Employing individuals in less expensive nations to perform back-office or software development tasks is known as offshore staffing, and it has become more and more popular among businesses looking for flexibility and efficiency. Citing the most recent research and practical feedback, the Belitsoft software development company provides best practices for selecting an affordable offshore vendor.
According to Deloitte’s Global Outsourcing Survey, over 76% of companies currently outsource IT functions (such as coding, QA, and UX/UI) due to cost pressures. Offshoring is still primarily driven by cost savings and access to skilled talent, according to Gartner and industry analysts. For instance, according to Business Insider, one HR executive saved about 40% on labor costs by shifting a position to an offshore location, and U.S. companies can hire equivalent engineers for $75,000 abroad that would cost $300K domestically. These large savings have fueled explosive growth in offshore services: estimates show that the global BPO market may reach hundreds of billions by 2030.
However, the cost structure of offshore staffing is complex and multi-dimensional. In order to fully comprehend the economics, astute clients must look beyond the headline hourly rates used by offshore firms and agencies, which usually employ a range of pricing models and fee structures. Below we survey the common pricing models and key cost factors, and summarize what surveys and client reviews say about the advantages and drawbacks of each.
Common Offshore Pricing Models
A number of different contract and pricing models are used by offshore staffing companies, each with varying financial implications. Below, the most typical are described.
Dedicated Team or Fixed Monthly Fee (Cost-Plus)
The client pays a fixed monthly rate for each resource or team, usually covering the overhead of the vendor in addition to the employee’s salary. Belitsoft, an offshore staffing agency, calls this a “cost-plus” model, where the monthly payment includes the hired developers’ salaries (according to local market rates) and the vendor’s overhead (utilities, rent, insurance, etc.).
This model is predictable and transparent: clients “know what your monthly payment consists of and how the money is distributed”. It is often used for long-term dedicated teams. According to Belitsoft, in a Cost-Plus model, the vendor only receives a set fee above the direct costs of salaries and benefits, meaning the client essentially takes on these responsibilities (much like an internal team). A clear cost breakdown and the option to personally choose each team member are advantages; the need for close team supervision and the obligation to cover any absences or downtime are disadvantages.
Time & Materials (Hourly)
Clients only pay for the actual hours worked (typically at set hourly rates based on seniority or role) and any materials or resources used under this model. For projects that are agile or evolving, this is typical.
Belitsoft points out that because agreed rates are fixed, T&M provides great flexibility (“you pay only for the time spent”) and makes budgeting simple. The final costs, however, might exceed the original estimates if the scope grows or the requirements change. It requires clients to have good project oversight to avoid uncontrolled budget increases. T&M shifts risk of scope changes to the client, and vendors may resist providing full details of who is working on the project, unless the client insists on transparency.
Fixed-Price (Project Basis)
In this model, the scope, timeline, and budget are all agreed upfront. The vendor delivers a predefined deliverable for a fixed lump-sum fee. According to Belitsoft, comprehensive statements of work (SOW) that are agreed upon prior to the commencement of work serve as the foundation for fixed-price contracts. This suits small projects or well-defined work (e.g. an MVP) where requirements won’t change.
The key benefit is certainty: “You know for sure what budget and results to expect”. The vendor assumes responsibility for all development risks, including those related to technology, operations, and staffing. Fixed-price projects, however, provide very little flexibility because, once signed, any modifications or new requirements typically result in additional costs. According to Belitsoft, fixed-price contracts are less common for large or open-ended projects because they often demand a premium (e.g., +20%) to buffer uncertainty and necessitate significant upfront scoping efforts.
Hybrid Models
A lot of offshore projects combine different strategies.
For example, a “dedicated team” might start on a fixed-monthly model with milestone payments, or it might start on a fixed-fee pilot phase before switching to a T&M or dedicated team.
Fixed-price should be saved for small, clearly defined pilots; dedicated teams (effectively cost-plus) are best suited for long-term, growth-oriented projects.
A hybrid mix can strike a balance between cost certainty and flexibility.
Project-Based Fees or Retainers
Some agencies and marketplaces charge flat fees for each project or monthly retainer fees. Often this is a form of fixed-price. As an alternative, remote staffing marketplaces may charge a placement fee equal to a percentage of the salary or a subscription fee per seat (covering multiple hires).
In sum, offshore cost structures tend to fall into these categories: hourly (T&M), fixed-price projects, and ongoing team/seat leasing (cost-plus). Belitsoft points out that agencies might have tiered, percentage-based, or flat-fee pricing. It encourages customers to be upfront about all expenses (recruitment fees, onboarding, retention, etc.). In actuality, a vendor might quote $20-40 per hour for junior developers in India as opposed to $80-120 per hour for senior architects in Eastern Europe. They might also mark up local salaries by 20-40% in a cost-plus agreement. The precise numbers are largely determined by market demand, skill level, and location.
Key Cost Factors and Overhead
The total cost of offshore staffing is influenced by a variety of factors outside the contract model. In addition to the vendor’s fees, customers must factor in indirect costs.
According to RPO analysts and recruitment portals, costs differ depending on the kind and length of the engagement, the level of expertise needed, the location, and the range of services offered. Engaging a full-time offshore engineer for a long-term project requires distinct costs than a short-term consultant for a one-off task. Demanding specific skills (e.g. AI, blockchain) typically propels higher pay and agency fees. Likewise, labor costs differ greatly: a developer in Eastern Europe might cost 2-3× an equivalent in South Asia; a U.S.-based company may pay $15-25/hr for a mid-level Indian developer versus $45-60/hr for a Polish one. However, to make a sensible cost-effective decision, consider not only hour rates, but also pros and cons of different offshore locations.
