The Cost of Vacancy: Definition, Formula, and Examples

Imagine you’re in charge of a manufacturing company, and your production line manager leaves for another job. According to the Society for Human Resource Management (SHRM), you’ll spend around 36 days and $4,000 filling the position.

While you’re sourcing, interviewing, negotiating, and onboarding candidates, you’ll also suffer decreases in productivity, efficiency, and employee morale.

These are among the costs that contribute to the cost of vacancy (COV), or the money you’ll spend while a position is vacant.

Understanding how to calculate the cost of vacancy can help you financially plan for the time it will take to fill your open position. In this article, we’ll explain the vacancy cost and how to calculate the cost of a vacancy for a particular position.

We’ll cover the specific expenses you must account for and offer some tips for saving money while you search for a new candidate to fill the vacant role.

What does “cost of vacancy” mean?

The cost of vacancy refers to the total expense of leaving a position unfilled. This may appear confusing on its face; it might be assumed a business saves money by not paying an employee to fill a position.

However, while having an open position means you can save on salary and benefits, you should also consider the cost of hiring someone new as well as any lost revenue in the interim. Your company may not make as much money when the position is vacant. You must also consider soft costs like lost productivity, decreased efficiency, and regulatory issues that could result in fines.

Some of these costs are unavoidable, but you can take steps to lessen the impact of the potential cost of vacancy. By understanding the cost of vacancy, you can plan ahead and budget for the time you expect the position to be open.

Factors contributing to the cost of vacancy

Some factors that contribute to cost of vacancy include:

• Lost productivity. If you have an open position, your team or organization may not complete as much work as before. This effect is often compounded in companies with high vacancy rates; as morale suffers, job performance can worsen.
• Lower customer satisfaction. You might not deliver on promises or meet customer expectations when you have an open role. This can decrease customer satisfaction and create additional problems to address, such as late deliveries or diminished quality of service.
• Overtime pay for existing employees. Team members may have to log overtime to complete job duties normally performed by the person in the vacant position, which is an additional cost to consider.
• Time spent hiring. Think about the time you and your HR team will spend reading applications and interviewing potential candidates. Once you have a candidate to fill the open position, you’ll need to onboard and train them. This is lost time you won’t have to spend on your regular responsibilities and company objectives.

How to calculate the cost of vacancy

Below, we’ll dig into the steps of determining the cost of vacancy.

Remember that these calculations don’t consider indirect costs like reduced team morale, increased workload for existing employees, and lost business opportunities. Each example is important in its own right and further strengthens the impact of a vacant position.

Steps for calculating cost of vacancy:

1. Determine the annual salary of the vacant position
2. Calculate the daily cost of the position
3. Estimate the number of days the position will remain vacant
4. Multiply the daily cost of the position by the number of days you expect the position to be vacant
5. Determine payroll and benefits savings from the vacant position
6. Calculate the overall cost of vacancy

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1. Determine the annual salary of the vacant position

To determine the annual salary of the vacant position, multiply the position’s gross pay before any tax deductions by the number of pay periods in the year. For example, if an average employee is paid $1,000 weekly before taxes, you’ll multiply that amount by 52 to calculate an annual salary of $52,000.

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2. Calculate the daily cost of the position

Typically, you can divide the annual salary by 260 (the approximate number of working days per year). Building on the above example, an employee who makes $52,000 annually would have a daily average number of $200.

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3. Estimate the number of days the position will remain vacant

You can base this on historical data or industry averages. For example, it takes an average of 72 days to fill a state government position in New Mexico. In contrast, the Honolulu city government learned from an outside consultant’s report that it takes six months to make offers to new employees.

How long it takes to fill a role will depend on many factors, including:

• The industry
• The role itself
• The company’s reputation
• The local economy
• Larger market forces

For the sake of this exercise, let’s use the number provided by the SHRM and assume it takes 36 days to fill your open position.

4. Multiply the daily cost of the position by the number of days you expect the position to be vacant

Let’s say it takes you 36 business days to fill a position for a salaried employee making $52,000 per year. Since the daily cost of the position is $200, the total number would be $7,200 ($200 per day times 36 days).

