Why it Contractors should not Reduce Daily Rates
Working as an IT contractor can be extremely lucrative. Contractors with rare or very new skills can enjoy very rewarding daily rates and even contractors with long-established skills will enjoy higher rates of pay than their permanent equivalents.
At the end of each contract, contractors must obviously look for another assignment and must carefully consider the day rates to charge for the work that they undertake. This is likely to be dictated to an extent by the state of the economy and its impact on the employment market, but employers are always looking for contractors to reduce their daily rates.
There are a number of reasons why contractors should not do this.
Contractors do not benefit from economic peaks
There is a perception that contractors should reduce daily rates when the economy is struggling, because permanent employees may be under pressure. This isn’t really an appropriate comparison. When times are good, contractors benefit far less than permanent employees that enjoy good pay rises and bonuses. Furthermore, when times are bad permanent employees normally at least enjoy a termination or redundancy package if laid off, whereas contractors can lose their work with minimal notice. It is therefore more appropriate for a contractor to maintain a standard daily rate that is not driven by economic peaks and dips.
Realizing your worth
When you market yourself as an IT contractor, this is based on a marketable set of skills. The value of those skills does not decrease simply because the client dictates that should be the case. For example, a programmer with core skills in SAP does not become less skilled when the market drops so why should the rate charged per day drop? There are arguments of supply and demand but as a contractor, your rate is more than just an hourly rate. You must consider the implication on your overall turnover. You are a business like any other. That means you can be flexible in other ways – perhaps you can increase the scope of your role for no additional charge or take on additional responsibility – but the cost of what you charge per day should remain constant.
You are setting a precedent
It can be difficult to move on from a rate decrease as future clients may be aware of this and may take this into consideration when negotiating. If you can demonstrate that you have maintained a day rate over a consistent period of time (and preferably have an increasing rate) then this demonstrates your value strongly and could seal future deals.
You will accelerate a general decline in rates
Market rates are driven by what clients can get away with paying. If they have to pay the going rate, they will. If some contractors start to reduce their rates, it accelerates an overall decline because more and more clients start to see and expect this. This is a standard business process. All sectors that are competitive operate within a minimum and maximum rate for what they sell. Your sector is no different.
Be very cautious about rate changes mid-contract
This is more rare but can occur when the client believes that the work scope has changed or that they are not getting the service(s) they expected. In the case of the former, you should ensure that you can demonstrate flexibility but also that you can provide evidence that you have supplied the contracted skills and experience required. In the case of the second scenario, it’s far more crucial that this is addressed. You should work hard to restore the client’s confidence in what you deliver, as there are reputation issues at stake. This might require additional training or investment on your part but that’s a necessary part of maintaining your brand.
It can be tempting when you have financial commitments and when there aren’t many roles to relinquish on the pressure from a client to drop your daily rate but the long-term damage could make this false economy. If your rate is well-researched and you have a strong track record of delivery, then should be no reason for you to start charging less for what you do.
