Ask most finance directors how many contractors work for their organisation, and they'll give you a rough number. Ask where that number came from, and you'll often hear: "HR" or "Procurement" or "the agency management system."
And that number is almost certainly wrong.
Research consistently shows that organisations underestimate their external workforce by two to three times. That's a huge blind spot with real consequences for cost control, compliance, and governance.
This article explores where hidden workers hide, why the visibility gap matters, and what you can do about it.
The 2-3x Problem: Where the Numbers Come From
"When we dig deeper, we often find contingent workforce spend is two to three times what companies think," notes workforce management research from Page Outsourcing. This finding aligns with what we see repeatedly: organisations that believe they have 150 contractors often discover they're actually engaging 300 to 500 external workers.
Why such a significant gap?
The answer lies in how organisations track their workforce. Most tracking systems capture only part of the picture:
HR systems typically track employees and perhaps some directly engaged contractors - but not workers coming through service agreements.
Procurement systems track supplier spend - but often can't distinguish between genuine service delivery and what's effectively labour supply.
Agency management systems track workers through staffing agencies - but miss direct engagements and purchased services.
Line manager spreadsheets often contain the truth - but that truth lives on C-drives, not in enterprise systems.
The result? Multiple incomplete views that don't add up to a complete picture.
Where Hidden Workers Hide
Understanding where hidden headcount accumulates is the first step toward gaining visibility. Based on our research and conversations with finance, HR, and procurement leaders, hidden workers typically emerge from four channels:
1. Purchased Services
This is the largest blind spot. When a consultancy provides "design services" or an IT firm delivers "technical support," the engagement sits in procurement budgets as services spend. But look closer: is the supplier delivering defined outcomes with their own methodology? Or are they supplying individuals who work alongside your teams, managed day-to-day by your people?
The latter is effectively labour supply - but it's invisible to HR, uncounted in headcount figures, and often outside worker classification assessment processes.
2. Direct Procurement
Headcount freezes drive workarounds. When hiring is restricted but delivery pressure remains, budget holders find alternative routes. A marketing manager engages a freelance designer directly. An engineering lead brings in a specialist through their network. A project manager extends a consultant "just for another three months."
These arrangements often bypass standard procurement channels entirely. They're funded from project budgets, not visible in central systems, and unknown to anyone except the individual who arranged them.
3. Supply Chain Labour
Your tier-one suppliers may themselves be using contingent labour to deliver your contracts. When a facilities management company staffs your buildings or a professional services firm delivers your project, some of their workers may effectively be working for you - on your premises, under your direction, representing your brand.
This creates risk you may not have visibility of, let alone control over.
4. The Extension Trap
A genuine three-month project becomes six months, then twelve, then twenty-four. The original contingent need becomes permanent dependency, but the worker remains classified as temporary. Over time, organisations accumulate hundreds of long-tenure "temporary" workers - each one a potential misclassification risk, each one invisible in workforce planning.
Why the Visibility Gap Matters
Some leaders may shrug at the visibility problem. "So we have more contractors than we thought - what's the real impact?"
The impact is substantial, across multiple dimensions:
Cost Control
Consider this real scenario from a recent audit: a contractor costing £190,000 per year, doing work that could be performed by a £60,000 employee. Multiply that gap across an unknown number of hidden workers, and you have significant, unmanaged cost leakage.
Without visibility, you can't benchmark. Without benchmarking, you can't negotiate. Without negotiation, you overpay. It is simply poor business management and planning.
Compliance Exposure
Worker classification rules apply regardless of whether you know about a worker. Tax authorities don't accept "we didn't know they existed" as a defence. Every hidden worker is a potential compliance exposure you can't assess, can't govern, and can't defend.
Recent settlements demonstrate the scale: Natural Resources Wales paid £14.6 million following an investigation into contractor arrangements. The root cause wasn't deliberate non-compliance - it was inadequate processes and visibility.
Security Risk
If you can't see workers, you can't offboard them. Research shows 48% of organisations know that former employees still have access to corporate networks. The number is likely higher for contractors, who often fall outside standard HR processes.
Physical access, system credentials, data permissions - all require visibility to manage. Hidden workers create hidden security gaps. Can you system link engagement ends to appropriately stopping system access?
Governance and Board Reporting
Try answering these board questions without complete visibility:
- "What's our total workforce cost, including contingent?"
- "What's our worker classification exposure?"
- "Are we confident in our compliance position?"
- Where can we reduce external workforce costs?
If you can't quantify your external workforce, you can't report on it accurately. You can't manage what you can't see - and you can't govern what you can't manage.
Getting to the Real Number
Gaining visibility requires acknowledging that no single system holds the complete picture. You need to triangulate across multiple sources:
Start with spend data. Procurement systems may not identify individual workers, but they show where money flows to suppliers who might be providing labour.
Audit services agreements. Review your top services suppliers. How are they delivering? Are they providing outcomes, or effectively supplying people?
Survey budget holders. Ask managers directly: who's working for you that isn't in HR systems? The answers often surprise.
Check physical access. Security badge data reveals who's actually on your premises—a useful cross-reference against official records.
Review IT access. Who has system credentials? How many are linked to known employees versus unknown entities?
Make progressive improvement in visibility, moving from "we don't know" to "we know roughly" to "we know precisely as quickly as possible.
Key Takeaways
- Organisations typically underestimate their external workforce by 2-3x
- Hidden workers accumulate through purchased services, direct procurement, supply chains, and extensions
- The visibility gap creates real risk: cost leakage, compliance exposure, security gaps, and governance blind spots
- No single system captures the complete picture - triangulation across multiple sources is essential
- Progressive visibility improvement is the foundation for control
What This Means for Your Organisation
The hidden headcount problem isn't about catching people out or auditing past decisions. It's about building the visibility foundation that enables proper governance going forward.
You can't control what you can't see. You can't govern what you can't count. And you can't confidently answer board questions about risk if you don't know the true size and shape of your workforce.
If you'd like to understand your contractor risk exposure, CoComply can help surface hidden headcount and assess compliance risk across your entire external workforce - including the workers you didn't know you had.