Need to secure a top rate as an IT contractor to ease the high cost-of-living? Here’s how

With the bulk of public and private sector limited companies facing potentially large uplifts in their post-IR35 reform tax bills, due to corporation tax and dividends both heading in the wrong direction, it is more important than ever to double down in your efforts to get more money out of end users, writes Matt Collingwood, boss of IT recruitment agency VIQU.

Still historically high inflation is kicking PSCs when they’re (already feeling) down

With inflation at a hefty 9.2% (according to ONS data for February), if you’ve not negotiated a rate increase recently as an IT contractor, you could be as much as 22.2% worse off than this time last year.

Compounding the situation, the IT contractor’s preferred vehicle – the Personal Service Company (PSC) -- is grappling with corporation tax increasing from 19% to a new maximum of 25%, effective since Saturday, in addition to dividends being more taxing from tomorrow. No doubt your accountant has upped their fees; a 45 year-high in food prices makes your lunchtime snack more bitter than sweet, and fuel costs to get to client sites aren’t feeling frozen.

Let’s take a step back

Usually, when goods or services are produced, all parties will adjust their prices accordingly when it costs them more to deliver. Higher prices feed higher prices through the supply chain, eventually onto the end-buyer; your client in the contracting situation.

As a contractor, you sit in this supply chain. Ask yourself; why should you be burdened with these inflated costs, when others in the supply chain are adjusting theirs upwards? Everyone is demanding more, why shouldn’t you?!

In my almost three decades’ experience running a successful contractor staffing biz, there are three core pillars to building a successful enterprise – increase turnover, increase profitability, cut or control costs. Let’s look at how these three pillars can prop up and then propel your PSC.

First and foremost, consider the costs coming into your business

Charge clients more

My first suggestion is the most obvious – charge your clients more.

You can do this by negotiating your day rate upwards. So, how do you negotiate a higher day rate successfully? Consider doing the following:

1. Make the first move in the negotiation.
2. Use a concrete number instead of a range.
3. Harness the power of silence to impact the recruitment agent or client’s decision-making and negotiation abilities.
4. Always be friendly – you’re more likely to get the result you want if you’re reasonable and nice while staying professional.
5. The best-negotiated contracts allow both sides to win (or at least feel like it).

Fly your flag

The next core step is to show your value. I always say the best contractors are those that ‘fly their flag.’ Remember, your client only really sees the end-result -- they don’t realise all of the background work and extra tasks you’ve completed off your own back to get to the right end point. They’re not mind-readers. So, think about where you’ve added value and highlight this to them.

I’d recommend doing this highlighting (aka flag-flying) through a weekly round-up email. I’m not saying to document every hour of your working day – but use the opportunity to flag up what you’ve done and the impact it had.

This will only have a positive effect when it comes to you renegotiating your day rate. So stick with it if it’s initially ignored.

Increase revenue streams

Many contractors add additional revenue streams by taking on multiple clients.

However, I’d highly discourage you from making the mistake of taking on multiple full time contracts when the client is expecting you to be directly providing the services.

Be honest if you have a team, or sub-contract. You wouldn’t believe the number of individuals I’ve come across who thought they could get away with juggling multiple full-time contracts without telling the client (during and post-covid). You will get caught out. And your reputation will suffer greatly.

Instead, if you have a main assignment, add additional revenue streams by taking on weekend or out-of-hours work. You could also consider retaining multiple clients for a nominal monthly fee for ad-hoc support or for being on-call. Be proactive and these recurring revenue streams could quickly build up.

I know one .Net Developer who offers 5 hours of on-call support to each client he completes an assignment with. The clients pay him between £400 and £600 monthly even if they don’t use his services!

Consider taking on SoWs

If you are an experienced contractor, you could consider taking on fixed-term assignments. This will involve you charging by project rather than per hour/day. If you are confident in your ability to perform a task faster than the client’s time frames, you’ll be able to take on more assignments over the course of a year. There’s also the huge bonus that such Statement of Work opportunities are outside IR35.

Next, actively control costs within your business

Seek proper tax advice / planning

We’ve seen lots of PSCs benefit from paying for proper tax planning advice.

For instance, at Spring Budget 2023 a few weeks back regarding pensions, your annual allowance was increased from £40,000 to £60,000 a year. This allowance is a cap on how much can be paid into your pension every year with tax relief.

If you’re not super savvy with your finances, it’d be easy to miss this opportunity to secure further tax relief. I’d strongly recommend working with a finance expert who can advise you on how to run your business tax-efficiently.

Reduce travel expenses through working remotely

Look to where you can cut costs in your business. For many contractors, this has meant switching from on-site/hybrid to fully remote.

Reduce your outlay on train tickets and fuel, by considering only taking on contracts where you can work from home the vast majority of the time. We currently work with a number of clients who are very flexible regarding contractors working fully remotely, as long as they are cooperative about attending on-site meetings once a month.

Penultimately, if you're keen to focus exclusively on one contract at a time, but at the rate you desire, here are my top tips to secure high rates:

• Increase your value – as I mentioned earlier, you need to fly your flag! Make yourself an indispensable member of the team, and you’ll have more room to re-negotiate your current rate.
• Increase your skillset – this might be through self-education or by taking on a lower-paying contract in an area you wish to develop into. I’ve known contractors to take a temporary 20% reduction in their day rate to future-proof their skillset. Eventually, these individuals commanded 150x of their original day rate!
• Be shrewd about the industries you choose to contract in. It’s well-known that some industries can and do pay more than others. For instance, banking, finance, and insurance tend to pay higher rates than hospitality and retail.
• Only take 3-6 month contracts. You might feel more secure taking a 12-month contract, but the reality is that your contract is only as long as your notice period – which is normally 4 weeks. You might as well take a shorter contract, in the hope you can renegotiate at the 3/6 month mark, or move on to a new contract with an improved rate within the year.

Lastly, be realistic – last year was last year

Overall, it’s important to remember the market we’re currently in. Manage your expectations. Follow my negotiation tips and recommend approaches to increasing your revenue streams and you will see the momentum turn in your favour – it just won’t be as significant as if you were making these moves in 2022.