Cost of Vacancy: Definition & How to Calculate it

Vacancies aren’t always planned. Where employee leave and hiring matters concern, vacant positions cannot always be foreseen. Potentially, any business could have a vacant position at any time. This could be because an employee earns a promotion, takes a job elsewhere, is terminated, or has other reasons. Despite no longer paying the employee’s salary, the vacant position they leave behind doesn’t necessarily mean the company is saving money. The cost of vacancy can affect the business—in terms of real dollars, team morale, customer experience, and more. 

In this post, we outline the true impact of a vacant position and its effect on other business areas. 

Vacant Position Meaning

A vacant position, also called a vacancy, is a position that currently has no one serving in it. 

It may be open because someone previously held the job left or the company newly created it. Vacancies may be left open on purpose, like if the company is under a hiring freeze. Alternatively, the vacancy may be undesirable and one the organization actively seeks to fill. 

What are the Cons of Open Positions at Your Company? 

Vacant position costs can vary depending on a variety of factors. Generally, they can be broken down into three primary categories, which we’ll cover here. 

1. The hard costs of a vacant position

When you have a job vacancy, the workload of the individual who left doesn’t go away. It must still be accounted for in some way. This can be done in a number of ways. Either by looking for temporary staffing services, using a contract employee, paying other employees overtime to help make up the work, or else letting the work go unfinished. 

There is also concern about employee turnover costs, which include the additional expenses to source, attract, and hire an employee to fill your vacant position. These costs include every aspect of hiring: marketing the role, onboarding, training, ramp-up time to full productivity, and business error rates resulting from a new hire. 

2. The soft costs of a vacant position

Lost productivity is the most obvious example of a soft vacancy cost, but many others exist. Additional vacant position costs that fall within this category include the negative impacts on employee morale, reduced quality of customer service, and harm to your company’s image or reputation in the eyes of customers and competitors from having a position sit open. 

3. Lost opportunities that result from a vacant position

Finally, we must consider the lost growth opportunities that come from not having a person in a particular role. When productivity is down, it affects your bottom line in several ways. 

Not only does it mean that you’re potentially paying extra money in overtime costs, but you’re also missing out on business and product development opportunities that you can’t take advantage of or explore with strained operations. This, in turn, thwarts your business’ growth and stifles its ability to scale.

What Does COV Stand For?

The cost of vacancy, or COV, is an important metric we can use to determine the actual business impact of open positions in the form of dollars and cents. COV considers not only business impacts like the cost of lost productivity but also the gap between the time talent is needed and the time it takes the recruiting team to supply it. 

How to Calculate Cost-of-Vacancy

The longer a position remains open, the more costly that job vacancy becomes. We can use a few widely accepted methods to evaluate the cost of a vacancy. For these examples, we’ll assume a hypothetical role with a salary of $60,000.

Simple salary multiplier

The simple salary multiplier calculates COV based on the position’s average daily value and the organization’s hiring time.

Here’s the formula:

Average daily value x average time to hire = cost of vacancy

Here’s a hypothetical example. 

Research has shown that an average employee’s organizational value is between one and three times their annual salary. Let’s take the middle ground and say that an employee with a $60,000 salary brings the organization $120,000 in value every year. 

If we divide their value by 260—the average number of working days per year—we get a value of $461.53 per workday. That’s how much we’re losing in value for every day the position sits open. If it’s vacant for 35 days, roughly how long it takes the average company to fill a position, that’s a total vacancy cost of $16,153. 

$461.53 x 35 = $16,153 

Lost revenue

This COV method works well for revenue-generating jobs like salespeople or loan officers. The principle here is that if there is a vacant job in a revenue-generating position, that revenue will be lost if no one is in that slot. 

The formula is as follows:

Average daily revenue x average time to hire = cost of vacancy

Based on metrics like historical data and sales targets, you can make an intelligent estimate of the average yearly revenue generated by any given position. Let’s say the average outside sales rep generates $150,000 in annual revenue for your company. If we divide this by those 260 working days in a year, that’s $596.92 per day or $20,192 total revenue lost for a 35-day vacancy. 

$596.92 x 35 = $20,192

This method can also be applied to non-sales roles by zooming out and looking at the average revenue generated by every employee. To get to this number, you’d divide your total profits for the year by your total number of employees. This gives you a ballpark of how your average worker translates in terms of revenue, which you can then use to calculate the lost revenue per day. 

