Outsourcing vs. Hiring: When to Use Contractors, Co-Manufacturers, and Overseas Production

You need more production capacity, but you don't have to hire a full-time employee. This guide compares five scaling strategies—in-house hiring, part-time contractors, overseas outsourcing, co-manufacturers, and hybrid models—with the economics of each. Choose the model that fits your business.

Five Paths to Scaling Production

When you hit capacity limits, you have five main options. Each has different economics, control tradeoffs, quality implications, and timeline. The right choice depends on your product, margins, timeline, and risk tolerance.

Option 1: Hire Full-Time Employee (Traditional)

Model: W-2 employee, on payroll, in your studio

Cost: $18–$25/hr wages + 10–15% taxes/insurance + benefits + workspace = $40,000–$65,000/year

Control: Very high—you set hours, process, and standards

Quality: Highest—direct training and feedback loops

Timeline: 4–12 weeks to competence

Risk: Payroll commitment, turnover, training investment

Option 2: Part-Time Contractor (1099)

Model: 1099 independent contractor, flexible hours, in your studio

Cost: $18–$30/hr (higher than W-2), no benefits, no taxes = $15,000–$30,000/year for 15–20 hrs/week

Control: Medium—less control over hours and process, but still direct

Quality: Good—still get feedback loops, but less commitment from them

Timeline: 4–8 weeks to competence

Risk: Higher turnover, less commitment, inconsistent availability

Option 3: Local Co-Manufacturer (Contract Production)

Model: Local manufacturer makes products per your specifications

Cost: Per-unit cost (typically $5–$50/unit depending on complexity), minimum order 50–200 units

Control: Low—you specify design, they execute, you inspect

Quality: Variable—depends on co-manufacturer's standards, requires strong QC

Timeline: 2–4 weeks lead time, no training needed

Risk: Quality consistency, minimum orders, no relationship with production team

Option 4: Overseas Manufacturing (China, Vietnam, etc.)

Model: Factory in Asia makes products, ships in bulk to you

Cost: Per-unit cost (typically $0.50–$10/unit), minimum orders 500–5,000 units, setup fee $2,000–$10,000

Control: Very low—you specify, they produce, you get what you get

Quality: Highly variable—requires extensive QC, prototyping, and supplier vetting

Timeline: 8–12 weeks lead time, significant upfront work

Risk: Very high—inventory risk, quality issues, communication barriers, ethical concerns

Option 5: Hybrid Model (Combination)

Model: You do some steps, contractor/co-manufacturer does others

Cost: Varies, usually 30–50% less than full outsourcing

Control: Medium-high—you control critical steps, outsource routine ones

Quality: Good—you maintain quality on critical processes

Timeline: 3–6 weeks depending on which steps are outsourced

Risk: Coordination complexity, but more flexible than pure outsourcing

The Economics: Real Cost Comparison

Let's compare the actual cost per unit for each scaling option on a typical handmade business doing $100,000/year.

Scenario: Soap Maker, Currently Doing $100K/Year

Product cost per unit: $8 (materials). Selling price: $25/unit. Margin: $17/unit. Currently making 4,000 units/year solo.

Scaling Option	Annual Cost	Cost Per Unit	Units Needed	Break-Even Revenue
Full-Time Employee	$50,000	$12.50	4,000	$100,000
Part-Time Contractor (15 hrs/wk)	$18,000	$4.50	4,000	$100,000
Local Co-Manufacturer	$0	$15 per unit	4,000	$100,000
Overseas Manufacturing	$5,000 setup	$5 per unit	4,000 (min 1,000/order)	$100,000
Hybrid (You do final assembly)	$20,000	$10 per unit	4,000	$100,000

Key insight: Lowest cost per unit is overseas manufacturing ($5), but it requires 1,000+ minimum orders and $5,000 upfront. Part-time contractor ($4.50/unit) is more flexible. Full-time employee ($12.50/unit) is viable if they handle 40% more production.

How to Choose: Decision Framework

Use these questions to decide which scaling path is best for your situation:

Question 1: How Standardized Is Your Product?

Highly Standardized (same product every time, no customization): Can outsource or use overseas manufacturing. Quality is easier to control.

Customized/Variable (custom orders, variations, personalization): Need in-house or local contractor who can communicate and adjust. Overseas manufacturing is risky.

Question 2: What's Your Production Volume Target?

Growing gradually (4,000 → 6,000 units/year): Part-time contractor or hybrid. Flexibility is critical.

Explosive growth (4,000 → 20,000 units/year): Full-time employee initially, then consider outsourcing. Scaling up and down with contractors is hard.

Question 3: What's Your Gross Margin?

Low margin (under 40% COGS): You need the lowest cost per unit. Overseas manufacturing may be necessary.

High margin (60%+ COGS): You can afford quality control and prefer control. In-house or local co-manufacturer.

Question 4: How Critical Is Quality/Customization?

Critical (your brand is built on quality, handmade feel, customization): Hire in-house. Keep control.

Standard (product quality matters but isn't your unique value): Can use contractors or co-manufacturers.

Question 5: Do You Have Time to Manage Outsourcing?

