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Contracting Direct - why do it, why it’s difficult, and how to make a success of it.

Going direct to a client has often been seen as the “Holy Grail” by most seasoned IT contractors. There are a number of advantages to going direct, as well as some obstacles to be overcome, so let’s start by taking a look at some of the advantages cited by contractors who currently contract direct:

Rates.

Agencies will often take 15-20% of the gross payment made by the client, leaving the contractor with 80-85% of the money and often wondering what the agency does for its cut. Of course the agency does many things for its margin, and we’ll take a look at some of them later, but if you can live without their services then you can potentially negotiate and benefit to the tune of the extra 15-20% without increasing the client’s budget.

Contract negotiations.

Having a direct client relationship will mean you are responsible for all and any negotiations that arise, including rates, working conditions, payment terms and indeed the contract terms themselves. This can be a double-edged sword, and a situation that is not welcomed by all contractors, some of whom feel that negotiations are better conducted at arm’s length through an agent. Others, though, quote the lack of transparency when negotiating through an agency to be one of the main drawbacks. Contractors often wish to explore issues such as remote working, part-time working, fixed-price contracts, freedom to take on other part-time roles etc, and these issues can best be addressed directly with the client. In these cases the agency has no incentive to open negotiations with the client, and may even have a dis-incentive if you are looking to cut your hours.

Client ownership.

Agency contracts will nearly always have a “handcuff clause” or restrictive covenant in place which will prevent you from dealing direct with the client if the agency has made the initial introduction. These clauses will often survive the termination of the contract, often by 6 months to a year, and sometimes more. However when contracting direct you own the client relationship, so you are free to work for them again in the future, and as we all know, having repeat customers is one of the keys to achieving success in any business.

IR35.

Much has been said on IR35, which at its heart is an attempt by HMRC to crack down on “disguised employment”. What the experts have been stressing to contractors is that they need to be seen to operate a business with all the attendant risks and costs of a commercial business. The advice given is that every IT contractor should invest in their own limited company and associated marketing infrastructure, ie website, hardware and software, as well as associated business activities such as marketing & advertising. Any business that finds its own clients by its own efforts, demonstrates this key principle, so going direct and finding your own clients is an excellent de facto defence against IR35.

 

So, with all the above advantages, what’s stopping you going direct?

Basically there are 3 potential obstacles to going direct, which we will examine in turn.

Lack of opportunities.

One things agencies do very well, is canvass clients for potential contract work opportunities. This involves marketing their services, marketing their contractors, touching base with former clients and cold calling new prospects on a regular basis. Most contractors simply find this approach time consuming, intimidating, and frankly far too hit and miss. An agency doesn’t really care if they manage to secure a C++ contract in Nottingham or a SQL Developer contract in Manchester as they can work them both equally well, not the situation for most contractors who have a specific skillset and often specific location requirements. So whilst it makes sense for you to ring up known clients who may have a use for your skills, or to register on client websites who you believe may have a use for your skills, hitting the phones day in day out to secure work is not a viable prospect. It was this lack of visible opportunities that prompted the launch of the Contract Spy direct contract service for IT Contractors in 2016.

Clients have also traditionally shied away from using contractors direct, as they have been afraid of being found liable for tax and national insurance for contractors who have been assessed as being disguised employees by HMRC. Typically the employer has wanted to place an intermediary, such as agency, between themselves and the contractor, to minimise this risk. However this situation has been improving for the contractor, probably one of the best things to come about as a result of the IR35 regulations. IR35 has meant contractors have paid much more attention to the terms of their contracts, and have sought to ensure they operate businesses in their own right. If contractors put a well drafted contract in front of a client, which seeks to maximise the number of pointers to operating a genuine business, then this also minimises the risk to the client that the contractor will be found to be a disguised employee.

Lack of a robust contract.

When contractors have found a direct role, there remains the issue of drafting a contract suitable to define the relationship and protect them in any client disputes or IR35 investigation. Whilst some contractors have resorted to amending previous agency contracts or standard templates from the web, many will sign off on the contract that the employer puts in front of them, as the line of least resistance. Contract Spy has recently announced that it is looking to develop a direct contract template specifically for use by its members as part of their membership benefits.

Risk to payment.

Contractors are understandably worried that they might not get paid when they start any new contract, particularly if the client or the agency is a start-up. With credit checking of companies much more affordable these days, there really is no excuse for starting a contract where you don’t know if the client (or agency) is a bad risk. The second area of payment risk is getting paid on time, a problem for small businesses of any description. Contractors who go direct sometimes feel they also have to spend their time invoice chasing – pursuing their client’s purchasing or accounts department for payment – any many are understandably reluctant to risk appearing to be a nuisance when pursuing their right to timely payment. Issues are often experienced at the start of a contract, so its good advice to try and build up a cash cushion to tide you over the initial couple of months. It also makes sense to explore the invoice process required by your client even before you raise the first invoice, and if necessary make that all important contact with the person in accounts payable who will be responsible for pressing the button and getting your invoices paid!

 

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