IT Contractor vs full-time Employee. Disadvantages to going the contractor route?

June 9, 2009 7:49 AM

I'm currently employed full-time for a large consulting firm and have recently been offered an opportunity to engage on contract as an independent consultant. I'm hesitant about the loss of stability that this may imply and request the communities feedback

Background: Working for several years for a "Large IT Consulting Organization", which also sub-contracts with Contractors and Professional Services organizations to supplement existing in-house skills for our clients. I have a good relationship with these folks and have recently been offered an opportunity to leave my current organization and contract for an engagement of at least 6 months to a year.

The question of compensation, tax, and benefits I think I've got a decent handle on. I'm more interested in the stability aspects to going the contractor route.

I'm an IT professional, age 25-30, recently married, no children for at least another few more years. Wife has a well paying job, current medium term savings give us roughly 6 months cushion time if I'm not drawing a paycheck.

In my current organization, it's important to keep oneself 'billable'. At the same time, I'm salaried and so have a measure of guaranteed income which I find reassuring.

Does anyone have any feedback, or lessons learned one way or another about going this route? I'd like to know more about what everyone thinks about this from a long-term career growth perspective, as well as short term gotchas and things to be on the look out for.

You can contact me directly at [e-mail]

posted by anonymous to computers & internet (5 comments total)

There's no guarantee of stability in the contracting world. Your six month contract might be extended or it might not. So the onus will be on you to build up your marketing machine so that you can go on to another contract (or contracts). You'll also want to work on your inside contacts, in order to increase your chances of having the contracted extended or getting a gig elsewhere in the company.

Although you said you had the pay hammered out, you might want to check it against typical consulting rates. If you look in my profile, there's a self link to a post I wrote on calculating an hourly rate. (Disclaimer: I run Consultant Journal, a blog devoted to independent consulting and contracting.) You should also consider the value you provide, as it may not be reflected in an hourly rate.

Really, what you need to do is work out a plan for finding work by the end of the contract. You should also consider whether this seeming "instability" will affect your personality and make it hard for you to pursue goals, such as committing to buying a home. I don't mean that it would preclude you doing those things. I mean that some people can't accept the potential instability of their income and therefore become stressed about making financial commitments, going on vacation, etc. If you think that could be you, you might want to look at how to address that. Although some people say that consulting/freelancing/contracting is a domain meant for only a few people, I personally think many of the concerns can be addressed with plans. So having an informal business plan and marketing plan for your contracting business is a good idea.

If you want more tips, please drop me a line.
posted by acoutu at 8:08 AM on June 9 [3 favorites has favorites]

If you are working for a consulting organisation and being billed out then you are probably missing a fair bit of cash.

I find that I can earn in 6 months what I could earn in a year in a permanent role - so I pocket some money and work about 35 week of the year. If you have a SO earning good money then you don't have too much to lose. The income security is a myth - people are getting made redundant every day and are WAY less prepared than you will be.

It is not for everyone. If you are looking to 'move up' then you probably need to be permanent.

Things you need to do:
- have 3-6 months of bills in a 'buffer' account
- Act professionally. This involves dressing smart (don't rock up in bike/running gear etc), acting smart, adding value.
- Don't act the 'expert' on day 1. Wait at least a week to see how the place works, who's toes you will step on etc.
- Being a yes man - take on the work, take responsibility. Don't complain when the permanent staff are not pulling their weight and taking your credit. Managers higher you to 'make them look good' - accept it.

Remember to take time off. I know guys who will not take a day off as it is costing them x £'s a day - my philosophy is that I am only working 35ish weeks of the year because I want to have a life and travel - as a contractor I can do this.

Before you do anything talk to a tax guy - not just anybody, but somebody who knows the contractor rules where you live. You do not want big tax bills down the track.

Go on, do it! Work for yourself. You can then afford to take a month of to do something you always wanted to do.
posted by lamby at 8:43 AM on June 9

Been there, done that -- that is, worked for consulting firms for about 5 years and went independent. That was 10 years ago and it's been great ever since.