Budget expenditure lost per employee

We have yet another way to look at vacancy costs if we examine departmental budgets. The principle of this method is that if you don’t have an employee on the job every day, they can’t produce the value reflected in the budget allocated to them. 

Here’s how it’s calculated:

Position budget value x average time to hire = cost of vacancy

To use this method, we first must find the average budget expenditure per employee. We can do this by taking a department’s annual budget and dividing it by the number of employees in the department. 

So, let’s say your marketing department has a total annual budget of $1 million and is staffed by eight people. If we divide $1 million by 8, we find that each employee has a budget value of $125,000 to the department. 

Once again, using 260 working days in a year, we can calculate that the lost budget value for every day an employee is not in a role is $480.76. If the role sits vacant for 35 days, that’s a total cost of $16,826.

$480.76 x 35 = $16,826

Using the various hypothetical examples we outlined above, we can see that our COV is anywhere from $460 to $600 per day—quite a hefty sum. 

Every additional day without a person in the role only multiplies the cost. 

How Time and Position Affects Costs of Vacancy

Thus far, we’ve been using a standard time to hire, typically between four and six weeks, depending on the industry. But some industries and roles take much longer to hire for, impacting your COV. According to Deloitte research, hiring skilled production workers can take 70 days and more than 90 days to recruit highly skilled workers like engineers, researchers, and scientists.

Knowing that a $50,000 position that sits open for a month can result in more than $20,000 in lost revenue is rough. Now, imagine how much more your business will cost to have a vacant scientist or engineering position with a salary surpassing $100,000 and a high contribution to the organization’s output. You’re talking about a significant amount of potential lost productivity and revenue.

In short, the more specialized or advanced the position, the more it costs you, on average, to leave that position vacant. 

Productivity cost considerations

Not all vacancies result in a total loss of productivity—if you hire a temp to tackle some of the work, for example, or split it among other employees. However, you’ll also need to consider the implications of these options. 

A temporary worker will typically have lower productivity than someone who’s been given time to train and onboard into a role fully. If a manager has to absorb some of the additional work, this means some of their time is taken away from higher-priority tasks, which also comes with a cost. Finally, consider the cost of any overtime pay if other regular employees are being tapped to tackle the additional workload.

Best Practices for Reducing Costs of Vacancy

1. Improve your hiring process

The most straightforward way to curtail the expense of open positions is to fill them more efficiently. You can do this by streamlining and accelerating your hiring process. 

Using a talent pipeline approach can speed up hiring by giving you an ever-growing, always-accessible pool of candidates to source from. Leveraging technology to automate manual steps in the hiring process can also shave days off your time to hire by simplifying time-consuming tasks like interview scheduling and screening. 

2. Use freelancers

The cost of a vacancy can be eliminated–or at least greatly reduced–by quickly fulfilling the operational duties with freelance labor. Freelancers possess specialized skills that allow them to get up and running quickly, ensuring your short-term needs are met while buying time to interview permanent candidates. 

When hiring a freelancer, you’ll need to balance the cost (which can sometimes equate to more per hour than a full-time employee) with the potential savings from not leaving the position open. 

3. Partner with a recruiting agency

To minimize vacancy costs as much as possible, some companies choose to work with a headhunter or a professional recruiting firm. A staffing agency can help businesses of any size meet their staffing needs with access to a pool of highly qualified, technically skilled workers. This greatly reduces the amount of time and effort hiring managers must expend finding and screening qualified applicants, thereby minimizing vacancy costs.

If you’re repeatedly hiring for the same type of job or need to fill multiple vacancies for the same role, consider using the niche expertise of a staffing agency that specializes in a certain industry or skill set.

Working with a staffing agency can reduce your time to hire, cost per hire, and other key recruiting metrics that impact the cost of recruiting. 

How a 4CR Can Reduce the Cost of a Vacancy

Reduce your vacancy costs by partnering with 4 Corner Resources, an award-winning staffing agency headquartered in Orlando, Florida. We cover almost all verticals and have access to top talent on a national scale. Our team provides a variety of direct-hire, contract-to-hire, remote staffing, and temporary staffing solutions. 

Whether you’re a small business looking to make strategic hires to help you grow or an enterprise-level organization needing to fill high-volume roles, we have a staffing solution to suit. In addition to filling the roles you have open today, we can help you build staffing strategies for tomorrow to optimize your hiring efficiency and costs continuously. 

With a long-term hiring strategy crafted hand in hand with an expert partner, your business can eliminate the needless expense of vacant positions and position itself for lasting recruitment success.