IT Contracts market update, advice and tips - if you are sitting on the bench this summer

If you cast your mind back to July 2022, and we get up our database for that period 12 months ago, it’s clear it was then a great time to be a technology contractor.

For me personally, it wasn’t bad either -- being the most successful for me as an IT recruiter of 26 years, writes Matt Collingwood, managing director of computer staffing agency VIQU.

July versus July

Sorry to rub it in compared with July 2023 which is going, going, and nearly gone, but the market last July was booming.

Companies were increasing their spending. Contractors were in high demand. Most contract candidates weren’t even having to apply for contracts -- agencies were hunting them down by any means possible!

Looking at this July, and the IT contractor market is in a very different place. For the majority of temporary technologists, a perfect storm is blowing – and is made up of:

• Less contract opportunities
• Contractors being unnecessarily forced inside IR35
• Clients pushing for cost reductions leading to falling rates
• The high cost of borrowing

Why are there fewer contract opportunities in the IT jobs market right now?

Many clients trade by taking out all available profits for their shareholders, meaning they have little-to-no ‘free cash’ on the balance sheet. For years, shareholders have expected good returns on their investments. To meet these demands, these businesses will use a facility from a bank to bankroll their business, including the running of IT projects. The difference is that  last July, in July 2022, clients could borrow at around 2.75% including the Bank of England base rate. Fast-forward only 12 months (to July 2023) and that borrowing cost is almost in double figures -- 10%. Some clients simply can’t afford these increases off their bottom line and so are only running the bare essential projects. While interest rates remain high, we will see much less spending.

The private sector isn’t alone. Although the public sector receives its funding in a very different way, many taxpayer-funded  organisations are already predicting a quieter financial year. Based on data I’ve seen released in the last couple of months under freedom of information rules, there has been a significant and overall drop in planned spending from the public sector organisations, in particular in NHS contractor usage.

As generalist’s rates decline, specialists command the market

With every penny being accounted for in July 2023, we saw a drop in contractor pay rates for new placements made -- consistent with the two preceding months. Thankfully, we have yet to see reductions for those on current assignments or at extension time.

But based on our agency’s average charge out rate of £745, I would say clients are telling us their latest budgets are £50-100 a day lower compared to this time last year.

There is a caveat you’ll welcome, however. The going rate in July was extremely dependent on skillset. So specialist contractors with niche skillsets found (and still find) themselves very much in demand, commanding high rates. It’s the more generalist contractors  who are suffering.

What does fewer IT contract opportunities mean for pay and demand?

A smaller pool of opportunities usually means more contractors on the market at any one time. In turn, this can create the perception among clients that they have more choice of candidate. And with that comes the belief that they can pay less for the same skillset. This of course is the law of supply and demand.

We are most certainly seeing companies negotiate harder. For instance, if a generalist contractor normally was worth £600 a day, the average client is now pushing it down to £500 a day.

The ripple effect: standing your ground, or accepting a lower rate

Unfortunately, there are generalist contractors who do not have the choice and financial stability to stand their ground.

They need their day rate continuing exactly as it is just so they can pay for their mortgage, their household bills and the like -- all of which has rocketed in the last nine months.

Accepting a lower rate might mean financial stability for them, albeit with less money to play with.

But the rest of the contracting community will be impacted too, as it gives clients the impression that they can take advantage of the circumstances, so accepting £500 over £600 can creating a downward ripple effect on rates.

Where agencies come in amid this downward pressure on rates

Agencies are also culpable here too, if they don’t push back on budgets when they are taking instructions on a new contract opening. But there has been pressure on agencies to drop their charge rates, which in turn, means some agencies are reducing the day rate in order to maintain their margin. All of these elements have trickled down to impact contractor day rates.

However, again, there’s a welcome caveat in contractors’ eyes. Clients are picking their battles. For specialist contractors with niche skillsets, I’ve had a number of clients who have been willing to wait for the contractor to end their current contract, just so the client can secure them. It all depends on the skillset and what skills are in demand in the market, versus what skills the client cannot do without!

