Last Friday marked my second year as a full-time contractor. I was lucky enough to be in a field, iOS apps development, that has been on high demand for the last few years and therefore I had no trouble finding good work so far.
In this first post of a two-part series, I’d like to explain what contracting is about and how it differs from other forms of employed work. In the second part, I’d like to demystify some of the myths and hopefully clarify some misconceptions I’ve seen both clients and employed colleagues having.
What I mean for ‘employed work’ is any work where a person is depended on one or more companies or people to get a job to do that will eventually translate into a payment. Companies and people that build products or provide services to consumers or businesses are independent, instead, as they have do their own thing and try to sell it.
A short preface
In my family, everyone from my father’s side of the tree is self-employed or has his own business. My father is self-employed and owns an electronics repairs and installations shop that he inherited from his father with whom he worked with until my he retired. My uncle, my father’s brother, is a self-employed musician. On my mother’s side, instead, everyone has always been employed full-time. My grandfather worked in his town’s police force. My mother did the same until she got permanently moved within the city hall’s premises as an accountant. One of my mother’s sisters is a teacher; the other a physiotherapist. My cousins all work as shop assistants.
With this background, I grew up seeing both sides of the coin. Myself, I’ve always dreamed of working independently, build products and make a living from that. However, I’ve been in all work categories and I’m still far from making a living from my own products. I started my career building a small iPhone app to help me complete my university studies in Japanese language. I then moved into an employed position and jumped ship a couple times only to realise I wasn’t really happy as an employee. So, since there was a good market in London, where I last landed a couple years ago, I set up my own company, Cocoa Beans, and started contracting.
For the first year after I announced to my family I was starting my own business as a contractor, my mother often asked me “Why don’t you just find a ‘normal’ job? Just do it for my peace of mind!”
I found that extremely weird as my father’s always been self-employed. I then realised that no matter what background you’re from, being employed is what seems to be regarded as a the norm by today’s society.
Being employed is a straightforward form of work, everybody understands it: a company needs help keeping up with their operations and they hire you for that. As a compensation for your work they give you a salary and may grant you other benefits.
There’s a lot of advantages in being employed:
- You don’t have to think about what to do next: that’s usually your employer or boss responsibly.
- You should get paid regularly and shouldn’t have to worry about it1.
- You get payed holidays, sick days, maternity, etc.
- Above that, you often get a range of benefits which vary from company to company - the bigger the higher the chance of getting a larger range / better benefits is. This may include private medical insurance, pension, discounts, gym membership etc.
- If you get fired or the company goes busted, you usually have at least 1 month of notice for which the company’s got to pay you in full. (However if the company suddenly goes busted it may avoid paying you when they cease operations.)
All other forms of employed work are based on the concept that a company may need help with something only for a given job to be done once or for a short period of time.
In the UK, the word ‘contractor’ and the word ‘freelancer’ are often used interchangeably, especially when referring to skilled workers. However, the term ‘contractor’ by itself is often used to indicate someone working in the housing industry (e.g. builders, plumbers, electricians, etc.) Therefore, if you’re a contractor in the UK, you need to be careful when telling others what you do! We’ll see how contracting differs from freelancing in the next paragraphs.
Anyway, contracting is really just a form of short-term employment. A contractor operates under a company other then the one employing him/her, be it the contractor’s own company, an umbrella company or a company the contractor is hired from as a full-time employee. Also, a contractor usually works in his/her client’s premises.
Contractors that work as full-time employees for a contracting company fall under the ‘standard employment’ umbrella. And the contracting company can really be seen as an agency.
Having done contract work for the past two years, I can confidently say that, if you can keep yourself busy, there’s little practical difference between being employed by someone full-time and being an independent contractor.
- Contracts tend to be full-time jobs that last for long periods of time2. That means you can keep fairly busy with just a couple of contracts per year.
- You get paid more on average3.
- You have more freedom. Being independent means that your clients cannot enforce rules on you on how, when and where you work. Unfortunately, though, the main reason companies hire contractors is to enforce the ‘where’: they’ll often want you to stay in their premises either full-time or most days; however you can get lucky and secure only remote contracts.
- You get to work on many different projects throughout the years.
- Changing often environment may allow you to make more friends.
- You don’t get paid for any time you take off work. This means that when you take holidays, get sick or for any other reason you can’t work one day, you can’t charge clients for that time.
- You need to pay your own pension, insurances and other benefits.
- You’ve got to deal with taxes, pension, insurances and everything else yourself or pay an accountant, a tax advisor and a legal advisor to do some of this work for you.
- You need to search for work more often.
- For shorter contracts, changing often environments may make it hard to make friends.
Quite often, when talking about what I do with other software engineers, especially the newcomers, I hear from them the same thing about why they’d like to become contractors: higher pay.
If you can keep yourself busy most of the year you can really end up earning more, on average, than someone with your same skills employed by the same company full-time, that’s true. What most people don’t consider when they think about contracting are the cons I mentioned above. They see the rates online and think that all of it is going into their pockets. Reality is that’s the gross rate you charge.
From what you charge you need to take out the cost of your company and personal insurances (note that some forms of insurance are mandatory in most countries), private pension, cost of keeping an accountant, any cost you encounter in your work and equipment (for example, as a software engineer, you may want to pay for your laptop and accessories, travel expenses to go to your clients, subscription to services like GitHub, etc.)
