PREVIEW

Select a topic using the links below

INTRODUCTION

      What is an IT contractor?

      A Brief history of IT contracting

      Permies versus Contractors

      How to break rank with permyism

                Educating yourself on IT contracting

                Preparing for the move to IT contracting

                The successful contractor

                What to do next

                Setting up your corporate foundation

                Structure choices

1. Installation and setup.
2. Maintenance and fine-tuning.
3. Patching and training.
4. Philosophy and psychology.
5. Investing for financial freedom
   

Chapter 1

Installation and setup

• What is IT?
• What is an IT contractor?
• Brief history of IT contracting
• Permies versus Contractors
• How to break rank with permyism
  

What is IT?

IT covers a broad range of products, services, hardware, software, and firmware systems. The developers, designers, sales staff, recruiters, manufacturers, wholesalers, marketers, support staff and all other ancillary industries and businesses require a staff that understands how their systems and technology work and how to support them. This invaluable human resource brings great value to organizations that have, use, or depend on IT They help source, acquire, supply, install, integrate, maintain, and support these technologies. 

• As consultants
• As contractors
• As temporary workers
• As permanent staff

We shall look at the difference between consultants, contractors, and temporary workers shortly, but for now, we can say that IT personnel fall into two main categories: permanent and non-permanent staff.

Permanent staff are normally on the payroll of the organization, have their wages paid, pension and all benefits such as health care, company car, expense account, etc paid directly by the organization.

Contractors normally remove non-permanent personnel from direct financial contact with the organization through a recruitment agency or other third party resource suppliers. The agency or Third Party Company acts as a buffer between the organization and the resource, i.e. the temporary worker, contractor or consultant.

In some rare cases, the resource may go “direct” to the organization, however in almost every case where this occurs, the resource acts through their own limited liability company or an umbrella company. This is because companies like to deal with other companies through contracts and legal agreements. They also like to deal with limited liability companies rather than sole traders or partnerships because of the limited risks that the Limited Liability Company structure offers.

What is an IT contractor?

Consultants

The companies that hire consultants highly respect them and treat them as such. a company will hire them for their knowledge, and organizations are reluctant to waste costly time in getting them to work on their projects. Many consultancy firms have developed ways of lengthening the time taken to complete the projects they have been hired to consult for, because consultants are paid for their time. This often means that consultant costs overrun the expected time and costs initially budgeted for by the organization.

Consultants also claim expenses, which are either paid for directly by the organization that hired them, or indirectly through their consultation fees. These expenses include, travel costs, hotel accommodation, meals and sundry expenses. Consultants and consultancy firms often use this source of income to buffer their high rates.

Contractors

An IT contractor agrees to perform or provide a service for a specific rate of pay (normally an hourly rate, a daily rate, or a fixed-term rate). This middle class of non-permanent IT staff is broad and at its fringes, touches on consultancy and temporary work.

Almost every industry on the planet today uses an IT contractors. They offer a means of quantifying an organizations IT human resource. They are easy to put in place and even easier to let go. Legally binding contracts control them and they come with fewer of the headaches associated with having a permanent staff. They come with their own personal liability insurance, they arrange their own pensions, they cost organizations nothing if they are sick or absent, and they could be likened to a photocopier or a telecoms link usage contract, rather than being a heavy toll on the organizations human resources payroll department.

IT contractors make money through five main methods. Firstly, they earn an hourly rate or fixed term rate for their professional work. Secondly, they can claim back on certain expenses whether to the client (the organization), the agency or their limited liability companies. Thirdly, in countries where a Value Added Tax is applied, they can arrange their accounts in such a way as to benefit or reduce their VAT liability. Fourthly, they can decrease their tax liability by arranging their personal finances in a tax efficient manner.

Finally, they can outsource processes of their company or take on staff in their limited liability companies to help reduce their corporate tax exposure – just as big corporations do.

Temporary workers

Temporary workers use agencies to source their work; however, a few large agencies/outsourced service providers now employ their own in-house staff who they place within organizations to fulfil lucrative contracts. These low skilled permanent IT personnel are poorly paid and – in most cases – poorly treated as well, giving this sector one of the highest staff turnovers in the IT industry.

Progression

This is because moving out of any one area is quite difficult, requires determination, commitment, new skills, re-education or qualifications, experience, and funds. Few make it simply due to lack of commitment or funds. Similarly, you can become quite comfortable as a contractor. The field is broad enough that you can move around it your entire working life without needing to branch out as a consultant.

There are specialist areas within most areas however, and these specialist areas often pay higher than the prevailing market rates. Certain industries such as military, hedge funds, investment banks and other financial companies often pay far above the prevailing market rates across the board for their IT needs. Whilst local governments, charities and outsource companies tend to pay the lowest in the IT industry.

A Brief history of IT contracting

The explosion of consumer technology – especially in the US – during the 1950’s, 1960’s and 1970’s saw an increase in the use of these IT specialists. At the same time, computers grew in popularity, and the number of applications they were used for, increased dramatically. Programmers, circuit board designers, computer games coders and testers sprang up leading up to the 80’s. In the office, admin staff had to learn to use the new word processors and desktop publishing computers and applications. The temporary worker had to add IT to his/her repertoire of skills.