Yes (you enjoy operations, vendor management, QC): Outsourcing works. You'll manage contractors, suppliers, and quality.

No (you just want to make, not manage): Hire in-house. It's simpler—one person, one relationship, direct feedback.

Quick Decision Tree

• Under 10,000 units/year: Hire part-time or full-time employee

• 10,000–50,000 units/year: Hybrid (in-house + contractor) or local co-manufacturer

• 50,000+ units/year: Overseas manufacturing becomes cost-effective if standardized product

• Highly customized/small batches: Always hire in-house or local contractor

Part-Time Contractors: The Flexible Middle Ground

For many makers, part-time contractors (1099) are the sweet spot: more flexible than employees, cheaper, and you can scale up or down as demand changes.

Pros of Part-Time Contractors

Flexible scaling: You can adjust hours week to week

Lower payroll tax burden (they handle their own taxes)

No benefits or training investment obligation

Can hire multiple people for different tasks

Cons of Part-Time Contractors

Higher turnover: They're juggling multiple income sources, may quit anytime

Less commitment: They won't go the extra mile like an employee would

Inconsistent quality: Without long-term relationship, harder to train and develop

IRS compliance: Misclassifying employees as contractors carries penalties

IRS Rules for 1099 Contractors

To legally classify someone as a 1099 contractor (not an employee), they must meet these tests:

• Control: You don't control HOW they do the work (you specify the result, not the method)
• Independence: They can work for other clients (not exclusive)
• Investment: They provide their own tools or equipment (or at least some)
• Flexibility: They control their own hours (you say when it's due, not when to work)

Common mistake: Paying someone $18/hr to work 20 hrs/week in your studio with your tools is probably a misclassified employee. Get the classification right to avoid IRS penalties.

Local Co-Manufacturers: Outsourcing Close to Home

For makers with standardized products, a local co-manufacturer handles production, freeing you for sales and marketing. The tradeoff: higher per-unit cost but zero labor management.

Finding Local Co-Manufacturers

Industry Groups & Directories

Search "[your craft] manufacturers [your region]" or check industry associations. Example: "Woodworking co-manufacturers in Portland" or "Candle makers available for contract production."

Local Chambers of Commerce

Chamber directories often list manufacturers. Can also ask members for referrals.

Business Networks

LinkedIn, local maker networks, craft associations. Ask: "Who manufactures [your product type] for brands?"

The Co-Manufacturer Relationship

A successful co-manufacturer arrangement requires:

Clear Specifications

Detailed drawings, photos, material lists, quality standards. Any ambiguity will result in products you don't want.

Quality Control Agreement

What happens if quality doesn't meet standards? Rework? Refund? Define upfront.

Minimum Orders & Lead Time

Negotiate minimum per order, lead time expectations, and payment terms. Usually 50% upfront, 50% on delivery.

Sample Approval

Always get a production sample approved before full production runs. Quality can vary between prototype and production.

Overseas Manufacturing: The Complex Option

Overseas manufacturing (China, Vietnam, India, etc.) offers the lowest per-unit cost—but brings complexity, risk, and typically isn't viable until you're ready for 1,000+ unit minimum orders.

When Overseas Manufacturing Makes Sense

Product is highly standardized (no customization)

You're targeting 10,000+ units/year (breaks even on setup)

Margins are tight and you need 50%+ cost reduction

You have cash to invest in inventory and risk tolerance for lead time

The Hidden Costs of Overseas Manufacturing

Setup & Prototyping: $2,000–$10,000

Factory creates first prototype, molds, tooling. This cost is sunk before production starts.

Inventory Risk: $5,000–$50,000

You must buy minimum 500–5,000 units per run. If they don't sell, you're stuck with inventory.

Quality Control: $1,000–$5,000

You need a QC person (hire locally or use a third-party inspector) to catch defects before shipping.

Shipping: $500–$2,000 per order

Ocean freight is cheap per unit but comes in 40-foot containers. Factor in 8–10 week lead time.

Supplier Management & Communication

Time zone differences, language barriers, cultural misunderstandings. Budget 5–10 hours/week managing the factory.

Realistic timeline: 6 months from "let's try overseas manufacturing" to first successful order. Expect 1–2 failed shipments along the way.

Hybrid Models: The Best of Both Worlds

Many successful makers don't pick just ONE scaling strategy—they combine multiple. This gives control, flexibility, and lower risk.

Hybrid Model Examples

Model A: Core + Overflow

You do core production (the handmade/unique part). Hire part-time contractor for packaging, shipping, admin work.

Result: You stay hands-on with quality, but free 10 hours/week for growth.

Model B: Bulk Outsource, Premium In-House

Co-manufacturer makes base product in bulk. You do final finishing, customization, packaging, and quality check.

Result: Handmade feel, lower production labor cost, faster turnaround.

Model C: Tiered Outsourcing

Overseas manufacturer handles 60% of production. Local contractor handles 30% for rush orders. You do premium/custom (10%).

Result: Cost savings, flexibility, and a mix of handmade premium and standardized products.

Scale Smart—Choose the Right Model for Your Business

TrueCraft helps you track per-unit costs across different scaling models, so you can make the economics work for your business.

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