On top of that you need to consider taxes on your company and yourself. In the UK, for example, all companies are subject to the Corporation Tax, which is 20% of your gross earnings after expenses - this expenses include your salary but not dividends, which is probably where most of what ends up into your bank account comes from.
Also, you need to consider how often you’ll work and that you don’t get paid for when you don’t work. Therefore you need to take into account that some times you’ll need to pay yourself even if you didn’t earn much, if anything at all for a period of time. In a field like software engineering, in 2015, in the UK or some parts of the USA, I see there being no problems in having work all year, but you still need to take into account national holidays, your own holidays and potential sick days and other inconveniences like “days off” between contracts. On average, in the past two years, I worked about 10 months out of 12 months per year. That’s 2 months every year when I earned nothing at all. And I’m one of the lucky ones.
It’s really because of this expenses and time that’s not paid, in addition to the risk of having no clients for short periods of time that you earn more as a contractor or freelancer. At the end of the day you won’t pay you everything you can and you definitely won’t earn the what you charge for in full.
Once you remove those expenses and take into account how much you’ll actually work, salaries offered by larger companies for jobs like software engineering often compare with what you earn as a contractor. That can’t really be said for smaller companies or for less experienced people, though.
Choosing a career as a contractor, really ends up being a choice on your own preference, what you want to achieve, how often you want to change job, etc. There might be a financial advantage in contracting if you can keep yourself busy, but that shouldn’t be the only factor to consider when thinking about becoming a contractor.
Freelancing, as far as I understand, if very similar to contracting. The pros and cons are pretty much the same. The main differences with contracting are the following:
- You usually work for more clients at a given time and/or for shorter periods of time.
- You usually work from home. As it’s expected, you won’t usually have to try to convince your potential clients that you’ll work the same remotely.
- It might be harder to find friends as you need to deal with less people and you won’t be under the same roof.
- Whilst contractors often find jobs through recruitment agencies4, freelancers usually find work by pitching companies or via their networks or directly by a company thanks to references or because of projects they built or contribute to that make them stand-out.
Working on shorter or one-job projects means you need to find new work more often and may also mean you may end up working less throughout the year. This can be a bad thing or a good thing depending on your situation. If have or you’re trying to build your own products, this option might work out better for you… especially if you have less commitments, i.e. if you don’t have a family and / nor a mortgage to repay.
It might also be that you’ll end up having more work than you can handle and will have to sub-contract to other freelancers or contractors. Many freelancers I know end up working a lot more than 8 hours in order to manage all their clients, sub-contractors and paperwork and keep up with the actual work. But they can work when and where they like, or have multiple streams of income and end up being happier and make more money then they would have otherwise.
In the UK, often freelancers seem to be regarded as the ‘cheaper’ version of contractors. People often mistake freelancer for less-skilled, cheap workers from oversees or development countries. This of course is, to say the least, imprecise. I know some really good freelancers and their skills as well as their rates are far from cheap.
I think freelancers are seen this way because of the increasing amount of people trying to get freelance work although they’re not qualified for the job. I’ve seen this happen increasingly from people living in developing countries. There are websites like Elance where companies and people can post project specs and freelancers compete on a bidding system for to get the job. Unfortunately on this websites you may find yourself bidding against people from developing countries that can afford getting the job for a tenth of the price you’d ask if you live in the UK or US. In many occasions I’ve seen companies complain then that they got poor result and that they had only wasted time and money and they need to start over. I guess the same rule applies for everything in life: you get what you pay for.
On the other hand, websites like Toptal aim at getting companies in touch with quality freelancers, no matter where they live, and will take on board only 3% of applicants - only the best.
Owning an Agency
Owning an agency, to me, it’s like freelancing on a larger scale. You’ll usually have employees and/or partners and therefore you’ll need more work to keep up with. Expenses are of course higher, as you’ll have other people to pay besides yourself. This means you’ll need to spend more time looking for clients and keeping good relationships with them and with prospects, as well as people that can help you in other ways, to keep to business running. In turn, you’ll be more hand-off the actual work and will avoid the bus factor.
There are many forms of work you can base your living on. If you’re not building the next big thing, you may want to work as an employee and get a quite and steady life. Or you may be sick of working for the same company for many years, or may want to combine a secure income with side projects that won’t necessarily make enough to be self-sustainable, but that you enjoy working on.
Among the options available to you, there are freelancing and contracting. They both have pros and cons, like everything else in life. Maybe you’ll be happier working for your whole life for a single company, or maybe you’ll jump ship every few years. Or maybe you’re seeking to build your own thing or realise you’re better off having some flexibility trading-off some free time or getting some extra burden on.
Whatever you choose to do, do what you like and what suites your interest best. Your work is gonna fill the largest part of your life, so you better do something that makes you happy, or to quote a wise man:
In the second part of this post I’ll look into some of the myths and misconceptions around contracting.
We all know that this isn’t always true, unfortunately. There always are businesses winding down due to internal or external factors, economic crises or anything else really. ↩
In my experience, 3-6 months with a high chance of the contract being renewed for up to 12 months and may be longer than that in some cases. ↩
If you keep yourself busy most of the year, and also depending on your skills and area of expertise. ↩
Recruitment agencies tend to focus on full-time contractors and employees. I’m not really sure why they don’t look for freelancers as well. Maybe I’m just wrong. ↩