As more uses for computers and IT were discovered, the demand for IT support staff, programmers, managers, testers, designers, etc also increased. By the end of the 80’s computers had moved into everyday life. Almost everything was becoming digital, from home entertainment, in-car control systems, home electronics, personal computers, musical instruments, music recording and playback equipment, telecommunication devices and even toys, all saw improvements through IT

Organizations found themselves needing an ever-increasing IT department and larger IT budgets to cope with the rapid growth in IT usage. Vast amounts of admin staff were replaced with IT literate secretaries, temporary workers and clerks. Nearly every task performed within an organization was now carried out with the assistance of either a computer or some other IT system.

Most organizations were not ready for such a rapid growth in demand for IT In those days, if you knew anything about IT you were almost guaranteed a job or contract in most organizations. However, organizations were slowly learning what they needed from their IT staff, and those early IT contractors of the 80’s learned fast. By the time organizations had discovered what they needed from IT staff, the first wave of IT professionals were up to speed on the technical and support requirements of these organizations. An industry was solidly established and in its early phase of rapid growth.

Then in the early 1990’s, IT contracting exploded. It coincided with the rise in Internet usage, record numbers of new start-up technology companies and the subsequent Dot-Com stock market boom. This breakneck growth peaked leading up to 2000, driven by rising Dot-Com company valuations and the exaggerated fears of the “Y2K bug.”

Sadly, most of the contractors who left to go permanent never returned. Instead, a new breed of younger, less seasoned contractors joined the ranks. Uninitiated, naive and uninformed, these contractors often treated contracting like permanent employment. This book also aims to confer upon this new generation of contractors the dos’ and don’ts of contracting.

A changing world

In Europe, the EU has also allowed many lower paid, skilled workers to enter and compete with domestic, home-grown contractors in Germany, France, the U.K., Spain, Italy and Portugal. In the UK for instance, the IT contracting industry is flooded with workers from South Africa, Australia, New Zealand, West Africa, India, the West Indies and more recently, Eastern Europe and the Far East. The indigenous IT contractors in the UK have to compete with these – often higher skilled and more assiduous – IT contractors. In the UK, especially in London, the locals are losing this battle.

Luckily the tendency is swinging back towards skill and less so towards certification alone. Most contracts nowadays insist on some form of technical test that, although often absurdly difficult and unrelated to the associated role advertised, helps to separate the textbook IT contractor from the experienced and seasoned veterans.

Rate change

The prevailing fixed daily rate system and an over-reliance on certification has attracted people with a different mindset than is required to be successful in IT contracting – over the long term. Because no matter how hard they work, the  daily rate will not change; many contractors have stopped working hard. This has brought lassitude and a non-committal mentality into IT contracting.

In this climate, everyone is losing. Organizations may think they are saving on their bottom line; however, the quality of work is poor and the lengths of projects are getting longer. For the IT contractor, this wide spread disease of slowing down to match the rate of pay is destroying many good workers’ work ethics and industriousness, not to mention damaging the general image held by employers of contractors.

Outsourcing

Global market trends such as outsourcing have also impacted on the IT industry. The IT industry has seen a  plethora of outsourcing companies spring up to monopolize many lucrative major contracts. These companies pay their staff less handsomely (whether permanent or contractor), thus they have attracted inexperienced, lower skilled and many unprofessional people into the industry. These outsourced IT staff reflect badly on all IT professionals, and are helping to drive IT contracting professionalism into obscurity.

Tax laws

As the IT contracting market mushroomed in the 1990’s, the HMRC focused its attention towards it. In the UK, they created a new tax law called IR35. This was aimed at stopping people who where using limited companies solely for tax planning purposes whilst working practically as a permanent employee. Initially the HMRC was ill prepared to tackle the number of perpetrators; however this did not stop many IT contractors either turning to permanent employment or turning to the many schemes that sprang up to supply the need to avoid the high costs of an HMRC audit.

Personal Services Companies, Umbrella companies and many more sprang up, promising to be able to guarantee contractors protection from IR35. Most of these schemes greatly reduced the benefits of being an IT contractor and in most cases made their clients permanent employees.

The tax office – not satisfied with the numbers that turned to Pay-As-You-Earn (PAYE) and relinquished their right to claim VAT – now turned their attention towards the structure upon which most IT contractors’ limited liability companies is based. They looked to stamp out the use of a spouse holding ordinary shares in a limited company – and earning dividends, but not bringing in income equivalent to their stock holding. Section 660a, as this is known, is currently being applied to IT contractors’ business structures and could spell further doom to IT contracting benefits.

Professionalism

Many contractors either have forgotten, or have not ever been told, that being an IT contractor binds them to an unspoken contract with the people they support. Whether you are a developer, a database administrator, a project manager, a business analyst, a tester, a Web designer, a helpdesk analyst, a hardware engineer, a trainer, a floorwalker, a network architect or an IT director – professionalism, humility, courtesy, customer service, and enthusiasm should precede all your actions.

