Contractors' Questions: Is an umbrella better for the AMS Framework?

Contractor’s Question: If I was to successfully put myself forward for a potentially fulfilling contract in the public sector which is apparently under the Alexander Mann Solutions (AMS) Framework, would I get paid more quickly if I used an umbrella company rather than my own PSC?

I understand that, traditionally, umbrellas operate a ‘pay when paid’ model, but with a growing number of brollies said to be using a weekly pay system, they surely pay the worker within seven days regardless, meaning the umbrella might have to absorb a cash flow hit because they pay without necessarily being paid themselves, right? This could be helpful to me, where there are protracted payment terms in place such as on the AMS Framework.

Expert’s Answer: Whether or not an umbrella company contractor is going to be in a ‘better’ payment position (i.e. waiting less time to receive their money in their account), than a PSC contractor on the framework you cite, very much depends on which Umbrella Company (UC) they work for.

It also would very much depend on the arrangement which the UC has in place with whichever recruitment business is involved in the contractual chain.

Umbrella companies should already have agreed commercial terms with recruitment businesses during the negotiations between the two parties, including when the umbrella is paid and when the contractor is paid.  

Ten years ago, it was almost entirely ‘pay when paid’ models in place at umbrella companies. But in recent years, we have witnessed a decline in the traditional ‘pay when paid’ approach and it is nowadays more common for UCs to take up funding/credit, with the effect that the contractor is paid before the UC receives income from the agency. For some contractors new to the market, it is often expected by them as part of the arrangement with their umbrella company that the contractor will be paid in advance of the UC receiving income from the agency. But note, it is usually only at established UCs (and established recruitment agencies), where the contractor stands a good chance of being paid on weekly basis, irrespective of longer payment terms higher up the chain.

With more certainty, we can say that how an umbrella company goes about managing the change from a standard, 32-day payment term to a longer payment term exceeding 32 days,  will often determine whether contractors walks away or not. In our experience, I imagine that if we chose to mirror a longer-than-standard payment term, then contractors may look to find an alternative UC which will be prepared to pay them weekly, regardless.

In your circumstances, you will most likely be looking to be paid by the UC weekly (with the UC possibly in arrears), even if the recruitment business is paying later than that (how much later depends on the negotiation, volume etc.).

You specifically mention a PSC. Well, whether umbrella contractors on the AMS Framework – which you also mention -- will be affected in the same way as a PSC, will come down to a few factors:  

• The relationship between the UC and whichever recruitment business as to whether there is renegotiation of the terms either immediately, at renewal or at all.
   
• The UC’s commitment to paying its employees on the same frequency as before the change (in payment terms).   
   
• The UC’s ability to ‘take the hit,’ as you say, and fund the gap. Some may not be able to do that, even if they want to.             

As you can see, it’s very much dependent on which umbrella company you, the contractor, is going to work through. A question to therefore ask whichever UC you're close to choosing is, ‘What will my payment frequency be?’. As I’ve outlined, it is becoming the norm between established UCs/recruitment agencies to ‘pay you even if we’re unpaid,’ and generally you'd expect a UC to be able to negotiate better terms than a one-person PSC but, as they say, ‘It Ain't Necessarily So.’

The expert was Damon Cochrane, operations director at Orange Genie Group.