How is the cost-of-living crisis affecting IT contractor day rates?

We’ve seen a steady increase in contractor rates since 2021 – the year the current cost-of-living crisis started, writes Charlie Cox, commercial director at STEM recruitment group SThree.

Average contractor pay rates on new placements made in Q1 2023 compared to Q1 2021 rose by a massive 23% over that two-year period. Looking more recently, in Q1 2023 compared to Q1 2022, contractors have enjoyed an average rate rise of 13%.   

Further, in line with this upward contractor pay trend, average rates between January and July this year compared with the same period in 2022 are up too - by approximately 5%. The trajectory on daily rates is invariably up, and that upward shift in contractor pay has happened alongside the cost-of-living crisis.

Contractor pay needs no more analysis – the results are in…  

We know that pay rates are vitally important to STEM contractors. And we don’t just know this anecdotally. Our most recent study ‘How the STEM World Evolves’ (conducted in the first half of 2023) analysed the mindset, motivations, and attitudes of Science, Technology, Engineering and Mathematics (STEM) workers, to put the importance of pay beyond doubt.

Ninety-two per cent of respondents to the study in the UK classified pay as “important” or “extremely important.”

Interestingly, 62% expressed satisfaction with their current remuneration, underscoring the critical role competitive pay plays in maintaining satisfaction in today's job market.

In comparison to other factors like access to training (48%) or the client's DE&I policy (49%), the pay rate's importance to the contractor community is undeniable.

Additionally, contract security (83%) and the personal fulfilment derived from assignments (81%) were also highly valued. These two findings in particular appear to demonstrate the multifaceted nature of job satisfaction among STEM contractors.

Rate is why contractors usually jump early

It’s not the first time that hard facts and figures have confirmed what our consultants have seen ‘on the ground’ – that pay is near paramount. In fact, we previously undertook comprehensive analysis which found the primary reason that contractors conclude projects or assignments ahead of schedule and transition elsewhere is pay rate.

The cost of living crisis, which has indiscriminately impacted of the majority of us since late 2021, is not solely the concern of permanent employees. This significantly affects contractors as well. We believe that when presented with opportunities that offer superior pay rates, contractors have demonstrated a willingness to transition, or 'jump ship', to more lucrative assignments.

Is ‘cost of living’ a reason for an  increase on extension?

When discussing pay rate increases as a contractor, it's essential to have a structured approach.

The 'cost of living' crisis can be a contributing factor, but it should not be the sole basis for your proposed rate increase.

Whether you're negotiating with an agency or an end-customer, your request for a rate increase should be fully justified. Prepare your facts and figures, outlining the reasons linked directly to the services you provide, any changes in these services, increased responsibilities, or altered milestones since the initial assignment.

It's also beneficial for you to understand the market rate for similar services.

So while 'cost of living' can supplement your justification for more money on renewal, it should not be the primary negotiation point. Similarly, while we're seeing cost of living currently being a partial influence on pay rises at extension, it is only one of many factors which gets considered.

The customer impact

The weight of compensation in attracting top STEM talent to an organisation cannot be overstated. So we’re advising organisations that, while they too may feel the effects of the cost-of-living crisis, cutting corners on contractor pay rates could result in them missing out on the best talent in the midst of a skills shortage -- making skilled STEM talent even more scarce.

Even if such an organisation succeeds in attracting a potential candidate, a subpar pay rate could lead to dissatisfaction and if a more lucrative opportunity arises, it is more than probable that a dissatisfied worker will seize it.

The domino-effect of such an exit can be detrimental to a project and the subsequent need to rehire can prove more costly. The financial implications of finding replacement talent can surpass the initial investment that would have been made by offering competitive market rates to highly skilled STEM professionals from the start.

Final thought

So even amid a cost-of-living crisis, it’s crucial for companies to recognise and invest in the value of their contract personnel by offering competitive rates, to ensure retention of top-tier talent doesn’t become a major issue. By not cutting corners on pay, end-users will be able to maintain a stable workforce and avoid the unnecessary costs of a high turnover on talent. Put simply, the value of pay rates is often fundamental to securing and retaining the best STEM contractors, and we expect that to outlast this somehow still-ongoing crisis.