Permies versus Contractors

In the IT contracting industry, permanent employees are referred to as “Permies.” Over the years, an unhealthy rivalry has grown between the two, Permies and Contractors. Permies think contractors are overpaid and in most cases, they wish they could benefit from the financial compensation as well as the freedom of movement and variety enjoyed by most contractors. However, anyone who truly understands about contracting would never wish to be a permie.

This insecurity and unreliability in employers makes permie roles seem less secure and conversely – makes contracting roles seem more secure. Insecurity does not exist, only the feeling of insecurity is real when it comes to IT contracting. If you fear insecurity enough, even permie roles will not stem your fears. In life, there is no gain without risk and no risk without the dual potential outcome of taking such a risk. In contracting the rewards are freedom, variety, money, self-reliance, and a more direct control of your career and earning ability.

Permie roles offer a sense of security, less money, less freedom, restricted career progression, limited career path, dependence on an employer for a limited financial gain, lack of variety, involvement in workplace politics, shallow status (often based on position and short term perks), and heavily restricted paid time off.

The benefits of permie roles are all derived from the permie income. This reduces the permie income drastically. Employee insurance, sickness, holiday and other paid time-off, membership to unions, perks (health care, company car, expense account, Christmas party, own office etc), pension plan, stock options, bonuses etc are some of the benefits that the lowered permie salary subsidizes.

In a sense, these really are not benefits – as the permie is already paying for all of them through a huge cut in their wages. In almost all cases, the loss in money does not equate to the benefits received. Paid time off for instance, is restricted to a few weeks a year, pension contribution is similarly restricted and the pension plan management is take out of the permies’ hands and controlled by the organization and their financial services partner. These inflexible arrangements often leave pension plan investors short after a lifetime of investing.

Every time you receive a pay raise or bonus as a permie, ask yourself how much money you helped the organization to make and what percentage your profit share is in comparison. In most cases, permies do not receive a fair or balanced profit distribution. This is understandable, after all, the organization is in business to make money and that means profiting on the backs of all its employees.

In IT contracting however, the control is placed squarely in the contractors hands. If you claim VAT, you are given the proper gross income. This includes VAT and claimed expenses. You then take these funds away and sort out your VAT return, tax return, VAT rebate, tax rebate, dividends, salary, personal pension, personal health care, company car (if you have one), time off subsidization etc. You can give yourself all the benefits that a permie gets and still end up with more money that a permie undertaking the same role.

In the case of the controller, because control is in your hands, you can make incredible savings with every benefit. For instance, you can shop around for the best deals on health insurance and offset the costs against your VAT and tax. You can also offset travel costs and company car costs. knowing that you are paying for the company car yourself, you can shop around for the best deals and make further savings in the hire-purchase deal you choose to acquire the vehicle with.

Concerning time off, you have unlimited choice in the length of break you take. Granted it will be unpaid through contracting, however you can subsidize this through your company savings. As an employee of your limited company, you will still be paid even whilst you are taking time off. Similarly, you will still receive all the benefits you have set in place, including dividends distribution and insurances.

Some contractors I know, work during the autumn, winter and spring, taking the entire summer months off on vacation. This is something you would not be able to do easily with a permie role – and still pay your mortgage, and return to a job.

We will discuss how to find contracts when you want them and how to eliminate lost time between contracts later, but for now, rest assured that the sense of security that permies see as the main advantage of being a permie, is an illusion. You can achieve the same level of security, if not better, through contracting smartly, applying the principles and techniques we will highlight later in this book.

By the end of this book, you will see that, as long as you are prepared to run a business professionally, contracting can reward you beyond anything that an equivalent permie role can ever give. Yes, you will be handsomely rewarded financially, and as you will learn, that will not be your only reward from contracting within IT The examples I will use are geared towards the UK market because it has one of the broadest, most diverse and liquid IT contracting markets in the world.

How to break rank with permyism

First, you need to educate yourself on what is required to succeed as an IT contractor. Secondly, you need to prepare and plan for the move to your new way of working and earning. Finally, you need to take decisive action by following your plan. Once you have made the transition to being an IT contractor, you need to consistently and regularly monitor your progression and steer yourself consciously onwards and upwards through education, qualification and selective contract selection. We shall next look at all these points in greater detail.

Educating yourself on IT contracting

The few that say they will, say so mainly because of plans to start or expand their family, or they feel a sense of insecurity because they are new to contracting and still subscribe to the old belief that contracting is insecure and the income erratic. In the case of the new or expanded family plans, we will see how contracting still beats going permie even if you plan to take time off to have a child.

Planning and money management will overcome most issues you will find when comparing contracting with permanent work. Permies often grow slavishly dependent on the monthly handouts doled out to them in the form of a salary. Because they expect to receive these funds without interruption, most allocate and spend their monthly salary long before they receive it.

People who live this way either subsidize their lifestyle with credit cards and loans, or they struggle every month leading up to when they are due to receive their next salary instalment. Sometimes permies and new contractors carry this terrible habit into IT contracting. Because the contracting income requires a different treatment and does not flow as monotonously consistently as the permie income, these new contractors often find themselves badly prepared for an unexpected tax, VAT, or delayed agency payment.

