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Contracting mindset tips: negotiation based on margins is futile

Contractors are small firms supplying their services in the business-to-business marketplace, which has none of the consumer protection or employment laws designed to protect the individual. And like any business, contractors negotiate rates with agencies and clients according to the realities of the marketplace and market forces, not some notional sense of fair play.

Focusing on margins during negotiation is nonsense in the real world

Last time you bought a car, did you ask the salesman what profit the dealership makes on each car they sell, and then try to haggle based on your personal view of what should be a fair margin?

If you sold collectables online via an auction site like eBay, would you expect your buyers to demand to know the original prices you paid for your goods and expect them to insist they pay a margin they feel is fair?

When you go shopping for new clothes do you expect high street retailers to display their cost price next to the retail price they charge you?

Client budgets and agency margins are normally confidential

Agencies are given a budget day or hourly rate by the end user client that is based on market forces. Either the agency has a fixed margin agreement or, being a commercial organisation in business to make money, they will try and negotiate the maximum percentage margin they can out of the client’s budget.

Unless an agent or client accidently reveals the budget and margin, or they are unusually open, you won’t know the total client budget, nor the likely margin the agency has agreed or will be targeting. This information is treated by most agency and client organisations as confidential, and rightly so.

Contracting businesses price to market, not margin

The amount you can expect to receive from that budget set by the client first depends on whether there is a fixed margin agreement with the agency. If not, then you need to have a feel for the market rate for your services and the availability of other contractors with your skill set. Then it’s down to how well can you can negotiate your contract.

If your skill is highly specialised and in great demand, you can call the shots in negotiations and demand a higher rate. But if your skill is very common and many of your fellow contractors are chasing a few contracts, then your negotiating position is weak.

Contractor mindset tip:

Basing your negotiating strategy on the possible margin an agency will receive and appealing to a notion of fair play is futile.

Published: 14 September 2010

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