A contractor is a self-employed professional that offers their skills to one or more clients, either short or long-term. Unlike employees, they are responsible for managing every aspect of their work life, which can be daunting for new contractors.
This article will outline some common problems faced by new contractors and some suggestions on both prevention and possible solutions.
1. Time without a contract/client (“on the bench”)
Within the confines of the contract terms, a client can interrupt a project or role with little notice, leaving the contractor ‘on the bench’ for a while. This is a problem in terms of income projection and consistency, that can leave you scrambling for new clients.
Prevention: Build a notice period into your contracts that will allow you time to replace the work, and always have some ongoing marketing activity with potential clients.
Solution: Contact former clients to see if they have any current needs, and ask your current client how long they expect to be without your services. It’s a good idea to have several months’ revenue saved in case you are suddenly benched and need time to find new work.
2. Being classified as a ‘disguised employee’
Many countries have strict rules on contractor criteria (such as IR-35 in the UK) and if authorities feel like your client treats you like an employee, they might reclassify you. This can result in unexpected costs for your client, and disallowed business deductions for you.
Prevention: Make sure that you take all the steps to establish yourself as an independent business, such as invoicing and not accepting benefits or expense payments. If you are entering a new country, take the time to learn all of the contractor/employee criteria so you will comply.
Solution: You and your client can appeal such conclusions of misclassification, using evidence that you are truly self-employed. Because of the lost tax revenue from disguised employment, authorities may determine without much cause and leave it to you to prove you are not an employee.
3. Non-payment/ Late payment
Client non-payment and late payments are a constant challenge for contractors, and when you are new it may seem difficult to set up a system to ensure timely payment. The client has the upper hand when paying for completed work, and your only recourse may be to cancel the contract if it continues.
Prevention: New contractors will be well served to use an umbrella company as an intermediary to the contract with your client. The client remits payment to the umbrella company pending project completion, and they will forward it to you with no delay.
Solution: The only risk your client has with payment issues is the loss of your services. Some companies do have cash flow issues, so it’s worth it to try to communicate with your client on how to rectify non-payment.
4. Being underpaid for your skill and experience level
Knowing your market value and setting your rates may be difficult for new contractors. Without any experience, you might try to rely on what you earned as an employee in a similar role, but that fails to consider the costs of being in business.
Prevention: Do some research on what other similar contractors are charging in the country, to give you a benchmark. Another approach is to take a traditional employee rate, and then add contractor-related costs and other value that you bring.
Solution: If you discover that you initially set your rates too low (or the client was unwilling to pay more) then you will have to resort to a renegotiation. If you have worked with the client for some time, you may be able to show that your value is justified for a higher rate.
5. Lack of experience negotiating the contract terms
Related to the underpayment problem is a lack of experience with contract negotiation. This process may be intimidating for new contractors who don’t know how to approach negotiation.
Prevention: You can study resources on negotiation, and what terms are essential in the host country to protect yourself. Remind yourself that you are in business with multiple client opportunities, so you can be prepared to walk away from unfavourable terms.
Solution: Depending on the time frame for the initial contract, you can propose a new one if it expires. This is not as difficult as it sounds, as commercial contracts are frequently updated to accommodate changes in business or regulation.
6. Taking on too many clients/ Time management
One problem that at first seems like an advantage is having too much work. New contractors may take on more than they can handle, just to make sure they have adequate income. But poor time management can result in lower work quality and production, as well as dissatisfied clients.
Prevention: Each client is a separate, but equal obligation and they have no idea what your workload is. You have to manage it by assessing your available time and energy before engaging a new client. Be clear with each client their expectations in terms of workload and deadlines.
Solution: This can be difficult to remedy after the fact, but in extreme situations, you can communicate with the client and try to roll back some projects or time commitments. A good client will be sympathetic to this as long as they know you are trying to work out a solution.
How can Contractor Taxation help new contractors?
Contractor Taxation has a global network of umbrella companies that can assist new contractors with their international contracting journey. An umbrella company can sponsor your work permit, help set up the contract, withhold taxes and makes sure that you remain in compliance at all times. They will also facilitate payment from your client, to avoid issues with late payments or non-payments.
Please contact us for more information on how an umbrella company can be an advantage for international contractors.
