The Contractor Lifestyle: Does it Live Up to the Billing?

Posted by John Yerou

on March 31st, 2015 17:46pm in Contracting Matters Blog.
Last Updated on March 28th, 2019 05:05am.

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Rich IT contractorFrom outside the world of contracting looking in, the rates contractors charge seem steep. Imagine someone thinking about self-employment, wondering where to pitch their service. It’s possible that seeing those hourly rates would give them an inferiority complex.

Or that same contractor may have entered the market already, accepting a lower rate of pay. They may well wonder what it will take to earn the big bucks they see their peers pocketing.

But what if that same dude took their first contract at the top rate? Earning so much compared to their permie peers from the off can still lead to self doubt. Are they good enough to live up to their billing and deliver value to match the pay cheque?

Well, that’s what we’re going to question, here. Can you cut it in a world of big earnings, volatile markets and uncertain continuity of (self)employment?

How to be a contractor: thick skin essential

Self-employed contractors demand and command self-belief. They tell themselves that they can not only deliver, but do it better than anyone.

Whether the latter is true is open to conjecture. But that’s not the issue, here. Any type of self-employment can seem daunting for those who’ve worked for the man all their life.

For sole traders, they set up shop and provide goods or a service for an indefinite period. Freelancers are similar, hopping from short-term contract to short-term contract.

It’s not the same for contractors. They have set contracts, no guarantee of extensions and the responsibility of running a business. As such, there has to be a hat full of indisputable reasons why they should even bother.

The underlying factor that turns most people to contracting is earning potential. Combine that with the undeniable independence the lifestyle brings and the road to self-esteem has solid foundations.

So, let’s look at all the pros and cons of being a contractor and whether you’ve got the cojones to cut it.

How much do contractors earn? Really?

When companies need a hand to overcome a barrier that’s beyond their remit, wise CEOs ask for help. They realise that although the fix may be permanent, setting it up needn’t be.

Employing a contractor on a 3-, 6- or 12-month contract makes sense. The company doesn’t have to create a permanent employee record or associated administration. They have no commitment beyond the contract term.

As such, they’re willing to pay more than a permie’s going rate for that role. As the contractor, your depth of expertise and the nature of the project will determine how much more.

To make it worth their while, a contractor will charge a minimum of 50% more than a permie. That’s because their role isn’t bound by the 9-5.

Yes, those may be the hours they put in for the client. But there’s their own business aspect to consider, as well as the fees their accountant will charge.

If there’s no extension guarantee, they’re also on permanent lookout for their next contract. On top of all this uninvoicable time, they’ve got to market their business, too.

As a contractor, you must buckle yourself in for barren months, so setting aside a contingency fund is a must. This is especially true if you have secured bills like a mortgage or second charge loan to maintain.

Lenders will have forwarded you those funds based on your annualised contract figure. You can’t afford to jeopardise your status, for either your own livelihood’s sake or your credit rating.

Choosing a skill set; is yours suitable for contracting?

You may be a superb admin or PA. You could be the greatest Santa that ever there was. You are the salesman who could sell matches to the Devil himself. The problem is, those roles tend to be permanent or seasonal.

There’s nothing wrong with possessing that acumen, by any means. But as stand alone attributes, they’re perhaps not suited to contracting.

Successful would be contractors monitor agencies and the types of jobs they advertise. Opportunities that are a good match for their skill(s) should appear on a consistent basis to make them viable.

If not, do you have a fallback position? Are you prepared to undertake temporary work while you wait for your chosen role to present itself?

There’s a reason lenders ask for a CV when contractors apply for a mortgage or other credit. They want to see that the applicant has a history in the trade they’ve gone solo in. That means you must have:

  • done your homework about your trade;
  • checked the long term prognosis of the market
  • considered a fall back position should your market become saturated or skill undesirable.

When you set your annualised contract, it must be a realistic figure based on your potential earnings. Yes, you might get a mortgage based on your contract. But the hard part is maintaining the payments, even in the face of adverse market conditions.

Can I convince a client/agency I’m right for their task?

Identifying your niche and confirming that it’s stable is one thing. Getting into it is another. True, there are some sectors crying out for skilled, short-term labour.

Companies still fight over IT contractors. In Scotland, Oil and Gas is a lucrative sector for those willing to forego long-term security for high pay.