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5. Determine payroll and benefits savings from the vacant position

You can calculate employee cost by adding the employee’s salary and benefits together. According to the U.S. Bureau of Labor Statistics (BLS), benefits cost 31% of an employee’s annual salary.

Continuing with the above example, let’s say a worker making $52,000 annually costs $68,120 each year after you factor in benefits. This is a daily cost of $262 and a 36-day expense of $9,432.

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6. Calculate the overall cost of vacancy

Now that you’ve crunched all the numbers, you can determine the actual cost of vacancy. In our example, the company is saving nearly $10,000 on salary and benefits... but we haven’t yet considered lost revenue due to the vacant job.

This includes factors like overtime costs for existing employees and the cost of hiring and training. These are in addition to expenses that are harder to quantify, such as decreased office morale and lower customer satisfaction.

The average cost of hiring a new employee is around $4,000 but can vary by role. If you pay your existing employees overtime while searching for a new full-time worker, you’ll have to pay time and a half (or possibly more, depending on your local laws or specific contract details) once they exceed 40 hours in a single week.

Hiring freelancers or part-time workers to fill in can be a great option for many roles, but you’ll have to spend additional money on training, recruiting strategies, and administrative fees.

Although you’re saving over $9,000 on employee salary and benefits, you may find you spend just as much (if not more) to fill your open position. Let’s say you spend $6,000 combined on overtime for existing employees or freelancer fees to pick up the slack. Your cost of vacancy already puts you in the red at $568, and you haven’t accounted for any soft costs.

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Cost of vacancy calculation examples

Let’s look at some more examples of calculating the cost of vacancy. This should give you a better idea of how the cost of vacancy can vary between industries and how it can affect certain unfilled positions more than others.

Example No. 1

Imagine you’re leading a health care team with an open position for a registered nurse. The person in this position typically makes $75,000 annually, or $377.88 for each working day after you factor in benefits. You expect to fill this position in 60 days.

Annual salary ($75,000) / Number of working days in a year (260) = Daily average number ($288.46)

Daily cost ($288.46) x Vacant days (60) = Salary cost ($17,307.60)

Annual salary ($75,000) x Benefits cost (0.31 of annual salary) = $23,250

Annual salary ($75,000) + Benefits cost ($23,250) = Annual cost of employee ($98,250)

Annual cost of employee ($98,250) / annual working days (260) = Total daily cost of employee ($377.88)

Total daily cost of employee ($377.88) x Vacant days (60) = Total payroll and benefits savings ($22,672.80)

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You must now consider the COV for this position. You might hire a traveling nurse to fill this void, which could cost more than $3,000 per week. If it takes you 12 weeks, or 60 working days, to fill your position, you may spend $36,000 on a traveling nurse for that period ($3,000 per week times 12 weeks). This is an additional expense on top of what you’ll spend on hiring.

Cost of hiring ($4,000) + Traveling nurse pay ($36,000) - Payroll and benefits savings ($22,672.80) = Cost of vacancy ($17,327.20)

The potential impact is also obvious when considering soft costs. Other nurses may have increased responsibilities while the position is open. This can directly impact patient care quality.

Patients may leave negative reviews about the hospital if they feel they aren’t properly cared for during treatment. Overworked nurses may feel increased job strain or burnout as they work longer hours to compensate for the vacant role.

Example No. 2

Let’s say you’re overseeing a marketing department with a vacant position for a marketing manager. This individual typically generates leads and oversees various campaigns while making $100,000 annually.

Because of the unique leadership responsibilities associated with this role, you anticipate it will take 120 days to fill this position. This means you’ll save more than $46,000 on daily salary costs (and over $60,000 after you factor in benefits).

Annual salary ($100,000) / Number of working days in a year (260) = Daily average number ($384.62)

Daily cost ($384.62) x Vacant days (120) = Salary cost ($46,153.84)

Annual salary ($100,000) x Benefits cost (0.31 of annual salary) = $31,000

Annual salary ($100,000) + Benefits cost ($31,000) = Annual cost of employee ($131,000)

Annual cost of employee ($131,000) / Annual working days (260) = Total daily cost of employee ($503.85)

Total daily cost of employee ($503.85) x Vacant days (120) = Total payroll and benefits savings ($60,461.54)

You may feel the impact in different ways during those 120 days when the position is vacant. Your staff may have to take on that person’s normal responsibilities, which may cause them to miss project deadlines or produce work that doesn’t meet normal standards.

