Direct contracts inflating rates

Over the last 12-18 months there has been a marked increase in so called “Direct Contracts”.

In actual fact these contracts are more based on who you know not what you know. Generally these direct contracts are granted to people with a previous history or relationship with a given company.

In most cases companies are taking on contractors ‘direct’ as it means that they do not have to go to market and it saves a lot of time and should save money – however a huge number of employers out there are not saving the money they should for direct contracts. This in turn is elevating market rates by giving false indications to contractors about their worth.

Let’s look at an example…….

Jo worked for one of the cities bigger IT employers as a permanent employee for 4 years earning around $65,000 per year + Super.

After 4 years he decides to jump into contracting and lands a PAYG contract with an agency earning $440 per day. The agency charges him out at $560 per day.

After 6 months he approaches his old employer and asks if they have any contract roles going. This time Jo is not represented by an agency. After some negotiation Jo’s previous employer decides that he may as well pay Jo what they would have normally paid the agency and Jo lands himself a $120 per day raise and is now on $560 per day. The manager thinks - 'what the hell, it's not my money!'

Huge mistake!!! At this stage what the employer should have done is pay Jo somewhere around $500 per day – thereby splitting the difference and ensuring that all parties win.

By paying Jo the full charge out rate the employer has now set Jo’s future rate expectations too high.

The next contract that Jo is offered, he will be asking for at least $560 per day, more likely $580 or $600.

This is where things go very wrong. Jo is now expecting to be paid the full charge rate rather than what he is really worth in the market.

This in turn pushes rates higher as contractor form inflated egos and delusional perceptions of their value in the market.

Employers that overpay direct contracts are not only shooting themselves in the foot by falsely and prematurely inflating rates and rate expectations, but it could be argued that they are helping to fuel inflation and place the entire economy under pressure.

Something worth thinking about next time Jo calls you and says “Remember me? I know your systems in-side-out. Got any contract jobs going? I’ll gladly come back for the right price….”

Make sure the price is right for all concerned!!!