Contractors like all business owners, plan their spending wisely and budget for the unexpected. As a contractor, if you follow this principle and build up a progressively growing buffer of income, you will comfortably ride any obstacle that comes your way. The key with contracting is not to live on what you earn, rather live on what you allocate to yourself, save the remaining and invest it to either grow or grow your IT contracting business.

Preparing for the move to IT contracting

There are a few things to consider when making the decision whether to become a contractor or to stay and become a permie. Firstly, there are many reasons why people contract in IT Let us examine some of these reasons.

Looking at the reasons why an organization would consider employing IT contractors services will explain part of the reasons why you should or shouldn’t become an IT contractor. Let us consider the pros and cons for an organization which chooses to employ the help of IT contractors.

From the organizations viewpoint

Firstly, the hours worked tend to be more flexible in comparison to a permie role. This is especially true if the organization pays the contractor by an hourly rate. In this scenario, it is more prudent for the organization to limit the hours worked or even reduce them so as to control their IT budget.

For the contractor this flexible time can be a blessing or a curse, depending of your view of time worked. For instance, if you seek to increase your turnover as an IT contractor then limited working hours is bad news for you. However, if you are looking to reduce or limit your weekly working hours (for a better quality of life or for travel considerations, etc) then this would be more ideal for you.

Secondly, because a contract is an agreement between companies, with one seeking the services of the other, personal consideration is often not important when the organization decides to terminate a contract. It simply decides it no longer requires the services of the contractor, and terminates the contract according to the boundaries laid down in it.

As an IT contractor, your health situation, family or financial considerations, or any other personal situation is simply not considered in the decision; after all you are a service provider not an individual. Can you imagine a large organization taking the personal and private needs of a cleaning services company’s staff into consideration when deciding to cancel or terminate the cleaning contract? It is absurd isn’t it? Well that is exactly how you, as an IT contactor, are viewed by most organizations. You are simply a resource or service provider whose services are contractually bound. This service can be turned on or off as is required for the benefit of the organization not you the IT contractor.

Permies on the other hand, cannot be so easily terminated. They are protected by powerful unions and strict employment laws. Often an organization is obliged to pay out huge amounts in order to terminate a permies employment contract. Therefore, an unfair dismissal can cost an organization dramatically more than any money they may be losing through keeping on the unwanted permie.

There are many schemes around this problem, however, and the human resources departments within most organizations know them. Therefore, it is not uncommon to find permies losing their jobs due to downsizing, relocations, reorganizations – where positions are simply eliminated or opened for competition leaving a permie to find they have to compete with other, external candidates for their old jobs.

From the IT contractors viewpoint

The advantages

We will start by looking at some of the advantages to contracting. These are as follows:

• Flexibility
• Financial compensation
• Business ownership
• Variety
• Tax

After discussing the advantages we shall look at some of the major disadvantages.

Flexibility

Not so for the average contractor. It is not uncommon for an IT contractor to have a résumé riddled with short term roles. This simply can be sold as affording the organization a candidate with a more varied experience. Whilst one year at an organization is considered short term for a permie, the same time period, is considered long-term for their IT contracting counterpart.

Because most contracts are divided into smaller length chunks; i.e. three months, it is easy for the contractor to decide not to renew the contract at the next renewal date. This is a perk enjoyed by all contractors who understand the power of this freedom. You no longer have to put up with a bastard boss or long, drawn-out corporate infighting and company politics. If you feel mistreated or unhappy at a contract, simply give your notice of termination, work the notice period and leave.

Financial compensation

Although the permie often never sees this outlay on their behalf, the employer loses revenue nonetheless. That is why an organization can afford to pay contractors more for their services. In the case of the contractor, the organization can afford to pay a higher rate and still save money in comparison with hiring a permie.

The choices available to the contractor for maximizing their returns are far greater than that afforded most permies. This makes contracting a financially prudent consideration for most IT fields. The only problem arises when a contractor is uneducated in the best ways to maximize the returns and benefits gained from this increased compensation. This is the reason this book was written, to educate IT contractors about maximizing their IT contracting business. 

Business ownership

If you choose to run your IT contracting concern through a limited liability company, you will have all the benefits and opportunities afforded the world’s largest companies. You will have all the tax avoidance opportunities enjoyed by these companies at your fingertips. Added to that you will be able to determine your own salary, bonuses and other perks based on your turnover. You will be a company director, which opens even more doors to you. Your elevated position will – in most cases – allow you to tap into deals only available to company directors and company owners.

Every penny you bring into your company will be money that you can fully control to draw the most profit from – for your company. If you so choose, you can expand your business and recruit other staff to undertake larger, more lucrative contracts or consultations. All this is available to you when you become your own boss. You can see why a lot of people would be attracted to IT contracting – for the satisfaction and pride in building their own business and becoming their own boss.

Variety

This variety makes a contractors life more exciting and vastly more interesting than a permies. Because contractors also have to learn to quickly adapt and integrate into organizations in order to provide the best service, they develop advanced interpersonal skills and learn to make friends quickly and communicate better. All this leads them to develop a vastly superior résumé -- in comparison to a permie who may work at the same company for half a decade – only interacting with their limited colleagues and work associates.