Clients may feel your team isn’t executing their campaigns as well as expected, and they can become frustrated. Negotiations with new clients may be impacted, directly impacting your company’s bottom line. The cost of vacancy can be especially high if you end up losing a client as a result of the vacant position.

Example No. 3

Perhaps the best way to see a tangible example of a cost of vacancy is to consider a sales position. Pretend you have a salary sales representative making $60,000 annually and bringing $500,000 in annual revenue to the organization.

If the position is vacant for 60 days, you’ll save around $230 each day or $20,769 total (not including benefits, which would raise the number to $27,290).

‍Annual salary ($60,000) / Number of working days in a year (260) = Daily average number ($230.77)

Daily cost ($230.77) x Vacant days (60) = Salary cost ($13,846.15)

Annual salary ($60,000) x Benefits cost (0.31 of annual salary) = $18,600

Annual salary ($60,000) + Benefits cost ($18,600) = Annual cost of employee ($78,600)

Annual cost of employee ($78,600) / Annual working days (260) = Total daily cost of employee ($302.31)

Total daily cost of employee ($302.31) x Vacant days (60) = Total payroll and benefits savings ($18,138.46)

However, you’d also lose the salesperson’s annual revenue of almost $500,000. It’s possible that other employees could bridge this gap, but it may come at the expense of maintaining relationships with their current clients or following up on new leads.

Assuming you average out the employee’s annual revenue for each working day, your COV would be $98,615.62. To get to this number, you subtract the total cost of the position (18,138.46, including benefits) from the lost revenue that your company didn’t bring in ($115,384.62).

Annual revenue ($500,000) / Working days (260) = Daily revenue ($1,923.07)

Daily revenue ($1,923.07) x Vacant days (60) = Total revenue lost ($115,384.62)

Revenue lost ($115,384.62) + Hiring costs ($4,000) - Payroll and benefits savings ($20,769) = Cost of vacancy ($98,615.62)

Strategies for reducing the cost of vacancy

Even if you can’t fully avoid the cost of vacancy, you can take steps to minimize its impact and improve your recruiting abilities.

The best way to mitigate the cost of vacancies is to prevent positions from opening. Focus on current employee retention and work to promote high levels of engagement and job satisfaction. Some workers may still leave for retirement or other opportunities, but you’ll find it happens less often than it would otherwise.

Here are some other strategies for reducing the cost of vacancy:

• Improve staffing processes. Are you pushing great candidates away from your company because of recruiting mistakes like poor interview questions and inefficient follow-up strategies? Identify shortcomings in your recruiting and hiring process to enhance your applicant pool, so you can choose from more talented individuals to fill your job vacancies.
• Fill more positions with direct hires. You can quickly trim recruiting costs using referrals and social media platforms like LinkedIn. It’s also worth taking a second look at your marketing tools to ensure they work for you in the best way possible. Upwork Full Time can be a great source for finding qualified candidates.
• Use freelance talent. Because independent contractors are hired for specific jobs and tasks, they can help you bridge the gap between full-time employees to ensure work is still completed on time. Upwork has a large network of freelance talent with a range of skills to satisfy all your company’s needs.
• Monitor recruiting metrics. Budgeting the time and money you’ll spend on each new hire is challenging when you don’t know where you currently stand. Keep track of the data and look for opportunities for marginal or incremental improvement. Measure what you spend in categories like hiring, training, and recruiting.

Minimize your cost of vacancy with Upwork

The cost of vacancy often includes lost time, energy, and financial resources (not to mention decreased morale and slowed momentum). However, understanding vacancy costs and taking steps to mitigate the effects helps you protect your organization’s bottom line and better allocate your time and money.

Take a look at Upwork’s large network of top talent if you’re ready to reduce your cost of vacancy by hiring freelancers or full-time employees. You’ll find plenty of qualified and talented workers to step in and meet your organization’s needs.