A guide to contracting direct with the end client – advantages and disadvantages

Contracting direct with the end client is gaining traction with many contractors who want to break free from third-party recruitment agencies or umbrella companies.

While many contractors deem such intermediary parties as a method to offer them some separation from the client, for other contractors the control and costs of such agencies come with little perceived benefit.

In reality, there are many pros and cons to contracting direct with the end client. Here’s a guide to contracting direct with the end client – advantages and disadvantages:

Pro: No fees

If you choose to deal directly with the client, then there’s no agency taking a cut of your take home pay.

Recruitment agencies typically take between 15 to 20% of the gross payment made by the client and umbrella companies may take a similar cut, or charge a fixed fee of around £30 per week.

Not only does an agency-free model potentially boost your bottom line as a contractor, the client will also make a saving by working in this way, so direct relations are financially advantageous to both parties.

Con: No one to fight your corner

On the flip side, you are putting yourself in the direct line of fire if you are contracting direct with the end client. You will be responsible for collecting pay for your services, which makes direct contracting a riskier commercial relationship.

Before signing up, you should always run an online credit check of the client company to help you to mitigate this financial risk.

It also helps to sit down with the client and go over your first invoice. That way, both you and the client understand the payment process that needs to be followed, which can reduce the risk of delayed payments. This initial contact will also introduce you to individuals at the client company who you can contact if there ever is a payment problem in the future.

Pro: Open negotiations

Many contractors also prefer the informal nature of a direct relationship where you can approach your directly client without fear that you are breaking a term in your contract. This further helps contractors to build better client relationships as there’s no third party looking over your (or the client’s) shoulder.

This allows you to negotiate directly on matters where an agency will often avoid getting involved such as part-time, flexible or remote working arrangements, for example.

What’s more, you can set up any repeat business and future work directly and you will not be constrained by the restrictive covenant clauses often used by intermediary agencies.

As a result, you have the freedom to build your own direct client base, which can provide you with a steady stream of work.

Con: A lot of legwork

If you do need to find a contract, and your direct clients don’t have any work for you, then you won’t have your agency’s roster of clients to fall back on. As a result, you’ll need to scour the job boards to find a contract.

Finding a new contract not only takes time, it can also be a confusing process to differentiate between an agency role and a genuine direct contract. What’s more, many roles may be described as “contracts” but turn out to be, on closer inspection, fixed-term employment or not direct contracts at all.

When you find some contract work, you may have to supply your own company contract, which will contain your terms and conditions of supply of service. Contract templates are available online to download or your client may have a template contract with an agency. Both of these templates can be easily adapted. Alternatively, you may want to bring in a legal expert to help you draw up a contract.

When you are offered your first role, you will agree the terms of the contract directly with the client, including the contract duration, your working hours, and your rates of pay.

Some contractors thrive on the logistical side of directing contracting, but others do not enjoy the process and the time it takes to negotiate with clients (and organise your finances). If that’s the case, then contracting direct with the end client may not be a fit for you.

Pro: IR35 friendly

Contracting direct with the client means you are also free to build up your own portfolio of clients, which will benefit your status outside of HMRC’s IR35 because you set the terms of your engagement with a client.

Con: No notice period

If you do want to contract directly with the client and sit outside of the IR35, then you should stipulate that the client can cancel the contract without notice when you enter a direct commercial agreement with the client.

No notice period is a clear sign of self employment, and, as a result, means you can more likely operate outside of the IR35. But it also offers you less long-term security.

In conclusion

Whether contracting direct with the end client is for you, or not, often comes down to your personality. If you thrive on contracts, negotiations and are confident that you don’t need an agency’s client list, then direct contracting could increase your take home pay. 

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Tuesday 27th Feb 2018