Tax

Table 1: Income tax rates for 2007 - 08

Although the permie boss earns 30.8% more than the programmer, his net to gross ratio is dramatically less due to being a 40% tax payer. He takes home 5.78% less of his income due to his higher tax status compared to the permie programmer.

The more this permie boss earns, the less of his money he gets to keep. If, one day he becomes the IT director and doubles his income to £100,000, his net will be £66,495.60, taking home 12.28% less of his gross income compared to the permie programmer.

Comparatively, a contractor doing the same job as the permie programmer could earn the same gross as either the boss or the IT director. Not only that, but with simple tax planning, the same contractor could end up taking home over 85% of the gross profits[1], an improvement of 6.2% over the permie programmers ratio net to gross ratio. This is because for most contractors in the UK, the rate of tax on their income is similar to that for corporation tax (see Table 2).

Table 2: Corporation tax rates for 2007 - 08

The disadvantages

• Security
• Uncertainty
• Increased personal dependence
• More paperwork and rules
• Money management

Security

Cost of liberty

Another consideration is your name or reputation. If you cause an agency to lose an organization as a client due to a lawsuit or other liberty related litigation, that client and agency may blacklist you and avoid doing business with you in future. Other organizations and agencies similarly will stay clear of you, fearing that you will cause them to – similarly – lose business. Soon you will be unable to secure lucrative contracts and have to return to being a permie or worse, unemployed.

Uncertainty

One of the many obstacles for new contractors is that they continue to think as if they were still permies. Successful contractors search, apply, and secure new contracts differently than permies do. Successful contractors also interview or bid for contracts differently, too. If you follow their example, you will have no anxiety about acquiring your next contract.

Increased personal dependence

• Securing and contributing into a pension.
• Saving for time off sick or holidays.
• Obtaining and keeping up the payments to various insurances (professional indemnity insurance, health insurances, litigation and tax investigation insurances and unemployment and income loss insurances).
• Chasing your accountants about VAT and corporation tax payments to avoid penalties and fines.
• Undertaking training to upgrade and enhance your knowledge and skills.
• Learning about new investments so that you can grow your income and savings.
• Keeping abreast of tax and company laws.

Most people who are steeped in permie thinking will not be prepared to take this responsibility. Instead, they will seek umbrella companies, personal services companies, PAYE services and other “lazy” ways out. Unfortunately, the price they pay for being lazy or not wanting to take the full responsibility is loss of management skills and loss of money. Most contractors on PAYE are paying in excess of 35% of their gross earning for the privilege. This is a potential loss of up to 20% or more of their earnings compared to if they took responsibility and ran a proper tax efficient contracting company.

Loneliness

It seems this type of work attracts a lot of introverted and shy individuals who hide themselves behind their large multiple screens and bury their heads in their software code. If this is how you like to work and you feel comfortable with the detachment and solitude then that is great for you, however keep in mind that you will have to communicate with your managers and fellow developer colleagues at some stage – therefore, some social skills and interaction would not go amiss.

The best way around this loneliness is to make friends out of your department. Often, an IT contractor is more readily accepted by other departments of an organization than in the IT department. Sometimes this situation can border on the ridiculous. I recall a contractor once sharing a funny story with me about a role he accepted within a military organization. The IT department was so jealous of contractors that the last four contractors had left before a week had passed. On his first day there, he chanced to ask a permie colleague where he might find the toilets. He was told, “You’re a contractor, go figure it out. Find it yourself.” Strangely enough, the contractor never stayed long enough to find the toilets. 

More paperwork and rules

Ignorance is seldom free; its price is often hidden from the ignorant individual. Some say, “What you don’t know can’t hurt you.” This statement is not true. In the IT contracting what you don’t know will cost you money, and what you do know, will make you more money. Therefore, learn to know more and you will increase your dividends and financial compensation. This will mean reading, enrolling on training courses or undertaking home study courses to improve your knowledge, qualifications and skills.

Money management

Like most permies, some contractors live beyond their means. This is especially true of those new to contracting; they carry the bad habits from their permie work experience into contracting. The danger of this is immediately clear once you take into consideration the irregular income patterns of certain contracts.

Whilst permies can set a clock by the arrival of their next salary instalment, contractors often cannot. Some IT contracts pay invoices weekly, bi-weekly, monthly, fortnightly, or even quarterly in some rare cases. Others have strange arrangements such as three week delays between submitted invoices and actual payment transmission, or payment delays subject to security checks and paperwork submission (i.e. passport, indemnity insurance, proof of residence, security clearance checks, etc).

This irregularity in income and the insecurity associated with getting your next contract, make living beyond your means a more foolish proposition for contractors than it may be for permies, who due to the consistency of their incomes, can plan their repayments and the settling of their temporary debts – such as bills and credit card balance clearances – more reliably.

Financial happiness is more to do with stress and worry than it is to do with earning levels. Stress and worry with finances comes with not having enough money to settle your financial responsibilities in a timely fashion. Most people use credit cards and loans to bridge the gap between what they make and what they spend. Some contractors carry on this disastrous habit into their contracting life to disastrous conclusions.

