Your money, and your life

Do you find that you’re constantly complaining about being paid peanuts in a job with no prospects? Time to think about contract work…

Simon Davies was miserable. He was working as a design engineer for a firm he disliked, and every time he wanted to get something done, he hit a brick wall from uncooperative managers.

Then he heard about the money on offer for contractors in the same field and jumped at the chance for a change. So he handed in his notice and set up on his own, offering his design skills to engineering firms throughout the UK.

Since then, Davies’ pay has almost doubled to around £60,000 a year, and he no longer has to answer to anyone but himself.

‘Earning £60k a year as a contractor is easy-peasy. It’s big money, and when you’re a staff engineer on £23k a year and a contractor comes in doing exactly the same job for £34 an hour, you have but one decision,’ he says.

Some may question why employers pay such premiums for freelance engineers, when they could simply offer higher salaries for permanent staff. But in many firms, engineers’ salaries are set by finance departments, where the politics of an office and rigid salary structures dictate that many engineers do not earn more than £30k a year. In contrast, a contractor’s pay is set by the project management team, to whom high hourly rates pale into insignificance compared with the hefty penalties they face if their project is not completed on time.

Employers also want flexibility from the labour market. Companies need certain skills within the business for the length of a project, but once that is finished, they just become a drain on the firm’s finances, says Stephen Brown, managing director of recruitment consultants Europrojects.

‘Work isn’t a consistent thing throughout a year or throughout a product lifecycle. It fluctuates dramatically. Companies want to be able to take people on when they hit peaks but not have them on the payroll when they go through troughs, so contractors fit that bill very nicely.’

The market for contractors has changed recently. In the past, engineers took contract positions as a fill-in while they were looking for permanent work. But these days people are more discerning, says Brown, and will hold out until they find their ideal job, rather than taking on short-term contracts as a stop-gap.

Those that are left are mostly career contractors, who would not take a permanent job even if they were offered one. They value the project-based nature of the work – when one contract is finished they move on to another assignment. ‘These people are the nomads of the engineering world, who are prepared to go anywhere – within reason – for a project.’

This can be good news for the companies hiring them, as contractors often pick up new ideas and ways of working as they move around. Freelance engineers act like bees, cross-pollinating ideas from one country or industry to another as they change contracts, says John Knapp, an electronics engineer who became a contractor six years ago. ‘I’m single so I only need to worry about myself. I can work on a job for a few months and then try something different somewhere else. If it’s a particularly good year I can go off on holiday for a few months.’

It might not be the ideal job for those with family ties, but if life is so rosy for contractors, why aren’t more engineers giving up their full-time jobs for the open road?

For a start, not every contractor earns a high salary. The money can vary greatly from year to year, says Ajay Patel, a microchip designer who went freelance in 1998 after working for an engineering consultancy. ‘One year I may work for 11 months and earn over £100k, of which 40-50% will go on tax and equipment, but another year I may only find a couple of months’ work and earn less than others in similar permanent positions.’

So contracting is not for the faint-hearted. You must be willing to take the bad times along with the very good. In the end, Patel believes he earns much the same as permanent engineers when their pension, national insurance, company car and stock options are thrown in.

Contractors have to sort all these issues out for themselves. They have to be their own accountant, administrator and marketing director. Some see this as a waste of valuable time that could be spent on more lucrative work, but it can offer useful experience of running a business, says Keith Knaggs, a freelance engineer in the telecommunications industry. ‘I’ve learnt how to set up the company, and to run it myself – it’s another string to my bow. Permanent people would never get that kind of exposure.’

Knaggs is considering getting the venture capital to launch a technology start-up, and is hoping his contract work will help to keep his head above water while he explores the idea.

But without such plans, some contractors risk staying at engineer-level for the rest of their careers, and never reaching management positions, he warns. ‘I’m hitting a crossroads now, and starting to ask myself where contracting is taking me. I’ve got aspirations of moving into management, and if I continue in contracting I’m never really going to get the opportunity to break into bigger projects.’

