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Thinking of becoming an I.T. contractor? Get a hard nose.

5. October 2012 by Dave Hawes 31 Comments

Why I think I can give some advice

Four years ago I created own start-up which did the very opposite of making me a millionaire, my plan B at that point was to become an I.T. contractor, which I did 3 years ago. I’m not the most experienced contractor but I have learnt a lot of lessons along the way. A couple of years ago a friend asked for some advice about becoming a contractor and another friend just asked me again this morning. So I’ve dug out the email I sent a couple of years ago and have put it here..

The Pros

  • The money is good
  • You can pick and choose contracts which includes locations (I compare this to when I worked at a consultancy who could send you anywhere round the country for months on end)
  • Every contract you meet new people, learn new things (business stuff as well as technical) and has the possibility to take you career in a different direction
  • You can stay out of corporate politics
  • As a temporary member of staff you generally don’t get given long term responsibility (although some people like having this responsibility so it might be a Con)

The Cons

  • The work is not guaranteed and the future is unknown
  • You generally only have 1 weeks notice (I was given that once when the client suddenly realised they had no money left, so it does happen)
  • You can be treated as a bit of an outsider sometimes.
  • No structured career path.
  • No perks and you never have that sense of ‘belonging’ which you can get as an employee in a company.

My Advice

In a nutshell, if you know a particular product / technology very well, you can convince people of this and my Pro list sounds good and the Con list doesn’t sounds too bad then you probably have a good chance of enjoying being a contractor, so here is the rest of my advice:

Setting your self up

  1. You have to believe enough in your abilities to quit a safe job for an unknown future.
  2. Set-up a Limited company
  3. Get an accountant to do the books / returns. This probably costs in the region of £800 - £1000 a year but it money well spent
  4. Get VAT registered on the Flat rate scheme. You charge you clients 20% and pay the HMRC 15% but you cannot claim VAT back on any of your purchases, so if you buy loads of stuff you might loose out here, ask you accountant you got in step 3!
  5. Get a good number of on going clients. There is a tax rule (IR35) that you cannot work solely for one company otherwise the tax situation is different. If you build a customer base of a dozen or so companies you regularly do business for this can help the situation. Speak to you accountant for professional advice on the situation (make them earn their £800 - £1000).
  6. Get an online accounts package. There are a good number out there, they can make it easy to raise and track invoices plus integrate with HMRC’s returns system, plus it’s online so it is available wherever you are. (£15 - £20 / pm ish) http://www.kashflow.com/ or http://www.freeagent.com are good examples.
  7. Build up a war chest. You need to save enough money to see you through any lean times. If you can save enough to keep you going for a year that is good. It also enables you to bargain harder for rates if you know you are not desperate for a new contract to pay the bills.
  8. Stay functional. When times get lean projects still need people who do the work and will cut out the management and make the doers manage the project as well, don’t get dragged solely into management and loose those functional skills.
  9. Be wary of recruitment agents. Take anything they say with a pinch of salt because they don’t work for you. ‘If you don’t pay for the product, YOU ARE THE PRODUCT’. At the end of the day the client companies hiring pay the the agent’s mortgage. This means the agent will do what it takes to keep the client company happy, not you. There are some excellent agents out there, just finding them and building a good relationship with them is the key.

Your are the product so sell and market yourself

Now that you realise you are a product you need to package and market yourself properly:

  1. Get a good CV. I used this book http://www.careerconsultants.co.uk/career/books-perfectcv.asp and spent 2 days re-writing my CV and hours doing re-work before I apply for new roles. CV writing is time very well spent.
  2. Be excellent developer but make sure you are a specialist in a popular product. This increases the chances of getting a contract plus increases the rate you can get. As a Microsoft developer I’ve chosen to be a Dynamics Crm specialist. Sharepoint and BizTalk are in demand at the moment as well.
  3. Blog / write articles, attend user groups, answer Stack Overflow questions, give back to the technical community you live in. This builds reputation and sets you apart from the other candidates who are going for the same contract. When you need a new contract these people you have helped by sharing your knowledge could help you back.
  4. Make a good name for yourself, be excellent at what you do and make sure the right people know this. If you are a contractor and you speak at events, make sure the audience know this as they might want to have you on their project for a few weeks / months. It is all about personal brand and inbound marketing.
  5. Networking and Inbound marketing is important. LinkedIn is excellent, make sure you keep your skills and availability updated. Updating your status to looking for work is sometimes all it takes to get a new contract.

 

In Summary, You need to get a hard nose

It might sound obvious but you are now on your own.