Living beyond your means accentuates and increases the insecurities associated with contracting. Living this way will cause you to run back to being a permie, abandoning contracting in disgust, blaming insecurity as the reason, whilst your bad money management habits were the real reason.

Avoid this pitfall by setting aside half to two thirds of your gross earnings for taxes, VAT, and a rainy day. Doing so will allow you to live within your means whilst at the same time, building savings and financial security.

All your purchases and financial commitments such as bills, mortgage etc., should pass the delayed gratification litmus test. Do not buy things that will cause you to exceed your allotted income allocation.   Similarly, you should prioritise your financial expenditure. VAT and tax should always lead the list. Payments to your various insurances should be next followed by accountancy fees, travel for work purposes before food, bills, mortgage payments, clothing, leisure and luxury purchases.

Surprisingly many contractors have this priority list reversed. They spend their earnings on luxury purchases first (flashy car, nice holidays, expensive clothing, shoes etc), buy food, pay their bills and mortgage then realise they do not have enough left for anything else. Soon the HMRC come knocking.

The successful contractor

We have covered the pros and cons of contracting; let us now summarize the traits and habits you need to become a great contractor.

• Adaptability
• Interpersonal skills
• Humility
• An observant self promoter
• Diversified experience
• An active networker
• Outstanding reputation 

Adaptability

To be a great contractor you have to be adaptable. Most contracting roles require ‘someone who can hit the ground running.’ A contractor is paid for their skills and knowledge – therefore, most organizations will not be prepared to train you extensively to do a role that they expect you to know already. Apart from a general orientation to the organization and a brief introduction to the location of the basic facilities and resources, you are pretty much left to adapt to the organizations culture, working environment, technical tools and procedures.

The learning curve in a new contracting role can be sharp. It will mainly be your responsibility to fill in the gaps, ask for what you do not know and avoid making serious errors early on in the role. However, with experience you will learn to adapt almost instantly, as this cycle becomes second nature.

You will have to be observant, especially in your first week on site at a new organization. Observe how people dress, learn to recognize the subtle boundaries in acceptable attire and grooming. Observe the unspoken acceptable lunch activities and duration. Listen to what most people you work with discuss to determine the acceptable unspoken boundaries. In some IT departments, no one speaks whilst in others, they may have a radio on and jovial banter prevails.

Quickly learn the dos and don’ts and acquire a list of the important people you need to be wary of as soon as you can. If possible, find a friend quickly. Someone you can trust to ‘show you the ropes’ and steer you out of danger.

Most importantly, do your work and do it exceptionally well, until you are told otherwise. In some organizations exceptional work may alienate you from the rest of your colleagues – therefore, try to determine the boundaries of acceptable excellence before you shoot yourself in the foot and forego a renewal.

Interpersonal skills

In most contracting roles, you have to work with other people. Learning to deal effectively with them is crucial to being great at contracting. From the first time, you speak to your interviewer(s) to the contract end date – you are judged on how you fit into the department or organization. How you interact with others and how well other people like or dislike you, are all points taken into consideration when your renewal is being reviewed.

A general rule therefore will never suffice for the variable conditions you will face, however a few traits are worth developing with everyone. These are as follows:

1. Show genuine interest in others.

2. Be friendly – smile.

3. Develop humility.

4. Never put down others – in front or behind their backs.

5. Develop a sense of humour.

6. Never gossip about others.

7. Look for some good in everyone.

8. Participate in social activities.

9. Participate in departmental customs (such as getting teas and coffees for everyone when it is your turn).

10. Avoid office politics (especially when being used to undermine another colleague).

The list above is not always easy to follow. However, do your best to keep to the points, and you will be liked by most people and quickly accepted into future IT teams. Conversely, if you are a show-off, antagonistic, unsociable, unfriendly, unhelpful, manipulative and prone to office politics and gossip, you are hardly going to be liked by many people.

Humility and helpfulness

Most contractors fall over at this hurdle. They feel that if they are helpful, they will dilute their own usefulness to the organization. This is not true. Any manager who sees you sharing and adding to the organizations IT knowledge pool and skill base will be happy to retain your services for longer. Similarly, if you are humble concerning your abilities, income, wealth, holidays and other material possessions, you will offend and upset less people than if you bragged and boasted about your advanced skills, and wealth.

Bragging about your experience gained through contracting and your advanced skills will cause people to constantly put you to the test or worse, cause you to make a fatal error through withholding information or using internal politics against you. Either way you will be leaving the organization earlier than you planned.

Be humble; let your actions tell how skilled you are rather than your tongue. Play down your income and only discuss the things that you know will not get any of your colleagues jealous of your wealth. As an example, try not to rub your situation in their faces by wearing expensive clothing, driving an expensive sports car and eating expensive lunches each day.

If you have these things, moderate how much you show and talk about them around your permie colleagues. It only takes one person to harbour bad feelings against you – be on good terms with your manager – and you are as good as out of the contract.

Conspicuous display of your wealth is never good under any circumstances. It attracts jealousy, envy, resentment and spite. You can make others feel inadequate and undermined. The easiest reaction to you by them is to hurt you or in some way, cause you to lose some of your wealth. The easiest way for them to achieve this is to cause you to lose your contract.