Firms are rarely willing to train temporary staff, which can mean contractors becoming ‘pigeon-holed’, unless they fund their own training or can find an employer willing to take them on without lengthy experience.

Then there is the dreaded IR35. Mention IR35 to most contractors and they will talk about the injustice of the Inland Revenue, and a tax system that labels all professional contract engineers and IT specialists as tax dodgers.

The rules were introduced in April 2000 to stop contractors avoiding tax and national insurance payments by setting up their own service company to work for just one client – effectively their employer – and then taking money out of the firm as dividends rather than salary.

The Inland Revenue can look back over five years of a contractor’s business, and if it decides these fall foul of the IR35 rules, it can demand the back-dated tax plus interest, and levy a fine of up to 100% of the tax owed.

This uncertainty is forcing many to leave the field, says Chris Tapp, a contract engineer developing radar systems for the automotive industry. ‘I’m not going to give up because the Inland Revenue decided to put up some obstacles, but there are an awful lot of people that have gone back to permanent employment, because they just don’t feel it’s worth the hassle.’

The rules mean that unlike other firms, contractors are unable to invest in new technologies, training and equipment through their pre-tax profits, and have to pay for business expenses out of taxed income.

What makes the IR35 system really unfair though, according to Tapp, is that it treats contract engineers as disguised employees. But if they are out of work for any length of time and want to claim unemployment benefits, they are turned away because they run their own businesses.

As a result, engineers are either taking their skills abroad, or deciding that contracting is no longer worth their while, and leaving the profession altogether.

Contractors are also often the first out of the door when a company hits problems.

When French telecoms firm Alcatel announced recently that it was cutting jobs because of the global industry slowdown, it said 4,000 contract staff would be lost. Earlier this month Japanese electronics giant NEC also said it was shedding 4,000 jobs, 2,200 of them contract workers.

But with this risk comes the freedom to pick up work more quickly than permanent staff, who have to give at least a month’s notice before leaving, says David Delve, an engineer with nearly 30 years’ experience in the contract field. ‘If there’s any sort of recession you do seem to get hit first. But you can see it coming, so you start phoning up a few agencies and something usually comes up. There always seems to be some work around somewhere – out of the 27 years I’ve been contracting, I’ve only been actually forced out of work for about two to three months at the most.’

To some the risk of being out of work for months at a time is too great, and even the extra money on offer is not enough to tempt them away from permanent jobs. Others love the varied work and flexibility that contracting offers. But above all, it is the prospect of working for themselves – and never having to answer to another manager again – that finally pushes many engineers out of the door.

So where does all this leave Simon Davies, our £60,000 a year man? Since he became a contractor, has he been hit by a lack of work with the downturn, or caught in the IR35 net?

Apparently not. Davies is now trying to find contract work abroad so as to see more of the world, and is looking to reduce his workload. ‘I’m trying to work six months of the year and then party for the other six.’

Nice work if you can get it.

The engineer described in this article as ‘Simon Davies’ asked us to disguise his true identity.

Sidebar: Work 37.5 hours in 3.5 days and take the rest of the week off

Not everyone chooses to become a contract engineer; for some it is a matter of necessity.

More than 650 design engineers recently lost their jobs at Daewoo’s former technical centre in Worthing on the south coast, when the Korean car firm hit the skids.

Among them was Geoff Taylor, who was made redundant at the age of 55, making it difficult to find permanent work.

With vacancies for engineers in the area few and far between, Farrow had little choice but to accept contract work further afield to pay the bills, while hoping something came up nearer home. ‘I didn’t really have much of a choice. I was made redundant, there were no permanent offers of employment on the horizon, but there were contract offers, so I took those.’

Having been made redundant twice from permanent jobs, the lack of security in contract work was not really an issue, and Farrow felt he could earn enough money to retire early, softening the blow of having to work away from home. ‘I can work 37.5 hours in 3.5 days and have the rest of the week off, which suits me. You just have to get in, work as hard as you can, make as much money as possible, and hope that the gap between this job and the next isn’t too great.’