How healthy is the contracting market in 2024, and what challenges lie ahead?

2024 is shaping up to be an interesting year. With global conflicts, an upcoming UK general election and the US presidential election later in the year, there is a lot of uncertainty in the air. How is the contracting market faring at the moment?

In this article, Nicholas Hopkins, Director and Head of Contract at Birmingham IT recruitment agency, VIQU, shares his thoughts on the state of the contracting market, and what challenges lie ahead for the remainder of 2024.

Thankfully, inflation is down and the UK is no longer in a recession; but interest rates remain high which will prevent access to funding for many companies looking to grow. Therefore, I don’t anticipate significant growth in Q3 and Q4 of 2024 in the IT contracting market.

Consequently, contractors need to buckle in and make smart decisions regarding the contracts they take on and how they operate for the rest of 2024.

Forecast for demand in the IT sector

At VIQU, we were very confident about contractor growth in Q1 of 2024 and we saw this come to fruition. However, that growth seems to have plateaued in Q2, and we’re forecasting a similar flat performance in Q3.

With requirement-to-offer time increasing by a drastic 140% compared to the average in 2022, it’s clear that end-clients are spending longer assessing and pondering over suitable contractor candidates.

Yael Selfin, chief economist at KPMG UK, said:

Despite the better near-term outlook, the improvement in GDP growth looks likely to be constrained by the ongoing weakness in productivity growth as well as reduced scope to increase employment levels.

Overall, we have seen a reduction in change and transformation projects amongst our client base. In the past, we would have clients divulging their 18 month project roadmaps and upcoming workforce requirements to us. Now, they are more coy about revealing their plans, and when they do it’s normally for only 3-6 months in the future.

For most, this is because they don’t know what sort of long-term budget they will be allocated, so they aren’t taking on big change and transformation projections where not absolutely necessary.

Contractors are fortunate in that this attitude can only last for so long, meaning there are plenty of companies that put off projects during the pandemic that they are now actioning. However, I wouldn’t say there is the hunger for starting new change and transformation projects that we saw before 2020.

Therefore, we are seeing less demand and more time between contracts for generalist contractors, such as project managers, programme managers and business analysts.

Where we are seeing heightened demand is in the green tech, managed service providers, defence and housing markets.

In particular, we’ve seen an increase in demand for contractors with security cleared back grounds (or willing to undergo a check).

With global uncertainty, countries are investing in their defence budgets and the supporting technologies.

Additionally, contractors with skills and experience in data, artificial intelligence and machine learning are likely to find it very easy to secure a contract in 2024, as companies continue to explore and adopt new technologies, creating efficiencies and effectiveness.

Being aware of cash-flow and aging debt

Cashflow and debt collection have become tougher than ever for businesses. I forecast it’s only going to get worse in 2024 as an increasing number of businesses sadly go into administration.

When you consider where some contractors sit in the supply chain, being reliant on the party above who are then reliant on payment from their customer in order to pay contractors, it shows how risky this type of cashflow reliance is, especially for hard working contractors.

Unfortunately, I’ve seen it before where contractors are hit with a bad debt, meaning they’ll never get paid due to the client or recruitment agency going into administration. This can have a detrimental effect on an individual and their family.

Therefore, contractors need to do all they can to ensure they don’t end up in the same position. From doing their due diligence around a company’s financial position (through Companies House), insuring debts and ensuring 28 day payment terms are in place, to checking (and potentially renegotiating) out of ‘pay when paid’ clauses and understanding client invoice processes, there are key steps a contractor can take.

And if all of that fails, contractors need to know when and how to escalate the issue in order to get paid and stay afloat in 2024!

Positive trends in IR35

Regardless of the upcoming election outcome, it’s unlikely that there will be any alterations to the off-payroll working regulations.

While this may not be the desired news for many contractors, it’s worth noting that businesses have been adapting to these regulations since their introduction to the private sector over three years ago. They are increasingly understanding how to engage contractors outside IR35 in a compliant manner.

More companies are becoming educated regarding providing accurate status determinations, to really allow them to individually assess each contract, so instead of the blanket inside IR35 approach, they can offer and benefit from off-payroll opportunities. 6 months after the changes, under 20% of our contractors were Off-Payroll, now that number is 55%.

Some are realising that offering outside IR35 opportunities means they don’t have to pay as much in some cases, so there is a slow but clear increase in outside IR35 opportunities coming up. This is positive news for contractors, especially given we haven’t seen any real changes in day rates recently.

CEST

With lots of dissatisfaction over CEST’s reliability from contractors, clients and recruiters, this lack of confidence needs to be addressed by HMRC. We know HMRC hasn’t invested further in the tool since 2007. I anticipate HMRC to look at an improvement to CEST.

Umbrella reforms causing concern

With new government reforms to handle umbrella company non-compliance due to be announced later this year, there is a worry that recruitment agencies might face the brunt of the reforms, with the introduction of third party debt transfers.

For now, all we know is that change is coming and that all parties should know where they stand in terms of regulations by the end of the year.

Whatever size or shape the reform comes in, new regulations should give contractors peace of mind that there won’t be another ‘Loan Scandal’ issue, so no nasty letters from HMRC 10 years from now demanding hundreds of thousands in tax, penalties and interest.

Looking ahead, I don’t expect the rest of 2024 to be a smooth ride for IT contractors.

However, those that operate smartly, ensuring their skillsets are up to date and reflect the changing market demand have nothing to fear, and can expect greener days ahead.