From outside the world of contracting looking in, rates contractors charge may seem steep. Especially those in IT and Oil and Gas.
But there are good reasons for those rates, which may yet get even higher after IR35 reform.
The question is, is contracting right for you? Can you cut it in a world of reduced job security and high income?Clients like the flexibility and expertise contractors add to their business. They perceive value in the service, despite (or because of) the higher rates.
Self-employed contractors like the freedom the lifestyle brings as well as the income. But they do have to work hard for it.
If you’re new to or are considering contracting, this guide will help. It should help you decide whether contracting’s for you or not.
What if that same contractor has entered the market already direct? Not knowing the going rate for their service, they’ve accepted too low a contract rate.
What will it take, they wonder, to earn the big bucks they see their peers pocketing?
Or say that same contractor struck lucky and took their first contract at the top rate?
Earning much more than their permie peers from the off could still lead to self doubt. Are they skilled enough to live up to their billing? Can they deliver their perceived value in line with the pay cheque?
We’re going to consider the scenarios for new contractors, here. Can you cut it in a world of top earnings, volatile markets and uncertain contract continuity?
Self-employed contractors demand and command self-belief. They tell themselves that they can not only deliver, but do it better than anyone else.
Whether the latter is true is open to debate. But that’s not the issue. Any self-employed role can seem daunting for those who’ve worked PAYE 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:
As such, there has to be a hat full of indisputable reasons why they should even bother.
Combine both and the road to self esteem and an assured future has solid foundations.
Let’s look at all the pros and cons of being a contractor and see if you’ve the cojones to cut it.
Growing companies often need help to overcome a barrier that’s beyond their remit. It’s a temporary problem, so taking on an employee is not the best solution.
Wise CEOs and HR managers 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 an employee’s going rate for that temp 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 at least 50% more than a permie. One reason is because their role isn’t limited to time spent on site.
Yes, contractors will work the hours the client determines on site. But they’ve their own business aspect to consider, too. That includes incurring fees from their accountant and any expenses.
If there’s no extension guarantee, they’re also on permanent lookout for their next contract. On top of all this uninvoicable time, they should market their ‘business’, too.
Large blank spaces on your CV will not look good when you want finance. Nor when you approach a new agency or client.
Charging enough to facilitate a contingency fund is most imperative, though.
Will your rate cover gaps in contracts? It must if you have secured finance like mortgages or second charge loans.
Your mortgage provider will have issued those funds based on your annualised contract figure. You can’t afford to jeopardise that status by having no Plan B.
Your livelihood and credit rating could suffer by not charging enough for your service. If you contract through an agency, be sure to outline your lowest earning threshold.
Even when you’re in work, keep your CV up to date. Keep your eye on upcoming agency and recruitment jobs and contracts.
And network like a business would on LinkedIn, Facebook and forums. Keep those irons in the fire and doors open, even when you’re in work.
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, some such roles tend to be permanent or seasonal.
There’s nothing wrong with possessing that acumen. But as stand alone attributes, they’re perhaps not suited to contracting.
Successful contractors monitor agencies and the types of jobs they advertise. Opportunities that match their skill(s) should appear regularly to make contracting viable.
If not, do you have a fallback position? Would you undertake temporary work while waiting 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 their chosen industry. That means you must have:
Your annualised contract rate 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.
All this prep will be for nothing if you don’t land the client. The role and the expectation of the client might not be what you’re used to.
Preparing yourself for both agency and client is essential. Here are a few examples of how the role of contractor and employee differ.
Identifying your niche and confirming that it’s stable is one thing. Getting into it is another.
Some sectors are crying out for skilled, short-term labour. Companies still fight over IT contractors.
In Scotland, Oil and Gas is the lucrative sector. For those willing to forego long-term security, high earnings potential is ever present.
But not all sectors are so labour-starved. In many instances, you’ll have to prove yourself at interview. Working short contracts, you’ll meet many potential clients during the year.
There are key differences between what employers want from a permie and from 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. They will often have to multitask.
These are desirable traits in a contractor, too. But they’re rarely top priority on your client’s list. You have a specific part to play and you need to be aware of its intricacies.
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 them can fix.
That’s the key difference and is what’s getting your foot in the door. And it justifies your rate.
But that won’t always stop snide remarks from permies on the staff. In their eyes, you’re earning more for doing a similar role and they’re jealous.
In the client’s ideal world, they want to pay you only until you’ve solved their problem. But often, if your contract allows, they’ll need you to offer support, too.
This is to enable their staff to maintain the job they brought you in to do once you’ve gone. You may even have to train someone in the skill you’ve honed over the years. That bit can be tougher than you think.
You have to prepare yourself to take ownership, then hand over. You can’t be aloof. But you can’t show propriety, either.
In interview, you’ve got to prove you understand the nature of the contract and other traits. You must demonstrate that you understand:
That’s where your self-belief (not arrogance) plays an immense role in getting the gig. If the client thinks you’re out of your depth, you may not even get a “we’ll let you know”.
Those traits aren’t as important to the client as they would be to an employer. In interview, just prove that you’re the best contractor for their situation.
There are times when you might not meet the client beforehand. Your agency could win the contract based on your portfolio, history or even reputation.
Think dealing with one-off clients is leaving you feeling like a piece of meat? You ain’t seen nothin’, yet.
Yes, you’re the solution to the client’s disposable problem. But you’re also solving the agency’s staffing vacancy.
They’ve positioned themselves as a supplier of bespoke trades people. The agency business is cut-throat. They are matchmakers taking a cut and both contractor and client 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.
The skills you tag on your online profile should match a client’s desired skill set.
The agency’s computational algorithm does its thing. It matches the two of you, then they take a cut for that privilege.
You have to be hard nosed about it:
If you say yes, that’s often it: your next three-to-six-12 months booked!
There will be times when you can’t take a contract for good reason. But don’t make a habit of it.
Agencies have reputations to uphold, but so do you. The more suitable work you turn away, the less prominence they’ll put on your profile for future jobs.
As alluded earlier, 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.
That includes staying abreast of your industry and keeping skills relevant. No one pays for your training, unless you want to invite IR35. And, no, you don’t.
Contracting through an agency or umbrella, accounts—or payslips—work more like PAYE. It is an easier option. But unless you’re new to the game, the limited company route is by far the more lucrative option.
The greatest responsibility of running a Limited Company 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 income to make HMRC suspicious. In the same breath, you want to retain as much of your income as the law permits.
To achieve that balance, 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.
Have you got time for that as well as 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):
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. And if your annual income is less than £35k, going the umbrella route is your best option.
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.
Contractors do earn more money than their permie counterparts. But, boy, do they work for it?!
Ask any of them whether they’d change a thing, 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 guts for the challenge. Once that penny drops, your destiny is in your own hands.
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.