One of the most common issues we hear about is the time lag between starting a contract and getting paid. Some contractors assume that they’ll be paid much earlier than the industry norm (as they were in their permanent roles) and this can cause friction.
So what is the norm when you start contracting?
If you work direct with a client, you’ll often negotiate the payment terms as part of the contract negotiations. It is prudent to have a standard set of terms and conditions that sets out your standard working practices for all contracts. Within the T&Cs you should have a clause that details your payment terms. This forms the basis for the contract covering the work within the contract term with the client. Some consultants and contractors stipulate when and how they are paid based on stages within a project, but the majority will look to ensure they are paid regularly (weekly or monthly).
When you secure a contract through an agency, the recruitment consultant will look to negotiate payment terms to reach agreement between the client and you as the contractor. They often use standard terms as set out in your contract with them as the recruitment agent, so ensure you understand their terms before entering into any negotiations.
In the main, there is usually a month’s lying time between the month’s accrued pay and payment of this. It’s worth factoring this into your calculations when you first start contracting to ensure that you have enough money saved to fund the potential gap in earnings.
Typically the gap between your last permanent pay cheque and your first contractor earnings is a couple of months (if you’ve lined up a contract before you hand your notice in). We’ve outlined a timeline to illustrate what affects the gap in earnings so you can calculate how long the gap could be for you.
Quit permanent role
Factor in your notice period. For some contractors, a short notice period means they need to secure a contract before they hand their notice in. For the majority, the notice period can be prohibitive to securing a role first as contracts often require a near-immediate start.
Secure a contract
For many contracts, the start is near-immediate, but for others there may be a lag in securing the contract and the start date. If this is the case for your first role, you need to factor this in as a delayed start pushes your first payment back.
Most payment terms have a lag of a month before paying for the time period worked. This means that although you may be paid weekly, you could wait up to a month before your first weekly pay comes through.
We’d advise you to retain savings (either personal or within your limited company) to cover what you want to pay yourself each month for at least 3 months. This will ensure you have a cash cushion between contracts. This is important irrespective of the billing and payment method you adopt with your agency and clients. We’ll provide more information on the various billing and payment options next in the series.
For more details on building a cash cushion to cover your financial risk, read or post on SMART business plans.