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!!!

Contractor Management Companies

Contractor Management Companies……

I’ve mentioned these in the passed, but what is IT Contractor Management all about?

Contractor management companies provide you with a company structure allowing you to maximise your earning potential as an IT Contractor.

Most IT Recruitment Agencies be happy for you to work through a Contractor Management Company as it takes some of the administrative tasks and costs associated with Payroll.

The Structure……

Working through a Contract Management company gives you the same benefits as running your own GST Registered Pty Ltd Company without the hassle and cost to you of having to administer a company.

Depending on the Contractor Company and the exact agreement you will be able to claim business related expenses associated with IT and IT Contracting. Things like:

• Mobile phone
• Laptop
• PDA
• Internet costs
• Training
• Seminars
• Subscriptions

The list goes on. Essentially anything you spend that assist you with earning money as an IT Contractor you should be able to claim pre-tax.

Who do I claim from…….

The simple answer is “Your company”. It works exactly the same way as if you had your own company with money sitting in a company account.

Your money is paid to the Contractor Management Company by the Recruitment Agency. The money sits in a pot allocated to you – just as if it was sitting in your company account.

For all intents and purposes this money is yours to distribute as you see fit. You can decide how much you want paid as taxable salary, you can make additional contributions to your Super Fund, and you can claim tax free money from the pot to reimburse your business expenses.

Why not set up my own company…….

• Time
• Cost
• Hassle

Setting up and administering a GST Registered Pty Ltd Company can be costly and is a potential minefield to IT Contractors.

In the past IT Contractors set up Pty Ltd companies in order to get out of paying tax. The ATO wised up to this and introduced ‘Personal Services Tax Legislation’. This basically means that contactors are seen as employees rather than companies – this whole are is extremely complicated, but suffice to say that the way that most contractors work nowadays – Personal Services Tax going to be an issue.

By using a Contractor Management Company you eliminate all the risk and gain all the benefit.

As Contractor Management Companies have a large number of clients and income streams Personal Services Tax is never going to be an issue.

So how does it work…….

Any employer can chose to allow their employees to claim business expenses, salary package and salary sacrifice. Most perm employees do not get the option as these types of benefits can be costly to administer, but Contractor Management Companies are set up to do exactly that.

They are structured in such a way and have all the systems in place that expense claims, salary packaging and salary sacrifice is all easy and cost effective.

Who are they……..

There are a number of Contractor Management Companies around. Here are just a few:

• ITG http://www.myitg.com/
• Freeland Global http://www.freelance-global.com/au/contractor.html
• Entity http://www.entitysolutions.com.au/
• CXC http://www.cxc.com.au/
• PayMe http://payme.com.au/

How much will it cost me…..

All companies have different free structures, so shop around and make sure that you only get what you need.

Some companies increase their fees as the type of service you require gets more complex. Many will charge extra for Salary Packaging, Lease agreements etc.

So if all you want to do is be able to claim your business expenses make sure you are not paying for all the bells and whistles unnecessarily.

Generally you’ll be looking at somewhere between 3 and 5% of you gross income as a fee.

This seems like a lot but the benefits far outweigh the costs if used properly.

So how do I make it work for me…….

Think outside the square! There are obvious things you can claim – generally these are larger purchases or ongoing costs like those mentioned above – Mobile phone, Laptop etc……

But…. …..what about……

• What about the newspaper you buy on a Saturday to see what is happening in the job market
• The pen you bough in the newsagents as you were rushing into a meeting
• The taxi you took when you went to your Agency function
• The packet of batteries you bought for you wireless mouse

It all adds up. Take a newspaper. You may think that $2.00 is not a lot of money and it’s not worth bothering about, but to spend that $2.00 you need to earn over $3.00 pre tax. By keeping that $2.00 receipt and claim it you save $1.00!!! It does not seem like a lot, but if you buy a newspaper most mornings that could be a tax saving of $350+ over the year.

I’m no accountant, so cannot advise you on what you can and cannot claim, but all of the Contractor Management Companies have specialist accountant working for them and they know exactly what you can and can’t claim. They will never pay a claim that is not within ATO guidelines, so you are always sure that you are acting well within Tax Law and Legislation.

Conclusion…….

If you want to make the most of your IT Contractor rates and reduce your tax payments without the hassle and potential problems of running your own Pty Ltd company – get a Contractor Management Company working for you.

If you’re happy just getting paid – stick with your Agency on a PAYG basis and miss out!!