Taxes and benefits can also affect the bottom line. Some nations, like Ukraine, do not charge VAT on IT services, while others charge 5-18% for software services. Payroll, benefits, office space, and legal compliance are frequently included in the fees charged by agencies. While no-frills pricing models might leave these up to the client, Connext cautions that higher-tier fee structures usually include “payroll, benefits management, and legal support.”
Another hidden cost is management and infrastructure. Analysts note that coordination and tools add up. Platforms for project management and communication, VPN/security, onboarding and training, and the productivity loss caused by time zone differences can raise base pay costs by 15% to 20% or more. For example, $100 to $200 for secure networks and $50 to $100 per developer per month for collaboration tools. New offshore teams frequently start out with an efficiency of about 60-70% and only increase to 85-95% after months of coordination. When figuring out their overall spending, clients should account for these indirect expenses (such as account management, overlap hours, and team-building travel).
Finally, legal and compliance overhead must be considered. Overseas hiring can entail contracts, IP protection measures, visas (if any), and exit costs. The complexity of the roles and the level of support (such as legal or HR support) can have a significant impact on fees. Furthermore, some agencies offer “Build-Operate-Transfer” (BOTT) models, which entail higher fees in order to eventually bring the team in-house. To put it briefly, the unit rate – whether it be hourly or monthly – is only one component of the budget. Risk buffers, agency fees, local payroll taxes, and technology overhead are all included in a well-planned budget. In order to manage the expanded workforce through a single vendor management office, astute businesses are now “orchestrating a multidimensional sourcing ecosystem,” combining offshore, onshore, insourcing, and even automation, as advised by Deloitte. This proves how important it is to understand the whole cost structure instead of just looking for the lowest price.
Best Practices for Cost-Effective Offshore Engagements
To optimize the cost-benefit of offshore staffing, research and experts suggest several best practices.
Research Location Characteristics, Not Just Rates
Cheaper hourly rates don’t always mean cheaper projects. Entrepreneur.com advises going “beyond [labor] costs” when choosing an offshore destination. Examine the region’s language proficiency, time zone overlap, cultural compatibility, and technical strengths. For example, Asia offers a vast number of reasonably priced engineers; Eastern Europe offers highly developed skills; and Latin America offers time zone overlap with the United States. In a flourishing market, a marginally higher rate could result in quicker delivery and cheaper rework expenses.
Vet Vendors Thoroughly
Check reviews and references. Independent client feedback is emphasized by G2 and Gartner Peer Insights as a crucial metric. Seek out suppliers with comparable project sizes and demonstrated experience in your sector. In order to compare multiple vendors on a short project and identify which ones deliver on time, with quality, and within budget, it is recommended that you run a small pilot or trial phase. Several firms on Clutch and GoodFirms mention that they chose a firm after seeing excellent pilot results (and could compare fixed bids).
Make All Fees and Payment Terms Clear
Make sure the contract makes all cost components clear. Will training, tooling, and software licenses be included in the fixed fee? Verify the percentage or flat fee and what it covers if you’re using cost-plus (for example, “overhead” may not be clear). Belitsoft advises being aware of the upfront costs associated with hiring, onboarding, and retention. Small things like mandatory setup fees or visa charges should be spelled out to prevent surprises.
Invest in Governance and Communication
Effective oversight reduces hidden costs. Deloitte’s research suggests expanding vendor management functions to govern the extended workforce. Use collaboration tools, schedule regular check-ins, and designate liaisons or project managers. By identifying problems early, this pays off even though it involves management costs. Entrepreneur.com underscores establishing “proper communication” especially at the start. Good communication avoids rework (a major cost sink) and builds trust.
Keep an Eye on Both Quality and Productivity
Don’t assume that low cost equals low output. To ensure that the output from the offshore team is worth the investment, metrics such as deliverable quality, bug rates, and velocity can be monitored. The labor arbitrage might be diminished if a remote team is producing noticeably less quickly. Overlapping work hours is one proactive tactic to improve real-time collaboration (each extra hour of overlap can increase productivity by 5-8%). To prevent turnover costs, it is also recommended to retain important offshore employees (through retention programs).
Establish Long-Term Relationships
When offshore teams function as extensions of the business, the best outcomes are frequently achieved. Treat them as long-term partners, not disposable vendors. Entrepreneur and Deloitte both mention that a strong, sustained partnership can lead to continual improvements and innovation. Such relationships can also lead to negotiated discounts or performance bonuses. Some clients on review sites commend vendors who “go above and beyond” and are “dedicated to client success” (suggesting they developed trust and commitment).
Organizations can optimize the cost-effectiveness of offshore staffing while minimizing pitfalls by adhering to these practices: matching the contract model to the project, investigating true costs, and actively managing the engagement. According to one consulting firm, hiring people from abroad is most profitable when businesses “have their outsourcing plans and processes in place,” understand the characteristics of their destination beyond price, select a provider that aligns with their needs, and keep lines of communication open at all times.
About the Author:
Dmitry Baraishuk is a partner and Chief Innovation Officer at a software development company Belitsoft (a Noventiq company). He has been leading a department specializing in custom software development for 20 years. The department has hundreds of successful projects in AI software development, healthcare and finance IT consulting, application modernization, cloud migration, data analytics implementation, and more for startups and enterprises in the US, UK, and Canada.