There is no sick leave, holiday pay or pension. If you are not working you are not earning. You have to pay the employees and employers tax / NI on what you do earn, you have to pay for accountants and your own training, your own hardware and software licenses the list goes on and on. This is why contractors rates look good to people who don’t understand the cost of being a contractor. Everything you do needs to be earning money. If you are asked to work a bit later on a project then make sure you get paid for it somehow. If your contract hasn’t been extended with a month to go, find a new contract as ‘if you are not working you are not earning’. Been asked to be ‘exclusive’ by an agent? Tell them to get stuffed unless they are willing to pay you if you are out of contract and they haven’t found anything for you. Been told that the contract is yours but haven’t signed anything? Keep looking until the ink is dry on the bottom of the paper.

I found my hard nose by loosing lots of money on my start-up and feel that is a big reason why I have done ok so far as a contractor. I ignored my own advice on one contract and put in a lot of effort over and above what I was contracted to do, the thanks I got was my 1 weeks notice just before Christmas when the project ran out of money. It was a sharp reminder to me why I should stick to my own rules!

Comments

Craig Hogan
United Kingdom Craig Hogan said:

Great post Dave, I have been doing this company/freelance thing for 7 years and although I find work without the 'help' (I use that loosely) of agencies the points here are all relevant.
The points I did different;
4. I am on standard VAT, so purchases with VAT are claimed back against VAT to pay. I did this as I started offering IT hardware as part of my service (this was pre Ebuyer when there was a few % margin in it). These days I don't do this, but companies look at VAT registration as a good thing, there are benefits for them to hire me apposed to someone who is not registered.

DO NOT forget to pay the HMRC for VAT and PAYE (you have been warned)

Get a good accountant and ask them every time you have a question, that is what you pay them for. If they don't understand freelance/self-employment find a new one that does, a good accountant will save your hard earned cash.

If you are interested in networking or meeting other consultants/freelancers then I would advise having a look out for local user groups.
These are the best place to meet people who do what you do, they are usually pretty casual (sorry for the blatant plug - our one in Surrey www.devevening.co.uk takes place in a pub) and from personal experience this is where I have built a pretty strong network of people I can ask to help me, or can pass work to when needed. Other groups, like NXTGen, Vbug operate all over the UK so go along and start networking.

Paul Tottie
United Kingdom Paul Tottie said:

Great post Dave! As a permey who is considering making the switch you have provided plenty of points I hadn't considered. It's not as straightforward as some agencies might have lead me to believe!

Stuart Lodge
United Kingdom Stuart Lodge said:

Great post, Dave.

From my own experience I'd also add:

- beware of the amount of time that conferences and exhibitions can take up - this is all time you don't get paid for!
- customers love fixed price projects, but hate fixed spec projects - and they love asking for free support after the bulk of work is done. If you find yourself bidding for fixed price projects, then add a significant contingency. Then always keep a track on how much time projects are really taking. If you find yourself out of pocket, then talk to the customer - they normally understand and work with you. If they don't then you know what to do next time there's a change request.
- do not register for flat-rate VAT if much of your work comes from the US - if it does then flat-rate can leave you significantly out of pocket
- there are an ever growing number of accountancy-startups (umbrella company and beyond) - I now recommend these ahead of real accountants - but that's partly because I've had a great experience with Crunch and had a nightmare with a real accountant (he went missing!)
- I personally avoid recruitment consultants... and I still haven't gotten around to writing a CV... word of mouth seems the way that all my projects come!

Dave Hawes
United Kingdom Dave Hawes said:

I don't think I really mentioned about not having a hard nose.

When I was on a salary I would just do stuff as I got paid the same no matter how much work I did over the month. It is easy to do this when you feel you belong at a company. I had little concept of putting a value on my time. I would often put in masses of extra hours in a month to deliver stuff and when the companies made a nice profit we would get an email saying well done, and if we were lucky a few hundred quid bonus at the end of the year.

Doing my startup showed me the value of my time and that I to to make sure people paid for it (I didn't do that and lost lots of money as a result). Now I value my time more accurately I'm not sure if I could go back to a standard salary. I think I would have to have a decent equity share in a company to benefit from any overall company success, which is exactly what I have now, equity in my company which lives or dies by charging for its product, Developer Hours.

Dave Hawes
United Kingdom Dave Hawes said:

Just to comment on the comments ;)

I would have to agree that you have to pay the taxman first, you just can't negotiate with those guys!!!

Going on the FRS for VAT is definately something that varies from situation to situation and can actually cost you lots of money if you get it wrong.

Getting work from word of mouth is always best but I feel it usually takes some time to build up a good enough reputation and network to be in this position.

On pricing, I only ever sell days of work now. Doing a fix price means that you would need to spend a lot of time defining it was you are going to build which in itself is a hard sell sometimes!

Personally I don't go to conferences any more, it was ok when I worked at a company on a salary as a nice job jolly but if I'm honest the value I got out of them was not very much. Now when I consider going to these things I have to put a missed days pay ontop of the entry price and ask myself if I would really get £x value out of the conference compared with spending that money on other stuff such as new software tools or books.

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