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Contracting .v. permanent work

The pros and cons

Becoming a contractor is sometimes seen as the holy grail of information technology work. With an earning potential that surpasses the permanent equivalent by sometimes 100%, it can look very tempting indeed. But is a contracting position really that covetable? The reality is that there is no easy answer, and permanent and contract work have just as many advantages as they have disadvantages. The decision to go with one or the other is one that should be based on a balanced consideration of pros and cons, perhaps keeping in mind that ultimately it boils down to a question of lifestyle.

It is not a myth that you can generally earn vastly more as a contractor than you could as a permanent employee, but it is not always true. A top end permanent employee in an organisation can earn nearly as much as an equivalent contractor, but will, in addition to his or her salary, have a range of benefits that the contractor won’t have. These benefits can range from a pension scheme, private health care, car allowance, professional development fund and so on. However, these roles tend to be very senior, and are few and far between.

In many ways, the greater earning potential that a contractor enjoys can be seen as a compensation for the lack in job security. Some effort needs to be invested in keeping work coming in, and depending on a range of factors such as your skills and reputation, timing and the state of the economy, it may be difficult finding your next contract. The contract market tends to be highly counter-cyclical, so in a boom, you may find that the market is tougher than in a bust. On the flip side, what you lack in security and stability, you gain in having more flexibility and freedom. You will also most likely work on more varying projects, gain more experience with different technologies and different working constellations as well as potentially progress quicker in your career.

Naturally, working as a contractor there is always going to be more administration involved compared to if you were in permanent employment and you need to read up on how umbrella companies work. You may also need to factor in the cost of an accountant to help you with compliance and to ensure you run as tax efficiently as possible.
So if you have the skills and you can stomach the lack of stability and security, then there are good chances that you will thrive in a contracting role. However, if you are in a good job with prospects, and at the same time value the culture and environment in which you work, staying put might be the best option.

Contracting Advantages

Better Remuneration – As a contractor you should receive more in compensation for your services than individuals in permanent employment. Factors that affect how much a service is worth are economic climate, how in-demand the skills are and how scarce they are in the market place. It’s also common for companies to use contractors in order to have their permanent staff learn from them, as contractors usually represent a higher level of technological competence. It is also worth remembering that even if the equivalent contractor rate is much higher than the perm rate, the cost to the company is lower.

Tax Savings – Use an umbrella company to ‘run’ yourself or go into business with a limited company.  Both options are likely to save you considerable amounts of tax and make contracting even more profitable.

Be your own manager – As a contractor you can choose whether to accept work or not. You have the liberty to select your contracts according to your own preferences.

Job Variation – Contractors normally take contracts ranging between 3 and 12 months in duration. Working shorter contracts you will gain a experience quicker, work on more varied projects and hopefully get some big name companies on your CV. Never agree to a contract of more than 24 months in duration (unless the pay is big!) as you won’t be able to claim site based business expenses.

International Opportunities – In some fields there are ample opportunities to work abroad, on international assignments.

Build your network – Undertaking contract work allows you to build business contacts. If a client likes the work undertaken you may be asked to undertake another assignment.

Skills Training – The nature of changing projects on a regular basis gives you a chance to update and further your skills on a regular basis, and to learn from the best.  In general, contractors have more advanced skills that their permanent counterparts, which serves to give your career a boost.

Contracting Disadvantages

Work Security – Termination of the project, a weaker market or skills that are out of demand are all threats to your job security. Stay on top of your skills, and plan for rainy days.

Administration – If you run your own contractor limited company you will most  likely have to undertake administration in your spare time in order for the company to run smoothly.

Applying for Contracts – Imagine job hunting every six months. Most people would be driven crazy, so it’s worth keeping in mind that it can be a struggle sometimes.

Short notice holidays – Essentially, holidays don’t exist. Or you need to plan them for when you have gaps between jobs. Since contracting is so dependent on maintaining good relations with prospective employers, you will need to manage this with some sensitivity.

Holiday Pay/Sick Pay – Simply put, they don’t exist. Make sure you make provisions for any eventualities.
 
Skills Training – One way of looking at this is that you may get free training and skills development on the job, but if you would need to go on courses, you would have to pay for them out of your own pocket.