But not all sectors are so labour-starved. In many instances, you’ll have to prove yourself at interview. If you’re working on short contracts, you’ll meet many potential clients over the course of the year.

There’s a key difference between what employers want from a permie and a contractor. A permanent employee will need to prove they can work well as part of a team. Their outlook must align with the culture of the company.

Whilst that’s not an undesirable trait in a contractor, it’s almost never top priority on your client’s list. Put yourself in their shoes, for a second.

The client has a problem? Good. Be the solution

There’s a good chance the staff will know that you’re earning a damn site more than they are. But, your client has a problem that none of their current staff can fix.

That’s what’s getting your foot in the door. And it justifies your rate. But that won’t always stop the snide remarks from the permies on staff, jealous of what you’re earning.

In an ideal world (for them), the client wants you only until you’ve solved their problem. And sometimes to offer support (where your contract allows) to enable their staff to monitor the job they brought you in to do.

It can be ruthless. In interview, you’ve got to prove that you understand the problem and can provide a solution in x amount of time. That’s where your self-belief will play a crucial role. If the client thinks you’re out of your depth when they talk to you, you won’t even get a “we’ll let you know”.

That you’re a good team player? That you’re committed to this trade for the rest of your working life? They’re not as important as proving to the client in interview that you’re the best contractor for their situation.

I am a name, not a number

There are times when you might not meet the client beforehand. Your agency could win the contract for you based on your portfolio, history or even reputation.

If you think dealing with one-off clients leaves you feeling like a piece of meat, you ain’t seen nothin’, yet. Not only are you a solution to the client’s problem, but you’re solving the agency’s staffing problem, too.

They’ve positioned themselves as a supplier of bespoke trades people. The agency business is cut-throat; they are matchmakers taking a cut and clients know that. As such, they have to do whatever it takes to uphold their reputation. One eye off the ball and there’s another agency in their place.

For your part, you’re a number. You’re a CV that matches a job posting. The skills you tag on your online profile matches the client’s desired skill set. The agent’s computational algorithm matches the two and they take a cut for the privilege.

You have to be hard nosed about it. They’ve got a job to do. The client’s got a vacancy to fill. You’re on their books as a potential candidate.

If the client’s pay-range gives them a cut and pays your salary, that’s your next three-to-six months booked.

Yes, there are times when you cannot take a contract for good reason. But you don’t want to make a habit of it. The more work you turn away that’s a good match for your skills, the less prominence they’ll put on your profile for future jobs.

Is anything about contracting painless?

As alluded above, unless you work through an umbrella, you don’t just clock on and off and consider your day done. Limited company contractors have the small matter of running their business, too.

Through an agency or umbrella, accounts – or payslips – are a tad different. But unless you’re new to the game, the limited company route is by far the more lucrative option.

The greatest responsibility therein is the accounting element. It can be the most testing and damaging aspect of your business to your livelihood if you don’t get it right.

On one hand, you don’t want your earnings to raise the suspicions of the tax man. In the same breath, you want to retain as much of your income as the law permits.

To stay between those pencil-slim tram lines, you need up-to-date knowledge of the UK tax system. And, of course, to keep on top of any changes; UK tax law is not a static animal. On top of staying ahead of the curve in your own industry, understanding the full scope of taxation is asking an awful lot of anyone.

As a contractor, you have two options (assuming you’re not a tax whizz yourself):

  • employ an accountant and let them do the heavy lifting;
  • work through an umbrella company, especially if you’re testing the contractor lifestyle.

If you’re uncertain, an umbrella company will do almost everything for you. They’ll help you set up your company, work out your taxes, pay you on a weekly basis. All you need to do is submit your timesheet. There is, of course, a fee for this service, which also impacts your take-home pay.

But of the two, setting up a limited company and employing a contractor-savvy accountant will benefit you most. Your accountant will even give you advice on how you can help them to help you.

In such a hostile environment, that offer of assistance can make all the difference. Does it sound over-dramatic? For someone considering contracting, it might. But this overview only relates the harsh reality of going it alone.

Summing Up

Contractors do earn more money than their permie counterparts. But, boy, do they work for it?! Ask any of them whether they’d change any of it, though? They so wouldn’t.

Contracting is a great way of life; it can make you a stronger person and a lot more secure in the long term. The money is there for those who want it, but understand this: you’ve got to have the balls for the challenge. Once that penny drops, the world is yours for the taking.


Author: John Yerou

John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.

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