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An Introduction to the World of Contracting

Part 1

Jerry Erickson

There are three different components of the contracting profession. The first is the contractor. That would be you, the programmer or engineer. The second component is the contract staffing firm, which is the agency that recruits and hires contractors. The third component is the client company, such as Microsoft, Boeing, or General Motors.

How it works

The client company contracts with a staffing firm to recruit and hire contractors to work on the client's project on a temporary job assignment. For example, let's assume that one of the thousands of client companies who often utilize contract personnel has a major project underway. They have tried to hire enough direct employees to staff that project. Unfortunately, they have not been successful, and now find themselves falling behind on their schedule.

The client can then turn to one or more contract staffing firms, and ask them to supply contract personnel in the job disciplines they require. Highly skilled contractors will then be hired by the staffing firm(s) and assigned to the job - normally right along side the client's direct employees - to work on the project.

There may be other reasons for a client company turning to staffing firms to furnish them with contractors. Perhaps they are a company that anticipates ups and downs, as far as manpower forecasts are concerned, over a several-year span. We frequently see this in the aerospace industry.

Such clients are far better off hiring contract personnel, rather than captive employees. In that way, they avoid the enormous cost of searching for and hiring each employee. Contract staffing firms have vast files of resumes for well-qualified contractors who are immediately available to fill their client's needs. The client also avoids the day-to-day costs of maintaining that individual as an employee (paying for things like insurance, payroll, and other administrative burdens adds up very quickly). The contract staffing firms assume all those costs.

The client also avoids a reputation, among their direct employees, of continually hiring personnel then, a couple of years later, letting them go. Contractors know that their job assignments are temporary and are always prepared to move on to other projects. Direct personnel are usually not conditioned that way.

As a contractor, working in this manner, you would be working on the client's project, under client supervision, but you would be an employee of the contract staffing firm that placed you. They would give you your paychecks, withhold taxes, and pay any benefits that you may receive (such as vacation, medical, etc.).

During the late 1990's another rationale has emerged for clients to hire contractors through staffing firms. Now we often see contract positions being advertised as "contract to hire" or "temp to perm" or "contract to direct." This is simply a "try before you buy" approach. Both clients and contractors are more frequently "checking each other out" before committing to a long-term relationship. This has proven very beneficial for both the hiring clients and job-seeking contractors.

Frequently overlooked, as a reason for entering the contracting job market...but perhaps the most valuable reason of all...is the opportunity for professional growth. This career enables individuals to work for a variety of companies, learning from each and taking that knowledge with them to their next assignment. And, in this day of constant changes -- with new software, programs, and computers being introduced on a regular basis -- keeping up-to-date is critical for your long-term career health.

After a few years of contracting, one can amass an invaluable set of skills. Added to whatever professional training one may undergo along the way, it doesn't take long for a contractor to make him or her a very valuable commodity.

How assignments are structured

The most common method is to work as an employee for a contract staffing firm on assignment with that company's client. The staffing firm normally finds the contract job opening, then hires you to work for their client.

Or, if you prefer (and the contract firm and client will allow it), you can work through the same staffing firm as an independent contractor instead of an employee. This method, however, involves more responsibility for the contractor and more risk to all three parties (contractor, staffing firm, and client).

An independent contractor must pay his or her own taxes, insurance (including liability), etc., and must qualify with the IRS to work in this manner. IRS Form SS-8 is the document that you would use to qualify. There is a list of 20 questions to submit for approval. People found to be illegally working as independent contractors, by the IRS, are subject to fines and penalties as well as payment of back taxes.

Fines and penalties can be levied on any or all parties found to be participating illegally. As a result, some staffing firms refuse to place individuals as independent contractors because of the risks to their company (as do some clients). The bottom line is this: if you can qualify with the IRS to work as an independent contractor...there are definite advantages to doing so.

