How to work out what contract rate to charge and maximise your income

When you go from being a permanent employee to contracting for the first time you need to know what rate to ask for your skills.

So how do you go about calculating this? What should you quote when speaking to agents and clients? We'll tell you how in this guide.

Why you need to quote the correct market rate

Failing to quote the market rate for your skills could lesson your chances of securing a contract, and more often than not could end up with you lining the pocket of an agency rather than your own.

If you quote less than the market rate then:

  • You could miss out on higher incomes, instead just lining the agents pocket with a healthy margin.
  • You could appear less skilled than you actually are and fail to get interviews. Perception is key.
  • Get more interviews since you are charging less than your competitors, but then fail get any offers because you are over qualified.

If you quote more than the market rate then:

  • You could appear more skilled than you actually are and fail to get interviews.
  • Get fewer interviews since you charge more than your competitors.
  • Fail to get any offers after interviews because you are not qualified enough.

Whilst maximising your income is one reason for quoting a good market rate, it is also important to pitch yourself at the right level. Your skill set, and hopefully your knock out killer CV is one part of the pitch and your price is another.

If they fail to align then it could lessen your chances of securing a position. Most firms expect to get what they pay for and the price you charge will be perceived to be what you are actually worth.

How to compare employee salaries and contract rates

Advertisements for permanent positions normally display a salary figure together with benefits, and sometimes a ‘total package’ amount. Prospective candidates can then easily compare various opportunities.

However, the majority of advertisements for contract positions rarely mention the rate other than quoting ‘market rate’. Whilst there is no legal requirement to quote the rate, if a rate is quoted this tends to be because:

  • It is lower than the market rate. This prevents agents receiving applications from candidates with higher rate requirements.
  • It is higher than market rate, and therefore is a good selling point for the contract. Great for attracting lots of CVs!

There is another reason for a high rate: the position might be fictitious and just be used as bait to collect CVs for future use. Whilst this is illegal activity, it does occasionally occur.

How agency margins work

It is in the interest of the agent not to quote the rate since they are looking to make as much margin on the sale as they can. That's how they make their money.

As sales people, agents welcome the opportunity of negotiating with contractors who aren’t entirely sure what they should be charging - because they can negotiate rates down and increase their margins. Thus, the naïve first time contractor can be a good opportunity for an agent.

Some agencies have fixed percentage margin agreements with their clients. Whilst charging under market rate can sometimes be attractive to an agent since they stand a better chance of placing you, beware of pitching at the wrong level. Most firms appreciate that you get what you pay for.

Asking the question 'What is an Acceptable Agency Margin' is nonsensical. Negotiating with agents is a game where they try and squeeze margin out of you whilst you try and get the top rate you can.

How to calculate a minimum starting contract rate

Contracting usually pays more than permanent employment. You can therefore determine a minimum starting point for your rate based on what you get paid as a permanent employee.

To do this start with your permanent salary and add in your benefits (health, contractor pension etc) until you get to a ‘total package’ figure. Put that figure into the Permanent to Contracting Calculator to determine a minimum starting rate.

For example, a total package of £50k results in needing a rate of £28 per hour outside IR35, or £39 per hour inside IR35. The IR35 tax legislation is a key peice of tax legislation that all contractors need to be aware of, and try to ensure they do not get caught by.

The financial impact of IR35 on your take home pay is huge, with contractors caught by IR35 taking home 25% less than those that aren't caught.

Researching rates using market surveys

Some web sites offer very useful survey results stating what rates certain skills can command in the current market.

Whilst these figures provide some good overall guidelines they can be a little limited, since they do not take into account combinations of skills, the level of experience, and market sectors.

Ask other contractors what your rate should be

This is the best way of finding out what you should charge. Simply ask an experienced contractor you know or work with who has similar skills and experience to you.

However, consider that rates for contractors working in the same market with the same skills and experience could have rates differing by up to £100 per day.

Rates vary considerably across markets

It can be, but is not always, the case that different markets pay higher rates than others. Banking for example is known for higher rates and a daily rate could be as much as £100 more in banking. But expect to work longer hours for that money.

Applying for contracts using agencies

When you speak to agents it will normally be because you have applied for a position and they are phoning you to discuss rates and possibly arrange an interview. Make sure you have a number to mind, for both hourly and daily rates.

They will inevitably ask the question ‘What sort of rate are you looking for?’

You can try your luck by saying ‘I charge market rates, what can the client afford?’ The agent might mention a rate, in which case you can try saying you were looking for £10 an hour more and then gauge their reaction.

If they don’t quote a rate then throw a number at them and try to gauge their reaction. If they agree with it then add £5 an hour to the next agent you phone.

After a speaking to around 10 different agents you will get a rough idea what is a good rate for your skills.

Protect yourself - don't commit too long on your first contract

For first time contractors it is hard to know what rate to quote for your skills. It’s not until you’ve got hard experience that you can measure what you’re worth, what you should have charged and what to do next time.

Therefore, for your first contract it is advisable to only commit to a maximum of a 6 month contract whilst you get the vital experience and understand what you are really worth.

If the agency is getting a nice margin, they may try and convince you to sign up for a year. Or it might be that the contract is for a year anyway, in which case you want to get it right first time.

You can counter the pressure to sign up for a long period by saying that provided you are happy you will stay. If they want a whole year (and you are sure the rate is good) then you could also insist on their being no termination notice from either party in the contract.

Sometimes agents will ask you to sign up for a year with a verbal promise of a rate review after 6 months. There's no such thing, don't believe it.

And the final piece of advice? If you find yourself having signed a contract and discover that the agent has taken a massive margin, or that you aren't charging enough - take comfort in the fact that we hear this all the time. You will not be alone, and it's a short term lesson that you only need to learn once!

Updated: Tuesday, November 8, 2016

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