When your rate gets cut: an IT contractor's guide

No less than seven financial services organisations in about as many months.

It all started in the first quarter with Morgan Stanley and Credit Suisse, and in August they turned up at a leading insurer and at Britain’s biggest bank.

So it's clear that IT contractors will be hoping that ‘take it or leave’ rate cuts were a spring-summer fad that September will have no truck with, writes Natalie Bowers of BOWERS Partnership, a contract recruiter specialising in Investment Management.

But who are the IT contractors most at risk, even as we enter September, a traditionally busy month for IT recruitment due to candidates and hiring managers returning from their summer holidays?

Are you a high risk target?

• You’re probably working for one of the larger investment or retail banks.
• You’re probably in a tall building in the City or Canary Wharf.
• You’re probably one of the hundreds of contractors on-site.
• And you’re quite possibly working through a double layered supply model. In other words, your agency probably doesn’t even own the relationship or the contract with the end-client. Chances are they are supplying through a 3^rd party RPO (Recruitment Process Outsourcer), or a Neutral Vendor.

Contractors, this set of circumstances puts you at a greater risk of a rate cut than almost any other type of contractor in the UK.

When an IT contract rate cut looms

So let’s say you get wind of an impending 10% rate cut, as IT contractors often do.

Let’s be realistic, you almost always have only two choices.

• Take it (i.e. accept the 10% cut)

or

• Leave

If you are leaning towards ‘Leave’ i.e. refusing the rate cut, which almost always triggers the termination process, it’s time to ask yourself the following five questions:

1. Do you have another offer?
2. Were you planning to leave anyway?
3. Is this the kick up the backside you need to get yourself out of your comfort zone?
4. Do you really want to be out of a contract at the moment, or can you afford to be?
5. Is the market ‘hot’ for your skillset and are you confident that you can walk into another contract at your current rate?

Contractors, the more ‘yes’ answers you can give to the above five, the more primed to leave you appear to be.

Review your contract

While weighing up how you’ll answer the musically-infamous question ‘Should I Stay or Should I Go?’ consult your notice period. How much notice does the agency/client have to give you to vary the terms, i.e. cut the rate?

Obviously the longer the period of notice in your contract; the more billing days you have until the rate cut takes effect. Make the most of those days. If you were planning to take time-off, postpone it until after the rate cut takes effect and maximise the days left at your current rate.

Contractors, you should always try to negotiate a decent notice period in each contract you sign, ideally 4 weeks or 1 calendar month, and be wary of clients/agencies that try to get you to agree to less.

It’s business; it’s not…

Remember, with an across the board rate cut -- no matter how it feels, it’s not personal to you. This is a spreadsheet exercise and the person who took the decision to cut rates probably doesn’t even know your name. Don’t take it personally and don’t fall out with your client or agency at this stage in the game.

Time to negotiate?

Even though you can’t control the rate cut, you may be able to use it as an opportunity to negotiate something that money can’t buy. Perhaps you’d like shorter working weeks or hours instead? Perhaps some working from home time would be accepted? Both alterations have been known to be accepted in lieu of rate cuts and, positively for contractors, can boost your quality of life.

Do the Maths

Money talks and contractors will often initially decide to stay or go based purely on the numbers.

Example: Let’s say IT contractor Jon bills an average of 18.5 days a month over a 12-month period, taking into account holidays and bank holidays.
 
Contractor Jon currently charges £500 a day but faces a 10% rate cut:

Jon’s current day rate: £500
Proposed percentage cut: 10%
Jon’s day rate cut in £s: £50
Jon’s new day rate: £450

Like Jon, calculate your revenue at your current rate over the period of one-month using the average days per month. So using Jon’s figures, it would be:  
£500 x 18.5 = £9,250 (A)
 
Now calculate revenue at the new lower rate; in Jon’s case:
£450 x 18.5 = £8,325 (B)
 
The difference is: £925 (C)
 
While this may seem like a lot of money for Jon to lose, it is worth casting your eye back to what he will be billing every month at his revised lower rate (B). And then work out, if Jon (or you, using your own figures) declines the rate cut and ends up being out of contract for just one month, how long would it take to recoup those lost billing days, even if the subsequent contract secured pays the original rate (A)?

Well the answer is (B) divided by (C), which equals 9. But that’s nine months, not days!

For the unconvinced, here’s a breakdown of the figures:

Contractors, as the table shows, Jon will have to work for a significant spell of 9 months to make up the difference (and gets to sit on the bench for one month, earning nothing).

Financial review       

If you do accept a rate reduction, it’ll be high time to do a bit of cost-cutting of your own. Scrutinise the outgoings of your business. Is there an opportunity to reduce some cost in your own operating model? If you’re working through an umbrella company for convenience, might running your own limited company make more sense, in financial terms?

Do you really need that £2million Professional Indemnity cover in this contract or will £1million suffice? Only last week a contractor confessed he still has a policy running for £5m just because his first ever client eons ago required it! He’s never reviewed the level of cover required by subsequent clients.  

Every day costs should be examined too, both personal (would you get more value for money from your gym membership if you were on a pay-as-you-attend basis?); and the professional (your company might be paying for your mobile phone but are you paying for an outdated data package that you don’t even use anymore?). In short, a bit of a financial spring clean of your own could bag you a saving of a thousand pounds a year or more.

Take action

As a seasoned contractor you naturally always keep your CV current and bang up-to-date with your latest and greatest achievements…don’t you? Well if you’ve fallen behind with your personal admin there’s never a better time than a rate cut to dust off your CV and be sure to distribute it to your favorite recruiters. Don’t forget to actually call the recruiters and have a chat with them about your current situation and ask them to put you on their radar for suitable alternative contract opportunities. This approach doesn’t cost you anything and the recruiter can be working on your behalf in the background while you’re still being paid at your current day rate.

Top 3 questions when you ring recruiters

Have you got anything for me right now?

The rate cut season normally coincides with softer market conditions. The chances of your agency having a nice new shiny contract role for you on the day that you want one are therefore slim. But there is no time like the present when it comes to registering your desire to put yourself on the market and giving your favourite agents the heads up. They can start looking for you and cannot charge you to do so.

What’s the market like in general?

In general terms, it is extremely unusual for large clients to impose rate cuts in a contract-rich market.

How will this rate cut impact on the rate I get in my next contract?

The good news is that your current rate, or freshly cut rate, will not have any impact on the rate you can negotiate on your next contract assignment. Your rate history is not public knowledge and it need not have any bearing on your next contract offer. You can also make sure that your next agency is aware of your pre-cut rate and factor this into any negotiations.

And finally…

Here’s an interesting fact. I’ve discussed (and sometimes presided over) a myriad of proposed and actual rate cuts with hundreds of contractors working at a large variety of clients over the years. The sentiment and the conclusion is nearly always the same. While a rate cut is certainly a very unwelcome visitor, it still makes more financial sense to be in a contract and billing at 90% than to be sitting at home 100% of the time.

And ultimately, the decision to jump ship is rarely linked only to financial considerations. More often than not, contractors get itchy feet because they want more challenging work; a CV-enhancing project, an improved work-life balance, and the opportunity to learn something new. But marry just one of those with a rate cut, and you’ll likely be bidding your client adieu.