What's the best way to build a winning team for your small business? Resources are tight and the stakes are high for every hire. You need a process that can bring in the right talent quickly and effectively, while still leaving you room to respond to a fast-changing market.

Direct hires bring stability, but also come with the risk of a long-term commitment. Meanwhile contractors often make sense in the short term, but they may not stick around to help you execute your long-term plans.

A contract-to-hire approach represents an excellent compromise. In this article, we'll provide details about this team-building strategy, helping you evaluate if this is right for you.

What is contract to hire?

Think of it like a trial period (for both sides). You bring someone into your team on a short-term contract, but you have a longer-term plan in mind. As they begin their tenure with your organization, you have an eye on possibly making them a full-time staff member at the end of their contract term.

This process is different than a traditional hiring scenario. You don't take on the immediate commitment of making them a full-time employee. The contract period gives you more time to review the candidate and see how they fit within your organization.

However, a contract-to-hire strategy takes a longer-term outlook than a straight contracting arrangement. Both you and the candidate understand that there is a possibility of a full-time position. As a result, the relationship isn't treated as temporary.

Another distinction comes from the difference between a contract-to-hire situation versus a long-term contractor. Some contracting relationships last for years — the understanding is that the structure will remain the same into the foreseeable future. With the contract-to-hire arrangement, the role is conceived as including a transition to an employee eventually.

What types of roles are best-suited for a contract-to-hire approach?

As we’ll see, a contract-to-hire approach comes with a large number of benefits. However, it isn’t ideal for every position. Some roles in your organization will require a full-time staffer from the outset. Meanwhile, others will benefit from a shorter-term approach.

Let’s answer the question in general terms. Often contractors are used for technical roles, such as computer programmers. You can also use them in situations where you don't yet need full-time help — bookkeepers, marketing experts, or web design represent common positions that lend themselves to this strategy.

Contract-to-hire scenarios can help you ramp up these contributions as your small business grows. For instance, the part-time contractor you use to maintain your website can become full time as your company expands and your online presence becomes more elaborate. Once you need the full-time help, you can begin to make the transition.

Benefits of the contract-to-hire strategy

Before considering a contract-to-hire situation, it's important to understand the potential value for your small business or startup. Here are some of the key benefits you can expect:

There's less initial commitment

Even great employers make mistakes. As much due diligence as you put into the recruiting process, it's hard to know just how well a new employee will fit in your organization. Studies show that almost half (46%) of hires prove to be failures within the first year and a half.

Using a contract-to-hire approach lowers these risks. As we’ve noted, the process includes a trial period. You know whether the candidates are a good fit before you need to make the final commitment to make them a permanent staff member.

A contract-to-hire approach lowers these risks [of a hiring failure].

Both sides get comfortable with each other

The contract period also gives both sides of the arrangement a chance to build a relationship. Yes, you can see if the individual represents a good fit with your organization over a longer-term horizon. But there’s a key flip side to this factor: the contractors also get a taste of your corporate culture, letting them become accustomed to the organization.

The hiring process can be streamlined

The lowered risk of a contract-to-hire structure has follow-on benefits. Namely, it takes some of the pressure off the hiring process. You can make quicker decisions because you'll have an extended period to gather further information once the person begins their contracting stint.

You have room for additional flexibility

Another benefit of the reduced risk: you have the freedom to take fliers on unusual candidates. The contract-to-hire process limits your downside if things go south. As a result, you can become more flexible about your approach to filling the role.

You will likely see lower initial costs

Hiring a contractor gives you more financial flexibility. You might not need them for a full 40 hours week, meaning that you can save money on their salary. Also, a contractor usually doesn't have access to benefits, like health insurance or matching retirement contributions.

Once you bring your team member in as a full-time staffer, these added expenses will kick in. But using the contract-to-hire model gives you some leeway in the beginning. As a result, it represents an excellent choice for a growing business, looking to scale operations (and costs) over time.

Drawbacks of the contract-to-hire strategy

Of course, any business effort comes with its share of challenges. As you consider launching a contract-to-hire program, it’s important to keep possible pitfalls in mind. Here are a few drawbacks to this strategy:

Your contract worker could get poached by another employer

The contract period is a time of uncertainty for your new team member. As such, their loyalty to your organization might remain shaky until the full-time offer comes into view. They might continue to seek out other job offers or supplemental contract assignments, hedging against the possibility that a more permanent position doesn't happen.

Fewer candidates are open to contract-to-hire situations

Most job candidates are looking for full-time employment. A certain portion of your talent pool will be skeptical about starting off on a contract basis. As a result, you might not have the same range of choice you would if you were offering an immediate full-time position.

There's a chance you'll cycle through multiple contractors

Part of the upside of a contract-to-hire situation comes from the built-in trial period. However, this can contribute to one of the drawbacks as well. If you often decide not to move forward with a full-time position, you can end up on a contractor treadmill.

This can take a toll on your resources. Rather than a permanent fix to your staffing deficiency, you could cycle through a succession of contractors looking for the right one. This means spending time and money on recruitment, onboarding, and training each time you bring on a new candidate.

Contract-to-hire tips

As we have seen, the contract-to-hire model can produce significant upside, but these benefits come with potential challenges. A well-designed framework allows you to maximize the value of the program, while sidestepping some of the biggest pitfalls. With that in mind, here are some tips that will help you get the most out of this strategy:

Create a system

Before reaching out to your first potential contract-to-hire candidates, think deeply about the process. Your chances of success will increase if you build a strong support structure. As part of this, determine your goals and devise a process that will help you achieve them.

Establish a transparent timeline

From the beginning, clearly map out how you expect the role to change over time. This includes your expectations, as well as dates when a transition to full-time employment could take place.

The details could change as the situation evolves. However, an unambiguous outline will form a framework for a successful partnership. At the same time, you'll avoid any confusion and minimize the chances for hurt feelings.

Set clear performance metrics

A well-defined timeline should be paired with explicit performance metrics. This is especially important when discussing the switch from contractor status to staff employee. To maintain a strong relationship, you should minimize any chance of confusion on this front.

What will it take your contractor to be eligible for the full-time transition? How will you define success for the role? Establishing transparent KPIs will keep the project on track and ensure that everyone's on the same page.

Understand your legal obligations

A contract-to-hire arrangement comes with specific legal requirements. It's important to pay attention to the fine print. Dive into the details and make sure you understand the implications for each team member.

Develop a robust communication process

Getting the most out of this approach requires strong communication. This includes a healthy two-way dialog with your contractors. It also means maintaining a feedback process among managers, HR, and other relevant parts of your organization.

Track progress and make any necessary changes

Even with a well-designed contract-to-hire plan, you'll likely run into some unforeseen hurdles. Meanwhile, conditions could change over time. As such, put in place a long-term process of review and upgrade.

Should you consider a contract-to-hire model for your small business?

Running a startup or small business requires flexibility. You need as many options as possible as you build your team, letting you maximize resources and minimize risk. A contract-to-hire approach adds another choice as you search for talent.

When a direct hire or a contractor isn't right, contract-to-hire provides an alternative that may work. Use the information provided here to determine if your small business or startup should go in this direction.