Average contract rates have remained static over the past decade, thanks to increased competition and outsourcing, so here we explain why it is more important than ever to maximise your potential earnings as a contractor.
There are two aspects to consider when working out how much you can earn as a contractor – firstly, what are the factors which affect the supply and demand of contract skills, and secondly, what influence do you have as an individual on your contract rate?
Find out how much your IT skills are worth with our contract rate check tool.
Contract rates – factors affecting supply and demand
- Economic conditions – what is the state of the overall economy? Although the contracting market took a big hit following the credit crunch almost a decade ago, the demand for IT contractors recovered strongly, and remains positive, as many firms prefer to hire temporary workers rather than add new permanent workers to the payroll. As with the UK economy as a whole, the impact of Brexit remains the key unknown.
- Industry-specific legislation. For contractors, this means the IR35 ‘off-payroll’ reforms – which went live for public sector clients in April 2017. The biggest impact may be in April 2020, when the rules are expanded to cover the private sector. You can find out more about the IR35 reforms here.
- Demand for IT workers – the IT industry has grown massively in recent years. Tech Nation 2017 reports that there are over 1.6m digital jobs in the UK currently, with the sector growing 50% higher than the UK economy as a whole.
- Skillset – obviously, the more sought-after the skills you possess, the higher the average rate.
- Location – where a contract is located has a profound impact on rates. 80% of all contract work is based in the “South”, with the City, Greater London and the South East providing the most lucrative contract work (in that order).
- Experience – alongside your skills, what do you offer in terms of business or industry experience?
Achieving the best contract rate – individual factors
- Direct or not? – if you are working directly for an end-client, there are no ‘middle men’ to pay, so you can keep the gross contract fee, which would usually be subject to an agency margin and ‘other’ administrative expenses.
- Agency margin – most recruiters will charge between 10% and 20% of the gross contract rate (the rate paid by the client). Although this margin is flexible, you will have to use strong negotiating skills to get an agent to reduce their take.
- Personality – even in the contracting world, people do business with people. How you approach the subject of a rate increase from your current client is an important factor. Discretion and timing are important, as is a realistic understanding of your value to the client.
- ‘Upskilling’ – if you have upgraded your skills whilst on your current assignment, or between contracts, you should be able to command a higher rate.
- ‘Promotions’ – if you take on additional responsibilities (e.g. becoming a team leader), your pay should increase accordingly.
- Also remember that the business structure you contract under (limited or umbrella) will have a major impact on your net take-home pay.
From our experience at ITC, there are many intangible factors which affect the rate of pay you can expect to command as a contractor. Often, personal factors can have as much of a bearing on your rate as your skillset – if you make a good impression with the client, or have built up a healthy rapport and reputation on an existing project. Clients want to work with contractors they get on well with, after all.
If you’re contracting for the first time, our advice would be to keep your head down and learn as much as possible about being a contractor, without going overboard on the rate negotiation techniques the first time around. Negotiation skills don’t come naturally to everyone, but they do tend to strengthen with experience – and the confidence you build after you have successfully completed several contracts.
- Tax-efficient life cover - via your limited company. Save up to 50%
- Tide business bank account - £40 joining bonus! - find out more
- Need a new accountant? - compare 30+ specialist firms
- Switch between umbrella and limited - flexible solution from Nixon Williams for contractors affected by the Off-Payroll changes.