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Contract negotiation and renewal – getting it right

Contract negotiation and renewal – getting it right

If you’re about to start a new contract, or if your contract is coming up for renewal, you should take some factors into consideration in order to maximise your earning potential, while also ensuring that your contract is compliant with current IR35 legislation. Here we look at how getting your contractual negotiations right can give your contracting career the best chance of success.

What am I worth?

The first rule of thumb when negotiating is to know what you’re worth. There are many resources that can help guide you, including contractor discussion forums and recruitment platforms that list the going rates for your sector. To get a rough idea, you can base your calculations on the annual salary expectation for your role, adding a percentage to cover your costs and expenses. Many contracting sites offer a calculator to help you work out your earnings, and LinkedIn’s salary calculator will give you a good insight into what you’re worth based on current market calculations.

Negotiating your pay

When it comes to contract negotiation, better remuneration is the primary objective for most contractors. Rates are influenced by a number of factors, including the state of the economy as a whole, fluctuations in market demand and the scarcity of any given skill. This is why timing and research are important factors in contract negotiations. Knowing the current strength of the market and the going rate for your services will give you a strong starting position from which to negotiate, but here are some additional factors you should also consider.

  • Rates vary by region, with the highest rates in Greater London, the South East and South West. Around 80% of all UK contract vacancies are concentrated in the South of the country.
  • Rates vary within industry sectors, with some of the highest rates of pay in the financial services sector. However, this can change rapidly according to national and global influences.
  • When applying for a contract role, you should generally avoid mentioning your current rate as this may limit your negotiation options later on. The first rule of any negotiation is that you aim for your highest possible profit while being prepared to compromise.
  • Your own skill set, the depth of your knowledge, and how much industry experience you have had will affect the rate you command. It’s crucial to be confident in your own skills and to communicate your value effectively in your negotiations.
  • There are times when it is simply not in your best interests to push for a rate increase at all, for example when the economy is weak, or when clients are cutting contract rates during lean times.

Negotiating your IR35 status

With the public sector off-payroll reforms scheduled to be introduced to the private sector in April 2020, it’s anticipated that many more contractors will be caught by IR35 rules. Although there are options such as working through an umbrella company that can make this easier, for many limited company contractors, working under IR35 might not be financially viable. Therefore negotiating your contract so that it’s outside of IR35 might be a better objective than attempting to negotiate your actual remuneration.

Under the new guidelines set out in the recent off-payroll consultation, the end client will be responsible for deciding if IR35 applies to a contract. According to the reforms, the end client is also obliged to communicate their decision directly to the contractor, rather than via the agency or any other party in the supply chain. The contractor is then in a position to dispute the decision via a client led procedure.

In theory, negotiating directly with the client, rather than via agencies who are often reluctant to disrupt their client relationships, is good news for the contractor. However, since any party in the supply chain can be held liable for non-compliancy, a good strategy is to keep both the agent and the client involved in the negotiation communications. This avoids any miscommunication by any of the parties.

Negotiating a contract renewal

Although the client might refer to a ‘contract extension’, your original contract should specify a start and finish date. After the finish date, any subsequent work will require a new contract. Although some contractors might feel that they’re obliged to accept the same contractual terms, a contract renewal can be a good opportunity to negotiate more preferable terms, including your remuneration and IR35 status.

If the client wishes to renew the contract, this indicates that they are happy with your work. Providing the market is strong, this could place you in an advantageous position to negotiate as you will already be familiar with the project. If the market has dropped, you should think carefully about negotiations. It might be more beneficial for you to negotiate yourself outside IR35, or strengthen the key factors that indicate your self-employment status. Contractors should be aware that ‘rolling’ contracts can come under particular scrutiny from HMRC when it comes to IR35.

Normally the contract renewal process is not started until one month before your current contract end date. If you haven’t heard from either the agency or the client at the start of that four week window, you should start the process yourself by asking both the client and agent if they’re interested in offering you another contract.

Providing the negotiations remain diplomatic, the contractor could find themselves continuing the project on better terms, which could result in a long term relationship with the client. If the negotiations aren’t successful and the contractor feels that they have better options elsewhere, this gives them the opportunity to politely decline a renewal and progress their career elsewhere. You can read our guide on “how to negotiate a contract renewal” to help you improve your negotiation tactics.

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