What is an IT contractor?
An Information Technology (IT) contractor is a trained professional who chooses to perform important IT functions for a client as an independent contractor. The IT contractor usually operates under the auspices of a working agreement with the customer, and is available for a specified period of time in exchange for the completion of specific tasks within that period of time.The contractor is engaged by a principal (the other party) to perform services under a contract for services (an independent contractor agreement). Contractors are self-employed and earn income by invoicing the principal for their services. A contractor pays their own tax and ACC levies.Contractors aren’t covered by most employment-related laws. This means they don’t get things like annual leave or sick leave, they can’t bring personal grievances, they have to pay their own tax, and general civil law determines most of their rights and responsibilities.
Why are they needed?
There are a couple of reasons why a company may choose to employ and IT contractor rather than hire a full time individual employee. The employment of the IT contractor is a means of temporarily securing competent information technology support during an interim period. The period may occur when the company’s own IT employee is away from the job for an extended period of time, such as a leave of absence or an extended illness. The IT contractor steps in and takes care of the day to day support until the full-time employee returns to duty. At other times, a company may choose to go with an IT contractor who supplies more expert support than an inexperienced employee on an ongoing basis. In exchange for a monthly fee, the IT contractor provides highly skilled services to the company. Smaller companies with simplistic information technology systems may find this arrangement economically superior to having a full time person oversee its IT functions.
To contract or not to contract?
Trying to decide whether to be an independent contractor or not can be very stressful. Many IT people spend months teetering on the edge, not fulfilled with their current work life, but also not confident enough to quit their full time job.Some make the leap after planning the move for years, while others are forced into contracting because of redundancy or dismissal.IT contracting is hard work. Once you’ve mastered it, rewards follow. Contracting is a great way to work because you’ve get freedom, total control and the flexibility to do what you love, while making money.And while it’s an enormously rewarding way to earn, it is one that needs hard work. To be a successful contractor you need to work hard at many things beyond the usual tasks people pay you for. You have to be prepared to become the marketing, sales, accounts, management and admin departments, all rolled into one.
What’s your reasons for operating as an IT contractor?
Contracting gives you independence. You have full control. You no longer have to work crazy hours for your boss with little reward to show. In the main you choose when to work and where. You can actually start to have a life.Be clear on what motivated you to do contracting so when the going gets tough you can bring to mind why you wanted to take on this type of self-employment in the first place.
These are good reasons:
- You wanted to drastically reduce your heavy work stress for health’s sake
- Your work was taking your life over leaving you no time to enjoy family and friends.
- You wanted to improve your future financial prospects
- You wanted to try out some of your own ideas and plans
- You only wanted to take on (as much the market allowed) work you found challenging and interesting
These are not so good reasons:
- You hated your “creepy” boss
- You wanted to work less days and take life easier (but at 24 years of age??).
- You were keen to work from home (in your pajamas sometimes) so you don’t miss your favourite tv shows
- Contracting sounded like lots of fun
- All your friends seemed to be doing it
Being an independent IT contractor
n independent IT contractor is someone self-employed providing IT services to clients. Most small independent IT contractors set up as sole “owner-operators” to test the waters first before forming a company to run their business under. They run under their own personal IRD number and register for GST using that same number.The reason for this is that as a sole trader “they are the business” unlike a company which is recognised as a separate legal entity in the eyes of the law and therefore need its own company tax number.
Independent IT contractors are paid for the work they perform and are personally responsible for the business and its debts as well as the profit or loss it makes. The contractor is usually engaged for a specific task and then invoice the client when the task is complete.As an IT contractor you are totally independent and on your own, so you’re not entitled to minimum wages or conditions such as annual leave, sick leave and notice of termination or an award. You have to negotiate the rates you’re paid and bear all the normal commercial risks of self-employment.
The test – what are you?
Are you a Consultant or a Contractor?In essence, consultants are paid for their knowledge while contractors are paid for their work.A consultant’s role is evaluate the client’s needs and provide expert advice and opinion on what needs to be done. On the other hand the contractor’s role is carry out the actual work required as determined by the consultant and client. In the most cases however, the two roles merge into one with the contractor also acting as the consultant. A contractor is a self-employed independent businessperson who agrees (or contracts) to do work for a fixed price. The individual hiring the contractor defines the desired results and the schedule. The contractor may supply labour only or labour and supplies. The contractor retains control over the work to be done, the methods used to do the job and the scheduling of the work.Determining whether an individual is an employee, contractor or consultant for tax purposes is important. As far as the IRD is concerned contractors and consultants are not employees but self-employed individuals or companies wholly responsible for their own tax and tax compliance.