Agencies, drowning in CVs

We’ve seen a big increase in CVs coming through in recent months. For instance, on Wednesday 12th July 2023, we received 400% more CVs than we did on the same day last year!

And earlier in July, for a generalist business analyst role (based in London) that we advertised, we received over 800 CV applications in just FIVE days.

As much as we’d like to personally respond to every contractor who came forward with their CV, when numbers like this are involved, it just isn’t possible. So, if you’re finding you’re simply not hearing back from agencies and clients, read on for my top tips for contractors in the current market!

One final thing on agents drowning in CVs. We’re finding that many generalist contractors are opting to apply and search for new contracts 6> weeks before the end of their current contracts, instead of the <4 weeks which has always been quite standard in the contracting community.  Who doesn’t want to get caught out in the current market, or get benched? You it seems, quite understandably.

Contractors want to be ‘outside’

IR35 remains the biggest motivator among contractors. As I said last week to ContractorUK, we’re having far more conversations about moving from inside to outside IR35, than we are about rate negotiations.

Why? Because contractors know that even if they have to decrease their gross pay, by moving outside IR35, they will see their net figure increase.

For those clients with budgetary constraints for contingent labour, engaging them in a different way to ensure the assignment is outside IR35 might be win-win for both contractor and client. This transition might enable a client to pay a little less, while lawfully increasing a contractor’s net pay.

Contractors looking for consistency

Last year, we would always expect a contractor to ask for a rate increase when they were offered an extension. Now, I’d say we’re probably getting asked only 20% of the time for a rate increase when having these extension conversations.

What’s driving this? Contractor confidence is low. They are aware that the language being used by clients is around “cost savings” and “budget cuts”. In what has become a quieter market, they don’t want to rock the boat.

Longevity is more important than rate at the moment. In fact, we’re finding contractors approaching us about their extensions, instead of us having to chase to re-secure them!

5 top tips if you don’t want a burnt behind from being benched this summer!

1. Be flexible

Where you can, be flexible -- even if that means taking a rate reduction. Gaining experience or building a solid relationship with the client could lead to long term gain

2. Pull on your network

I might be doing myself out of business here by recommending this, but by all means contractors approach old clients and try to cut out the need for a recruitment agency. Just be aware of each agency’s contract and the restrictions about returning to their client – check your small print, but this restriction is usually six-to-12 months.

3. Upskill

If you’re between contractors and twiddling your thumbs, a client is never going to raise their eyebrows to a month or two without a contract if you’ve used that time sensibly. Grow or deepen your skillset through training courses or certifications and make yourself more desirable.

4. Go along with four becoming six

Most contractors tend to start looking for a new contract four weeks before their current one comes to an end. If you’re a generalist contractor, I recommend going forward sooner rather than later. Start six weeks before your contract runs out to give yourself a better chance of avoiding bench time and not disturbing take-home.

5. Request a rate rise at renewal

If you’re offered an extension, still ask for a rate increase regardless. There’s no harm in mentioning the fact there’s a cost-of-living crisis on, but more importantly, highlight the positive work you have done that justifies you asking the question.

Big picture...

It’s certainly not all doom and gloom on the temporary labour market for computer and technology professionals. Yes, generalists are feeling the pinch more than technical contractors with niche skillsets. But let me reassure all contractors, in my 26+ years in IT recruitment, I’ve seen the market dip and then recover, and it will happen again – and by ‘it’ I’m talking about the ‘recovery’ bit!

In the meantime, us contractor recruitment agencies need to get behind the contracting community. From outlining the benefits of outside IR35 contracts to clients, to being flexible on margins, agencies have their part to play in supporting contractors as our economy tries to swap dicey for stability. Just like contractors, taking a lower margin might hurt us in the short term, but in the long term, it can lead to new and improved relationships. Enjoy the summer!