The brand-new contractor transitioning from full-time employment automatically faces a dilemma from day one: setting rates that are not so high as to chase clients away but not so low that the contractor does not earn what he or she is truly worth. Matters are complicated when contractors work with agencies that make their money by taking a cut from a contract already negotiated with a paying client.
For the purposes of this post, we will be discussing contract rates and work skills relating to contractors who find work through employment agencies. If you are a contractor who operates completely independent of an agency or umbrella company, different guidelines apply.
The Importance of Getting It Right
Setting contract rates is a balancing act without a lot of room for error. It is important that the new contractor gets it right as early as possible in his or her contracting career in order to maximise opportunities.
If rates are set too low, the new contractor will most likely miss out on higher incomes while their agents pocket the difference. Rates that are too low also make the contractor appear to be less skilled than he or she is, and it may impact interviews among clients who might assume the contractor is overqualified.
If rates are set too high, the contractor runs the risk of chasing away clients who expected a higher level of skill. The contractor may get fewer interviews as well, especially if prices are significantly higher than the industry norm.
How to Determine the Right Rates
Unfortunately, there is no black and white chart that sets rates for contractors. Contractors have to figure this out on their own. Here's a good place to start: the contractor can ask him/herself how much he/she would make if he/she continued working as a salaried employee. The contractor should take into account salary and all the benefits that make up a total compensation package.
A total compensation package worth £50,000 for a contractor qualifying under the single person tax code would work out to about £30 per hour outside of IR35. Inside of IR35, the contractor would need to charge about £38 per hour. Remember, this is just a starting point.
Contractors can also search online to find the average going rate for certain kinds of skills. Going one step further, the contractor should be asking experienced peers how much they charge for the same kind of work. The person who employs this strategy will soon discover that contract rates are commensurate with work skills. Clients will pay a fair price for the skills they need as long as the contractor truly has those skills.
In closing, contractors always have to be aware that agencies do not necessarily work on a fixed margin. Agency representatives try to negotiate rates as low as possible in order to improve profit margins. The contractor's job is to get rates high enough to be paid what he or she is truly worth without chasing away clients at the same time.