Cost Estimates, Worked Examples and Selection Checklists
Three-year total cost of payroll and HR software: a worked TCO for a Canadian employer
Build a three-year total cost of ownership for payroll and HR software, with renewals, switching costs and internal time, worked for two options.
A three-year total cost of ownership (TCO) for payroll and HR software adds four things: the subscription for each year (with headcount growth and renewal increases), the one-time costs of switching (setup, data migration, training, parallel runs), the internal time your staff spend running payroll and the HR tasks the software affects, and any year-end or add-on fees. Comparing only subscription prices often picks the wrong option: in the worked example below, the option with the higher subscription costs about $4,260 less over three years because it saves manager time on scheduling.
This guide is part of the payroll software selection checklist. The employer is an invented composite and every price is illustrative.
Why three years
Three years is long enough to include a renewal or two and the one-time switching cost spread over a realistic life, and short enough that headcount and pricing assumptions are still plausible. Many payroll and HR contracts run one to three years, and the switching cost (setup, migration, learning) is usually paid only once, so a one-year comparison overstates the cost of switching and a five-year one relies on guesses.
The cost lines
| Cost line | One-time or recurring | How to estimate |
|---|---|---|
| Subscription (PEPM × employees + base fee) | Recurring | Price page or quote × your headcount by year |
| Modules and add-ons | Recurring | Only the ones you will use |
| Renewal increase | Recurring, from year 2 | Contract cap, or a buffer (for example 5% a year) |
| FX movement (USD plans) | Recurring | Buffer; see GST/HST and USD pricing |
| Setup or implementation fee | One-time | Vendor quote |
| Data migration (employee data, YTD balances, history) | One-time | Internal hours × loaded cost, or vendor fee |
| Training | One-time, plus new staff | Hours × loaded cost |
| Parallel run(s) | One-time | Extra time for one or two runs |
| Internal payroll time | Recurring | Hours per run × runs × loaded cost |
| Related HR time (scheduling, time-off, onboarding) | Recurring | Only where the software changes it |
| Year-end, off-cycle and amendment fees | Recurring | Vendor fee schedule |
| Exit cost (data export, archive access) | One-time, at end | Contract terms |
Sales tax is left out of the comparison and added at the end: GST/HST is usually recoverable as an input tax credit; PST is not.
Worked example: 25-person Ontario retailer
The same employer as Profile 2 in the cost per employee examples: 25 hourly employees, biweekly pay (26 runs), growing to 28 in year 3. Loaded cost of the office manager who runs payroll: $40 an hour. Store managers' loaded cost: $30 an hour. Assumed renewal increase: 5% in year 2 and again in year 3.
Option A: payroll plus HR tier at $10 per employee plus $45 base ($295 a month); schedules stay in a spreadsheet. Option B: all-in-one with time and scheduling at $18 per employee, no base fee ($450 a month).
Subscriptions
| Year | Option A | Option B |
|---|---|---|
| 1 | $295 × 12 = $3,540.00 | $450 × 12 = $5,400.00 |
| 2 | $3,540 × 1.05 = $3,717.00 | $5,400 × 1.05 = $5,670.00 |
| 3 (28 staff) | (28 × $10 + $45) × 12 × 1.05² = $3,900 × 1.1025 = $4,299.75 | (28 × $18) × 12 × 1.1025 = $6,048 × 1.1025 = $6,667.92 |
| 3-year subscription | $11,556.75 | $17,737.92 |
One-time costs
| Item | Option A | Option B |
|---|---|---|
| Vendor setup fee | $500 | $1,000 |
| Data migration (20 hours × $40) | $800 | $800 |
| Training | $400 | $800 |
| Parallel pay run | $300 | $300 |
| Total one-time | $2,000 | $2,900 |
Internal time (yearly, then × 3)
| Item | Option A | Option B |
|---|---|---|
| Payroll per run | 1.5 h × 26 × $40 = $1,560 | 0.75 h × 26 × $40 = $780 (hours imported from time clock) |
| Scheduling by store managers | 3 h/week × 50 × $30 = $4,500 | 1 h/week × 50 × $30 = $1,500 |
| Three years | ($1,560 + $4,500) × 3 = $18,180 | ($780 + $1,500) × 3 = $6,840 |
Three-year TCO
| Option A | Option B | |
|---|---|---|
| Subscriptions | $11,556.75 | $17,737.92 |
| One-time | $2,000.00 | $2,900.00 |
| Internal time | $18,180.00 | $6,840.00 |
| Total | $31,736.75 | $27,477.92 |
| Software and one-time only | $13,556.75 | $20,637.92 |
On software cost alone, Option A is about $7,080 cheaper. Including time, Option B is about $4,260 cheaper. The result depends almost entirely on the scheduling-time assumption: if managers would save only 1 hour a week instead of 2, Option B's advantage shrinks by $1,500 a year ($4,500 over three years) and the two options are roughly level. Test the assumption before you sign, for example by timing schedule building for a month.
Stress tests worth running
| What if | Effect on the comparison |
|---|---|
| Renewal increase is 10% a year, not 5% | Hurts the option with the larger subscription more (Option B) |
| Plan is billed in USD and CAD weakens 5% | Adds about 5% to that option's subscription |
| Headcount reaches 35 by year 3 | Per-employee pricing grows for both; base fees matter less |
| One payroll error causes a penalty and correction | Favours the option with fewer manual steps |
| You leave after 18 months | One-time costs weigh more; check early termination terms |
Use the renewal, FX and tax-inclusive calculator for the uplift and FX lines, and the monthly cost estimator for each year's subscription.
Common TCO mistakes
- Treating internal time as free. It is the largest line for many small employers.
- Counting time savings you cannot name. Only include savings tied to a specific task that will change.
- Forgetting year 2 and 3 increases, especially after a first-year discount.
- Leaving out migration of year-to-date balances when switching mid-year; see switching payroll providers mid-year.
- Ignoring exit costs: archive access or data export fees at the end of the contract.
When the switch is from spreadsheets rather than another system, the manual payroll payback guide is the better frame.
FAQ
Should I discount future costs?
For small amounts over three years, discounting changes little and adds complexity. For large enterprise contracts, a finance team may prefer a net present value; the ranking of options rarely changes.
What loaded hourly cost should I use?
Use wages plus employer CPP and EI, vacation pay, benefits and a share of overhead, or simply wages plus 20–30% as a rough illustrative rule. Use the same rate for every option.
Should the TCO include sales tax?
Compare options before tax, then add tax to the chosen option's budget. GST/HST is usually recoverable for registrants; PST and non-recoverable QST situations should be included as a cost.
How do I value fewer payroll errors?
Count only errors you actually had (corrections, amended slips, penalties) and the time they took. Avoid adding speculative risk values that would decide the outcome on their own.
Sources
- Canada Revenue Agency — payroll obligations, input tax credits
- Government of Ontario — Employment Standards Act, including scheduling-related rules and public holiday pay
- Bank of Canada — exchange rates for USD-priced plans
- Statistics Canada — wage data to sense-check loaded hourly costs
