Hidden cost of fixed term contracts

I feel like in the last few years with the upcoming changes in IR35 there has been a tendency to confuse FTC (in the historical sense) and the new world FTC that tends to be applied to contractors who are now working within IR35.

In the past, an FTC was a way of getting a resource for usually 6 months to a year on a yearly salary basis pro-rata for the period in question. This resource would, depending on HR policy, usually be eligible for pension, bonus and other permanent staff benefits. The pricing point for such contracts was usually aimed slightly above a permanent salary to compensate for the lack of future security but below what you would pay a contractor to do the same tasks. It goes without saying, the types of roles that this worked on are ones that were candidate rich, not highly skilled / specialist (by this I mean specific industry experience too).

Enter 2018 onwards…..

With the introduction of changes to IR35 legislation into the private sector the phrase FTC has taken on the additional meaning of describing a contractor that has been engaged on a fixed term contract on a PAYE basis rather than through their limited company. This is all fine for now but where it gets confusing is the pay point.

A lot of contractors (by no means all) are operating outside of IR35 for a reason…. They are specialist, industry specific consultants that perform tasks that many permanent employees would not have the skills or knowledge for. Businesses have realised this and as thus have in many cases priced FTCs at a day rate x no. of days worked basis and then (depending on HR policy) given those individuals the permanent staff benefits. In many cases, firms have also increased that rate to offset the tax loss of NI now paid by PSC Consultants. There is still a contingent of FTCs that are of the non contractor, less skilled / knowledge / industry specific that are being offered but they are few and far between.

The reason I am writing this is to highlight something many business are either unaware of or simply choosing to ignore. In the case where you convert a contractor to an FTC of the old school meaning, i.e. slightly above perm salary type, you are setting yourself up for long term failure. The reason is simple: someone earning say 200K through a PCS gets put into a category where you pay 110K with no permanent job security even if some (again depending on HR policy) perks of permanent employment exist.

There may be situations where contractors take this because they have no immediate 2nd option but my experience tells me that those people are immediately out looking for another job and if they are good at what they do, they leave at the earliest opportunity. This may be fine for large firms to swallow but in the majority, when they are specialists working on time critical projects with tight budgets, one apple can quite often upset the apple cart very quickly. In a project or 20-50 people, it only takes 2/3 to walk out for it to have cost knock on effects that very quickly negate the wrong initial price point of an FTC of the old school.

Firms need to see FTC as a temporary resource and pay them accordingly, not as a perm resource that lasts for x amount of time.