Be helpful to your permie colleagues and be prepared to learn from them. It is tempting to unload your vast knowledge and experience; however, try not to give unsolicited advice. Permies may feel insecure and undermined around a knowledgeable contractor. Therefore, only give advice if you are asked for it, or when you feel it will be of immediate help. If you sense a permie is talking nonsense or trying to show their superior technical knowledge in order to belittle yours – refrain from engaging them and causing everyone to see how little they really know. You may win the battle but you will water and feed the resentment growing within them. Later on, this same resentment will bear fruit elsewhere, causing you some financial inconvenience.

As always, be humble and avoid such confrontations. Your humility will save you a fortune in the long term in IT contracting. You know what you know – you can do the job and you can do it well; therefore, there is no need to talk about how great your knowledge is, especially when doing so will not increase your contract rate.

An observant self promoter

This heading may seem to contradict the previous heading, however closer examination of this topic will show otherwise. As a contractor, you are in business to attract and secure work for your business. In a sense, you have to be a working advertisement and a sales and marketing department for your business. Therefore, you have to be an observant self-promoter. Observant because you need to be observant to spot opportunities and a self-promoter because once you spot an opportunity, you need to promote your services in order to be considered for the opportunity.

As you contract at various organizations, you will hear of problems that you may be able to offer a solution. This could lead to a contract extension or the start of a new contract (either way, you stay longer in a contract). This is a great way to guarantee your contract is extended or you are kept on after your initial contract ends.

The opportunity could be a training, software development, management, hardware and/or software installation and configuration, system management, support etc. Incidentally, this is also one of the best ways to improve your hands on knowledge and skills.

If you have been producing excellent work for the organization, and the decision makers and your colleagues like you, you stand a greater chance of getting the extension or new project opportunity than if you have not.

Diversified experience

The value of a contractor to an organization lies in them knowing what to do and how to do it. This means they require no training, and can be left to carry out the required work – in most cases unsupervised. This experience and skill is mainly acquired through the hopefully diverse experience the contractor has gained.

Your employment status, after 24 months at any one organization, changes to that of a permanent employee. If you are a contractor, and you are not moving around different projects at least several times a year or every couple of years, you may be getting stale and your skills may be getting blunt and undiversified. You may also be putting yourself at risk with certain tax laws that are meant to catch contractors who might as well be permies – we will discuss these tax laws at length later.

By staying at one organization and doing the same role for years on end, you are robbing yourself the advantages of new skills, experience and potential higher rates. These are part of your value as a contractor – a broad and varied experience.

If you have not changed contracts in a long while, you may lose confidence at interviews, get out of touch with market trends and fall behind with the latest technology and procedures across different industries. You need to stay ahead of the market trends and keep your interviewing skills and confidence high by regularly moving around to different projects. Nowadays, this has become a valid contracting tax avoidance strategy; especially with new tax laws, designed to catch contractors who carry out non-project based long-term contracts.

An active networker

If you contract through an agency, your rate will be decreased by a sizeable fraction – 10% to 30% or more in rare cases. This decrease is the agency fees. It makes sense then that a contract you acquire by going direct without an agency will be that little bit more lucrative. It is therefore, prudent to be constantly on the lookout for such contracts.

You can find them through using your list of contacts. Old friends, old managers, even old agents may be able to put you onto new contract opportunities that will allow you to go direct to the organization.

Networking and building a long list of contacts is only of use if you keep in touch and update these people of your current situation and possible future requirements or availability. It is easy to get into the habit of only calling your contacts when you need them, however, this can be counterproductive. It is better to stay in touch regularly and build a social or professional friendship with them. Lunches, social meetings for drinks, messenger chats, and email conversations are all ways of doing so.

You should also take every opportunity to help your contacts find resources they are looking for, even when that resource does not directly benefit you. Other contracts, agencies, managers etc will be more helpful to you if you are helpful to them, too. In some cases, you could earn a commission or at least earn a free drink for your trouble. However, the long-term value of networking and helping your contacts is that when you need help, they, too, will be more willing to help you.

It is said that people like doing business with people they like. Help others to help you by networking and maintaining contact with those who – one day – could help you secure your next lucrative contract. Once you start networking, you will find the process of securing your next contract less daunting and more profitable.

Outstanding reputation

The contracting world can be very small, and word quickly gets around amongst agencies, contractors, and permie managers in organizations. If you do a really bad job at one organization and your contract is prematurely terminated or if you manage to hold onto your contract but infuriate your agency or other contractors whom you work with, you may find that your name is passed around to the friends of these agencies and other contractors. Some of them may have a say in how successful you are at securing a future contract.

Similarly, if you infuriate managers, team leaders, your permie colleagues or other contractors – when they move on to other contracts and your CV is presented to them for a role at their new organization, they will ensure you are never called for that interview.

What to do next

Do your research

To begin your research, first talk to contractors doing similar or the same work as you at your place of work. Next, look up a few IT recruitment agencies who work in your area of expertise. Get relevant information from them about the contracting market, especially what you need, to more easily secure contracts in your field of expertise. Find out how much the average contract in this field – at your level of expertise – pays. Ideally, you are looking for almost double that of your permie wages.

