IT contractor guide to 'going direct'

In the IT contract jobs market, 'going direct' to the client, instead of through an agency, has long been the preserve of so-called 'career' contractors.

These seasoned IT contractors often secured work off their own backs by getting a client who they impressed via a recruiter to subsequently take them on independently.

If not, the senior IT contractor would, and can, 'go direct' thanks to word of mouth from their contacts network, which must include other contractors for an optimum return.

It is estimated that only a quarter of IT contractors engage directly, says the PCG, seeming to confirm the arrangement as the staple of the well-established few.

But the contractors' trade group also said that in "these straitened times," many end-users would now rather engage all of their contractors directly.

It's still true that new contractors might be best off via an agent, but all IT freelancers who are able to 'go direct' are currently more appealing than ever for promising the client a saving.

Where to Find a Direct Contract

The use of technology within HR management has continued to increase over the years. A survey by the Chartered Institute of Personnel and Development found that three quarters of organisations used their own corporate website to attract applicants.

Not only did end-users who advertised roles on their own websites report lower recruitment costs, for not having to pay an agency, but they also saw the selection pool widen, as did how flexible they could be with the candidate. Also, the time taken between advertising for the role and getting someone 'on the ground' to fill it reduced.

IT contractors wanting to go direct should therefore register with the websites of prospective clients to hear about future openings through automated emails. Manual checks for the latest IT roles cut the risk of missing out if the contracts are only emailed on a weekly basis, or not at all.

Would-be direct contractors so often have to work hard to find a role, says Louise, an IT contractor with a string of direct engagements under her belt. What helps, she says, is a well-oiled wheel of contacts, made up of colleagues, end-user staff and agents. She also endorsed keeping an ear to the ground for word of mouth, and checking national, local and online press adverts, as well as IT-related forums, such as open source project boards. Testimonials, similarly, should only be a few clicks away.

The type of service you supply also has a bearing on going direct, said the PCG, addressing IT contractors. A spokesperson explained: "If yours is the kind of work that could work on a fixed price basis with project-based work, then cutting out the middle-man may well be the approach for you."

In short, IT contractors do not have to work through agents if they are able to find client work directly. However if they operate as self-employed or within a partnership, contractors can only find clients directly.

Putting Your Very Own 't' in 'Contract'

The astute contractor with a direct ambition will be ready to supply their own company contract, which will contain their own terms and conditions of supply of service. Some clients insist on the freelancer providing the contract. Contract templates are available from the PCG, which also provides a list of legal experts who can draw up such contracts.

Upon receipt of an offer for their first direct role, a contractor will agree the contract's terms with the client. Terms will include the duration of the contract, how many hours they are expected to work a day/week, and hourly/weekly pay. If your contractor company has a template contract with an agency, this can be easily adapted for direct to client use.

Louise reflected on a recent agreement, directly between her and the end-user: "The client was happy with the contract I supplied and did not question the terms."

Directing Yourself Away from IR35

Having just set the terms of your engagement, it is now significantly easier to prove that you are genuinely in business of your account should you be called to do so by HM Revenue & Customs, given that you made all the decisions.

In fact, direct contractors typically have a "much cleaner contract since there is no need to protect the intermediate agency from various things, like employment rights claims and them being responsible for your mistakes", explains Alan Watts, a veteran IT contractor.

Assuming contractors are aware of any IR55 implications, and fully 'proof' themselves against IR35 by taking professional advice, the contractual nature of 'direct to client' may indeed help their IR35 status, the PCG confirmed.

The group recommended that, when framing their contracts, contractors entering a direct commercial relationship should stipulate that the client can cancel the contract without notice. No notice period is conducive to self-employment, and, as a result, is a signpost away from IR35.

Louise has put the advice into practice: "The client wanted to have a week's notice either way, but I decided to give them the ability to terminate the contract immediately and kept a week's notice for myself."

In the Direct Line of Fire

But with a straight commercial relationship comes greater risk. Although a direct IT contractor may have a better defence against IR35, having no agent to collect and guarantee your pay for services already rendered makes going direct an arrangement with higher stakes.

"You are also responsible for all your own negotiations on [hourly/daily] rate", Watts adds, and "agents, for all their faults, are quite good at that."

To mitigate the financial risk, contractors should run an online credit check of the client company before signing up.

In the Direct Line of Payment

On the other hand, no agent in the contractual chain means 'direct' contractors have no agent to pay any commission to. While this means you won't necessarily command a better rate for your skillset, you, and you alone, will receive 100% of your pay rate, after tax.

Again, Alan Watts: "With a bit of haggling you can get pretty much the same gross rate as the agency would, which means you are getting what would have been their margin in your bank account instead of theirs."

How Long is this Direct Payment Line?

Going direct effectively puts more money into your pocket than going via an agent – indeed, "everything" on the payment front can sound enticing, says John Waine, the IT Coach. "But just don't be surprised if payments are not made when you expect them to be," he warned. "Typically, the payment terms are much longer and also not necessarily consistent. I've worked with many direct contractors who seemed to spend half their time chasing up invoices."

Contractors who are direct to the client are "usually at the mercy of the client's payment cycles," confirms Watts, adding: "Unless you sort out your own factoring, or have a very understanding client, you are looking at 30-90 day payment terms which can be painful."

The payment terms of direct contracts are a particular shock if the contractor is fresh from having an agent in the loop. Often, agencies commit to paying weekly invoices within 7 days of receipt. Of course, payment-related issues occur regardless of whether you work direct or via an agent.

Some contractors planning to go direct do "worry about the time that it takes clients to pay," agrees Louise, but sometimes, she hinted, without due cause. She recalled: "I was prepared to have to wait a number of months for my money if necessary, as I believe that the client company is financially sound and I have enough back-up money to see me through.

"However, as it turns out the client is a very quick payer. Despite having 30 days to pay if I invoice on a Friday, they pay on the next Tuesday."

Horses for Courses

The fact that most clients outsource the recruitment of contractors to agencies is, arguably, why most contractors are not direct to the end-user. That agent will handle the contract negotiation and administration with the client company, meaning the contractor doesn't have to get involved. And the agent deals with all payment issues, including rate and terms, so the non-direct contractor shouldn't need to chase the client for late payment.

For most IT contractors, being able to take such a 'hands-off' approach is enough to convince them to enlist an agency, or sign up to the one providing the role. For others, the pillars of agency working fail to register as 'perks' when compared to going direct.

Pointing to her last direct role, Louise reflected: "The main things that an agent can do for me are find the role - not needed in this case; provide the contract – I prefer to provide my own; and factor the revenue stream - I have enough back-up money to make this unnecessary.

"As I don't need any of their services, I'm very happy to save myself and the client the agency fees [and go direct.]. "But would I do it again?," she asked. "Absolutely."