laptop and a man standing in front of
a man sitting at a table with a laptop and a man standing in front of

With the recent hype around fractional roles, lots of Founders and CEOs have likely wondered if hiring a Fractional role makes sense financially. Specifically, I'll talk about a Fractional CTO. Does it make financial sense to contract with a Fractional CTO?

TLDR: If you are time-deprived as most Founders and CEO, the short story is it does. And it's no surprise that I would say this, since that is what I do. If you have time, keep reading and I'll explain why.

Before we get into the financial aspect, let's address a few other things that are equally, if not more, important. As the Chief Technology Officer, is an important role for a software companies.

Experience

A lot of startups and small companies end up naming engineer 1 (or close to 1) as CTO. While that is not necessarily bad, you end up with someone that doesn't have the breadth of knowledge most Fractional CTOs have.

This is one reason many Fractional CTOs offer services to mentor and coach existing leadership to make them more successful in their role. Fractional CTOs can offer a depth and breath of experience that current leaders likely lack and you can leverage them as a trusted advisor to support your current leaders. A fractional CTO can provide valuable guidance and coaching to the existing technology team, and help them improve their skills and performance. They can also help the business attract and retain top talent while fostering a culture of innovation and excellence.

Filling a gap

While a CTO is an important role for any software organization, many startups and small companies have avoided hiring one. One of the major drivers may be cost. CTOs are not cheap and committing to an FTE is often more than a startup or small company can afford. It's equally possible the workload in the early stages does not support the need for a full time CTO.

A Fractional CTO can offer the same or better quality of service as a full-time CTO at a fraction of the cost. They can also help optimize the technology budget and help reduce unnecessary expenses.

A Fractional CTO can be utilized for an individual project or as on as-needed service. Perhaps to implement some maturation activity or to evaluate the technology choices. A Fractional CTO can adapt to the company's needs for strategic leadership activities. As much, or as little, as the company requires.

Risk

There are a few types of risk hiring a Fractional CTO can help. The easy one is you are only committing agreed upon hours a Fractional CTO works for you. Most Fractional CTO contract give you the ability, with ample notice, to stop the contract.

A Fractional CTO brings a diverse and extensive set of skills and expertise to the table. These skills can help the business leverage the latest technologies and best practices. They can also help the business access a wider network of resources and partners. Thus, allowing a company to avoid some of the early pitfalls that an engineering department may stumble on.

Veloctity

Hiring a Fraction CTO usually is much faster than recruiting a capable FTE.

A fractional CTO can help the business scale quickly and efficiently, and support the growth and expansion of the business. They can also help the business avoid common pitfalls and risks that come with scaling.

A fractional CTO can adapt to the changing needs and goals of the business, and provide flexible and scalable solutions. They can also help the business cope with unexpected challenges and opportunities and realize faster time to implementation.

Cost

The elementary thing to say is x hours from a Fractional CTO is less than FTE CTO but lets try to quantify that a bit more.

I ran some numbers to get a better idea of the true cost differential. And of course there is not straightforward and easy answer to that. I've calculated these numbers by leaning to the conservative side.

Calculations for a FTE real costs CTO
Calculations for a FTE real costs CTO

As you can see from the image above, I conservatively used two different approaches to calculations to make a basis of what a FTE CTO costs per hour. I came up with $207 to $240 an hour. This is without calculating equity, which at the CTO level is very often part of the conversation. Also there are some places both by geography and vertical where that number can be many multiples of this.

For our sample, I'll use a number in-between. I'll use $225. There are 2080 hours in a year. Because the estimates took vacations and stuff into account, for an FTE, we can multiply 225 * 2080 to get $468,000.

Now let's take a hit at what a Fraction CTO makes. The numbers I see are anywhere from $200 to $500. Again, this can vary by geography and vertical. I know many Fractional CTO that go from $200 to $300 an hour. Remember, with a Fractional CTO, they have to pay ALL the taxes and benefits themselves. But for the sake of comparison, I'll use the $300 number (I'm not billing that much).

So looking at the two just by hourly, it seems the Fractional CTO is not a cost savings after all $300 is more than $225. However, that doesn't consider something incredibly important. You only use the Fractional CTO for a fraction of the time. Most fractions roles are lower than twenty hours a week. Let's see what a couple of different uses calculate out to.

Recall we are using $468,000 as the total cost of an FTE and $300 for Fractional FTE. I'll do the calculations based on all twelve months to keep it simple. And even though it's a forgone conclusion, you would not use a Fractional CTO for 40 hours a week, I'll calculate up to.

  • 5 hours a week for a year: $78,000

  • 10 hours a week for a year: $156,000

  • 15 hours a week for a year: $234,000

  • 20 hours a week for a year: $312,000

  • 25 hours a week for a year: $390,000

  • 30 hours a week for a year: $468,000

  • 35 hours a week for a year: $546.000

  • 40 hours a week for a year: $624,000

As you can see, at 30 hours a week for twelve months, at $300 an hour, is the breakeven point.
In reality, you most Fractional CTO would take some time off. Even without counting that, or equity, the thirty hours a week for a year would likely get you more value because of all the things I talked about above.

For long-term contracts, most of the Fractional CTO I've talked with get 20 hours a week.

For short-term focused things, most would get up to 30 a week.
Now, let's run those numbers with a little lower rate of $225 an hour.

  • 5 hours a week for a year: $58,500

  • 10 hours a week for a year: $117,000

  • 15 hours a week for a year: $175,500

  • 20 hours a week for a year: $243,000

  • 25 hours a week for a year: $292,500

  • 30 hours a week for a year: $351,000

  • 35 hours a week for a year: $409.500

  • 40 hours a week for a year: $468,000

This should look familiar, ass it is what the FTE numbers were. So if you hire a Fractional CTO for $225 and hour, not only is the money a wash, you get more for your money.

I didn't plan this, really. But I'm currently charging $225 an hour. And a little less for things like coaching.

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