Call the advertisers and ask if the roles are still available. If the roles are no longer available, ask how long it was available before the role was filled. Also, ask what you would need to secure similar contracts in the future.

Armed with this information, you can now proceed to acquire the relevant skills and experience, or if you already have them – highlight them in your résumé.

Be prepared to compromise

After selecting the IT specialization closest to your current skills and experience, you next need to acquire the missing experience, skills, and knowledge. Seek first to acquire this through your permie job before venturing into a contract. Failing this, you should aim for a junior contractor position as a stepping-stone to help you acquire the missing experience.

Some areas of IT contracting are easier to enter from a permie position than a contracting position. Business Analysis for instance, is easier to enter as a graduate than it is to enter through any other means – except if you are coming from a project management background. Other IT specializations such as SAP are expensive to train for, and so it would be more prudent to use a permie training program to fund the training and certification needed for them.

Setting up your corporate foundation

As a contractor, you are a business owner in your own rights. You have the option to outsource any one of the following business functions to third parties:

• accounting and tax planning,
• sales and marketing,
• human resource,
• public relations,
• legal and compliance,
• admin

However, every time you outsource a function, you lose control of part of your business and possibly lose revenue too. Whilst it is important to focus your energies on what you do best – leaving the other functions that you do not specialise in to third parties, it is unwise not to understand these functions at all. Not understanding what your accountant or agency does means that you will not know how you could improve that function. Similarly, if you do not understand your business you will not be able to clearly identify profit haemorrhaging.

Profit haemorrhaging occurs when you lose money unnecessarily due to bad planning, and over-outsourcing. Contractors who can’t be bothered to learn to maximise their returns turn to companies and agencies who promise to alleviate this responsibility. An industry has grown to service these lazy contractors, offering a complete outsourcing package. For the price of their laziness, these companies literally turn contractors into permies working for them. They strip the contractor of almost all the benefits of contracting leaving them with less than two thirds of their gross income.

We shall discuss the outsourcing services solutions available to UK contractors first, and end this section with how to take total control of your contracting business by running a limited liability company with minimum outsourcing for maximum financial benefits.

Structure choices

• umbrella
• composite
• limited liability
• other structures

These structures are all offered by Managed Services Companies (MSC’s). An MSC is any company that offers to manage the running of your contracting affairs for you. They can be difficult to identify but cost you dearly if you are caught using one by the HMRC. To find out if an MSC is involved with your company or contracting business, look out for the following signs:

1. They benefit financially on an ongoing basis from the provision of services to you. Often they will receive a percentage of your contracting income as their fee for providing services. This fee will be linked to your contracts, therefore you pay only whilst you earn. They will also handle invoicing of the organization you are contracting at and pay you, less their admin fee (in essence this is what all agencies do).
2. They will influence or control how you get or secure your contracts. An MSC will normally arrange contracts, negotiate changes to your contracts, negotiate rates, arrange when you go on site, and handle disputes between you and organizations.
3. MSC’s may also influence how and when your time sheet and their invoices are paid by the organization. They will normally have access to your company bank account or control it and make payments on your behalf.
4. They often offer payroll services and calculate dividends, expenses, tax and VAT due, and also instruct you on how much to pay yourself from the company bank account.
5. MSC’s may also promote insurance schemes promising protection against tax loss due to tax investigations, or successful HMRC legal cases brought against you. These insurances are normally related to IR53, PAYE, or VAT.

A word of warning about MSC’s, stay away from them. Since 2006, the Chancellor has targeted them exclusively and removed all their benefits, therefore using one will actually cost you dearly when you eventually are caught by the HMRC. Once caught, you will have to pay all benefits gained from using one by having all your income treated as PAYE.

Umbrella Companies

Umbrella companies promise to remove the hassle of managing your contracting business. In return they offer you a means of contracting. Their downside is that they treat your contracting income as PAYE[2]. This means you lose the 17.5% VAT, plus your income receives the permie tax treatment on the rest (10%, 22% and/or 40% deductions) after allowed deductions for expenses – less the Umbrella Companies admin fees.

A few things to beware of in Umbrella companies; make sure they do not use the services of an MSC. Similarly, you may be at risk if any of the other contractors operating under the umbrella become involved in trouble with the HMRC.

• It has never been an MSC or Composite Company.

• It doesn’t use the services of an MSC or Composite Company.

• It’s not a subsidiary of an MSC or Composite Company.

• It’s not a subsidiary of a company that once was an MSC or a Composite Company.

• It operates a salary only scheme and does not attempt to operate outside IR35.

• Allows you to claim the following:

1. VAT on expenses if your company is VAT registered.

2. Limited Company accountancy costs.

3. Business insurances – professional indemnity, business contents and other business related insurances.

4. Company bank account charges and interest.

5. HMRC approved Pension scheme payments.

6. Your gross salary – usually kept to a minimum, in order to maximise shareholder dividend disbursements and avoid paying employees and employers national insurance contributions.

7. Spouses’ salary – must be a realistic actual amount related to duties performed.

8. Travel expenses.

9. Motor expenses – mileage claims if the vehicle i