A third way that some people become contractors is to form their own corporation and work as employees of that corporation. Their company simply bills their clients for work performed. They then pay themselves out of corporate profits. This method, too, is not as simple as working as an employee of a staffing firm.

Complications with incorporating, dealing with the IRS, carrying your own liability insurance, providing benefits, and finding companies that will hire you in this way, make this perhaps the least popular method of working as a contractor.

Why do people work as contractors?

There are many rewarding aspects of working as a contractor. The most important, to the majority of those working in this profession, are:

Making more money than you would probably make at a similar direct (captive) position

Having the opportunity to travel, if you wish, to different job locations for work

The professional challenge of working on a variety of projects for different companies

You should never be charged a fee when you apply for, or accept, a position as a contractor

Contract employees first surfaced prior to World War II in the Detroit area. They were hired to help in the retooling and manufacturing of automotive plants for the war effort. The profession has been steadily growing ever since. You will find contractors working in virtually every major industry in the world.

Typically, the average length of a contract assignment is from six to nine months. Many last longer; some are also shorter. Once an assignment is completed, the contractor moves on to other employment (usually with a different staffing firm working for another client).

Contractors are highly qualified, highly paid individuals. They often have obtained additional schooling and technical training in their field. They are, therefore, very well qualified to handle most jobs in their specific discipline. That is a major reason why they are usually paid more than their direct counterpart would be paid. And...the opportunity to make more money is why most people become contractors in the first place.

Besides receiving a higher than usual rate of pay, contractors often get daily per diem (in addition to their hourly rate), and travel pay to their job locations. Of late, many have entered this field because they have lost their captive position due to downsizing by their employers.

Besides being a professional at their job discipline, and having a desire to make more money... an equally important quality that must be a part of every contractor's makeup is the ability to be mobile. They must be able and willing to relocate, sometimes thousands of miles from their homes and often with but a few days to report to a job assignment in another city, state or area of the country.

Contracting locally

Although the contractors I have just described are mobile and travel from city to city for various job assignments, there is also another type of contractor. I call them "freeway", "subway", or "local" contractors.

In many major cities of the United States, there are thousands of these workers who continually go from assignment to assignment within the same metropolitan area, and usually continue to live at the same address. Most local contractors are located in the major metropolitan areas of the United States, such as: Los Angeles, Chicago, New York, etc.

Three things sometimes make local jobs less desirable to the "road" or "out-of-town contractor." First, the pay is usually somewhat lower than for a similar "road" job. Sometimes this is simply caused by the lack of per diem paid to those who work away from their tax home. Other times, it is actually less money per hour.

Second, the length of assignments for local contractors tends to be somewhat shorter than for road jobs. And third, local contractors are more frequently required to attend job interviews -- unlike their "road" counterparts, whose resumes are often the extent of their personal contact with client firms prior to reporting for work (unless a telephone interview is requested).

On the plus side, however, is the fact local contractors are often able to build up a reputation with many client companies. If a contractor is really good at his or her job, he or she is likely to be called back more than once by some companies. In many cases, too, a local contractor may be able to remain working for the same contract staffing firm on several consecutive assignments (often accumulating vacation time, remaining on the company's 401(k) plan, and retaining medical insurance without interruption).

Why are contractors paid more than their direct counterparts? Often, it is because their jobs are temporary. Other times, it is because the expertise they provide is not readily available on the open market. When a client company is behind schedule on a project...they are usually willing to pay a premium for needed expertise.

When the project is again under control, or completed, the contractors will likely be terminated, and must then find another assignment. If they are lucky, the contract firm for which they were working will be able to place them on a new job immediately. More often, however, contractors will be left to their own devices to find their next assignment.

Plan ahead

As soon as you are working on a new assignment, you should begin preparing yourself for your next job. Your resume will need to be updated (reflecting your new job assignment) and copies printed. This may seem a bit premature, but it is the best policy. Then, when your present job is approaching an end or, worse yet, ends without notice, you will be prepared to pursue your next assignment.

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