Why the difference matters.Every business owners knows that one of the keys to success is clever marketing. So if you’re a self-employed IT professional, do you call yourself a contractor or a consultant? While it can sound like an issue of semantics, most agree that what you call yourself can make a big difference. The issue usually comes down to whether you’re selling your time (contractor) or simply selling solutions to problem (consultant).
There are countless talented programmers, networkers, tech writers etc. out there who can follow directions and do what someone else tells them to do to carry out work. But that’s quite a bit different from having the experience, creativity, and initiative to assess a client’s needs, determine the best way to solve the problem and deliver the solution. An experienced consultant does all this without handholding—saving management the time and hassle of hiring, training, and supervising.
So why does this matter anyway?
It’s because a consultant is usually paid higher fees than a contractor.The contractor bills clients by time spent performing services. Their invoices contain details of hours worked multiplied by the agreed fee per hour. Contractors often go through agencies for their work. The consultant bills clients by project. Their invoices show charges for design of solutions and management of those solutions. They rarely work through agencies, and generally drum up their own work by networking or marketing. They set their price based on the expertise and quality of the solution they provide and not just on the time they take.
Whether an IT consultant or IT contractor, your reputation and client testimonials may be critical to landing your next contract. If you consistently wow your clients by delivering innovative solutions to their complex problems, you’ll be compensated for your expertise and creativity if you work hard and have a good reputation in the marketplace.
Insure – you can’t afford not to
Insurance is something that every business needs regardless of its type, trade or industry. It is said to be a “necessary evil” but while some people gamble by not spending any money on insurance, if they are unlucky the loss could be heavy. The short answer is; a business must take all the necessary steps to protect its viability and its continued operation. The cost of insurance needs to be worked into the overall operation costs. The risk is too great to ignore – in fact, if you’re a professional contractor director and fail to arrange insurance cover, any subsequent loss to the business because of loss to a client from mistakes you make or records you lose can result in huge claims for damages. One thing you can guarantee on today – if you’re in business things will arise that come from around the corner which are totally unplanned for.
The 2 types of insurance IT contractors need.
- Professional Indemnity – this insurance covers you for a client’s loss where the client sues you or your business for making a costly mistake while working the contract. Some examples could include contractor negligence, loss of data or documents or unintentional breach of copyright. It will also cover the costs of dealing with claims, and any damages awarded to the client. Retroactive cover means the cover is back-dated to the date you commenced contracting,
- Public Liability – this insurance is to cover losses in case a member of the public is injured, or property is damaged as a result of the actions of the business (or its employees). For example, if you damage computer equipment at your client’s site, any claims would be covered. £5m cover is typically provided by insurers.
Why get professional indemnity insurance cover?
Every business and every person in business should obtain insurance cover for anything that could go wrong.Any business or contractor that gives advice, offers a professional service, or handles data or intellectual property belonging to a client or business, needs professional indemnity insurance. This cover protects you the contractor against the cost of a claim for negligence or a mistake that leaves your client out of pocket.Even if you’ve done nothing wrong, the cost of defending yourself against these claims can be very high.
Professional indemnity cover can help protect you and your business against this risk.As an IT contractor, you may be required by a client to take out certain types of insurance cover according to the terms of your contracts. This is really for the client’s ben3fit in that he has a fall backup for costs due to damages he may suffer from the contractor’s negligence or error.Alternatively the contractor may simply wish to be fully covered for any risk so he has peace of mind.
What does professional indemnity cover?
- Professional indemnity insurance will protect you from potentially crippling claims by unhappy clients. There are a variety of potential danger areas, including:
- Negligence – where you have been negligent, or where you have breached a duty of care to your client.
- Loss of documents or data – where you have mislaid important paperwork or data belonging to a client.
- Intellectual Property (IP) – where you have accidentally infringed copyright, trademarks, or other types of IP owned by other businesses or individuals.
- Defamation – where you have created or used material about other organisations that may cause offence.
- Dishonesty – where someone from your business has stolen from a client.
Not all PI policies will cover you for every one of these possible scenarios. When you are researching policies and getting quotes it’s important you check exactly what each one covers.So professional indemnity insurance covers a business who is sued by their client for a mistake they’ve made in their work.
The compensation payment will usually take into account the financial loss that the client has suffered. Professional indemnity insurance can cover a broad range of potential risks. What can seem like small errors can be hugely expensive, but professional indemnity insurance can help to safeguard your business.
- Wrongful act, error or omission
- Misleading or deceptive conduct
- Unintentional infringement of intellectual property rights
- Fraud and dishonesty
- Defence costs
- Court attendance costs
- Lost documents