Are fixed-price contracts good to avoid IR35?
The short and simple answer to the still-posed question - Are fixed price contracts good to avoid IR35?’ is ‘Yes,’ writes Charlie Hemsworth, of status advisory Bauer & Cottrell.
In fact, fixed-price contracts, paid upon successful delivery of an outcome, can be a very strong indicator of an outside IR35 position. However, they should be approached with caution, and a weighing up of both the pros and cons before entering into one.
What is a fixed-price contract?
A fixed-price contract (FPC) is an agreement in which the parties negotiate and agree on a set price for a defined scope of work, regardless of the actual time, efforts or costs incurred by the contractor in doing the work.
The fixed fee reflects an agreement on the value of the services; remains unchanged throughout the engagement, and would typically be invoiced and paid on successful completion of the project/services.
Why are fixed-price contracts good for IR35?
Genuine FPCs are based solely on outcomes, so they demonstrate significant financial risk to the contractor – if the final result isn't delivered, payment is not received, regardless of the time invested in the project. Exposure to such risk strongly indicates a position of genuine self-employment.
Working in this manner also fosters an environment where three crucial status tests - substitution, control, and mutuality of obligation - are usually in the contractor’s favour. All three would be typically under the contractor’s control, with their responsibility being to deliver the end result, without being told how to achieve it.
What are the cons for the contractor?
As mentioned earlier, the principle remains: 'no delivery, no payment'.
While this is fantastic in the context of your IR35 position, it does present a commercial risk to your business. Life's unforeseen circumstances or changes in the client's situation may mean you have to walk away from the work, which could result in invested time and effort with nothing to show for it.
Equally, there's a risk of underestimating costs, leading to unexpected expenses or additional time investment which reduces your ability to profit from the engagement. It's essential to thoroughly evaluate the project scope and associated risks to ensure you are adequately compensated for your services, while remaining competitive. This takes time and the contract cannot be initiated until it’s formalised and agreed.
Top tips for fixed-price contracts as a contractor
You’ll need a clear, well-defined scope – specific and detailed information on exactly what is being provided for the fixed fee, including project plans, deadlines and schedules, plus specifications.
Ensure clarity in price and payment terms, specifying the total fixed and unchangeable price for the work, along with the details of how and when you will be paid.
If possible, establish a process to handle unexpected changes, enabling you to address and price any significant alterations in scope to prevent misunderstandings.
Other things to consider include delivery acceptance criteria; project dependencies and dispute resolution mechanisms.
You and your client should also ensure that the terms outlined in your FPC are fully implemented in your day-to-day working practices.
Fixed-price contracts as an IR35-conscious limited company, in a nutshell…
A fixed-price contract is great vehicle for achieving an outside IR35 position in engagements where requirements and deadlines are very clear, and there is less scope for deviation, delays or changes to a project.
These limitations and the lack of ability to adapt to changing circumstances mean FPCs won’t work for all limited company contractors. Implementing and drafting such contracts require time and careful consideration to ensure commercial suitability for all parties.
By contract, ‘Time & Materials’ contracts -- which are more suited to potentially evolving projects, pose less financial risk for contractors. But a T&M contract can still be very much ‘outside IR35,’ if the overall relationship is demonstrated as one of genuine self-employment.
Finally, bear in mind IR35 status has to be considered for each and every contract, and cannot usually be determined by one factor alone, including basis of payment. The Intermediaries legislation hinges on the relationship as a whole, making it crucial to ensure that your contracts and working practices consistently support your position in all aspects. As always, thorough contract drafting and validating the written terms against the working arrangements is key.