In this business, I think the "stability" a salary offers is a farce, an illusion. If your consulting company can't bill you out, you will be laid off, period. Companies generally can't afford to keep paying somebody who isn't making them any money. It's harsh, but this is business.

This is anecdotal personal experience, but I've done work for several companies as an independent contractor and have survived several layoffs, even as each company's internal "permanent", "secure" employees (people with families, mortgages, etc.) were given their walking papers. I know the feeling is that when money gets tight, the contractors are the first to go, but in most cases that simply is not true. If they need you, if you provide a lot of value to them, they will find a way to keep you. (And a lot of times, managers can rearrange their budgets to pay contractors more easily that they can for salaried employees.) If anything, I feel being independent gives me MORE control over my employment situation.

What really kicked me out the door is that I started looking at the bill rate charged to the customer vs. the salary/commission paid to me (roughly 50% of the customer's bill rate), and I just could not get past the fact that it wasn't worth spending 50% of my bill rate on marketing, sales, and administration of my consulting firm. That's a lot of overhead. I just couldn't justify paying them that much for doing so little for me.

If you do good work and you're decent at networking, you can do this.
posted by LordSludge at 8:44 AM on June 9

It will help if you can maintain a fairly dispassionate sense of fiscal and, if you work from home, time management. You should be OK with eating savings during periods of no income. This means taking the longer view of your work and income situation and not letting down time freak you (or your partner!) out. Some things to think about:

• Don't eat your paycheck! Your current nice, predictable income will turn into flood or nothing. Some of what you collect will have to go to taxes, some to cover expected, but not predictable, down times. Plan to smooth that by saving some or most of what you collect. This is different from your 6-months buffer. This is to cover your expected, but not predictable, down times. You may be lucky and have a long ride with one client, but you can be dropped and have to find another on short notice. You'll also need (in the US, at least) to pay quarterly tax estimates in lieu of withholding, and your savings will need to cover that as well. You'll also pay (US, again) what your employer used to contribute to your Social-Security tax.
• You'll have to buy your own benefits. Budget for retirement contributions and health insurance to come out of your own pocket.
• If you'll be working at home, your work will always be right there and it can take some discipline to not let it stare you down. If you can't comfortably completely be either 'at work' or 'not available', it might help to have a work space you can close a door on when you're not working. Likewise, it might help to hold yourself to consistent work hours, if that's consistent with what you'll be doing. Consider a work-only phone you can shut off when you're not working or on call.
• You may be expected to provide your own tools (in the US, by the IRS for sure). Maybe that's just a laptop computer (plus a hot spare, if it's critical to doing your job) and a telephone, maybe more. Plan for that.
• No working in pajamas; dress for work, even working at home. Dressing professionally (maybe dropping the tie if one would've been required on site), starting and ending work at a specific time, and answering your phone in a business-like manner, all build your sense of competence and professionalism as well as conveying it to others. It also helps you keep a sense of separation between being at-work and not-at-work.
• Build in vacation and other down time and make yourself take it. There's no paid vacation nor any requirement for you to take any, from the client's side. You'll have to structure that yourself (that goes for sick & personal days, too). Plan it and make yourself take it - everyone needs to get away from it occasionally, even if you love what you do.
• Love what you do and look forward to doing it. If you're just tickled pink that anyone would actually pay you to play with their toys (yay!), if you can laugh all the way to the bank, it's a great motivator to do the non-work support stuff that keeps your consulting gig going. I don't know a single consultant that enjoys marketing themselves, for instance.
• Keep good records, especially financial ones, but also of what you did, who told you what, who told you what to do or not do and when. Put agreements in writing and distribute it to everyone involved so you have something to refer back to if (when!) things get sideways.

Best of luck, whichever way you choose.
posted by TruncatedTiller at 8:54 AM on June 9

This is anecdotal personal experience, but I've done work for several companies as an independent contractor and have survived several layoffs, even as each company's internal "permanent", "secure" employees (people with families, mortgages, etc.) were given their walking papers.

True for my current contract - they made 10% of the work force redundant, but kept a number of contractors (I was one) as we are in different buckets of money, are not counted as head-count, and we normally do the work of a few permanent staff.
posted by lamby at 5:17 AM on June 10