There are a number of ways to work as a contractor. The two most popular choices are either to work through an agency, or directly with a client. But what’s the difference?
Although many contractors work directly with a client, some – especially if they’re new to contracting – prefer to defer some of the work of finding and securing their contracts to a recruitment agent. An agent offers many services: from sourcing contractor job openings and connecting you with clients, to settling contract terms and negotiating rates.
On the other hand, working directly with a client means you’re wholly responsible for the relationship. This means more work and more responsibility, but the plus side is that you don’t have to pay any agency fees, which can be steep.
Before we get going, if you’re new to the contracting game and need to know how to become a contractor, check out and download our free business guide.
What’s more popular: agency or direct?
So how many contractors choose to work directly compared to using an agency? A study by IPSE revealed the following:
So, agencies are by far the most popular. But why? Suneeta Johal, Research Manager at IPSE, said:
“Agencies have a variety of contacts and provide opportunities with large and lucrative clients. Additionally, agencies often pay independent professionals if the client fails to do so which provides a safety net, so this may be another reason behind a high number of freelancers choosing to use agencies.
“Although recruitment agencies seem to be the preferred method of securing work, we are increasingly seeing freelancers gain work through collaboration with others, such as meeting in workhubs or subcontracting work at peak times. The rise of social media is also a key factor.”
Which option is best for you?
Most contractors feel like they need to use an agency when they start out, as it’s safer and easier if you don’t know 100% what you’re doing. Credit control – one of the most difficult aspects of self-employment to manage – plays a large part in this.
Whereas direct contracts leave contractors at the mercy of their clients as to when they get paid, when using an agency, the contractor can set up payment terms which mean they get paid regardless of whether the client has coughed up or not.
However, once a contractor gains more experience and is more confident in selling their services directly, it becomes easier to establish direct relationships with clients, where payment terms are set out plainly and respected by both parties.
In reality, most contractors will have clients both through agencies and direct relationships. But which is the better option? To find out, we asked some veteran contractors who have experience with both.
Alan Smith, an IT consultant who works with investment banks, said:
“I generally find it is easier to negotiate better payment terms with an agency than directly with the client. But I hate the whole pseudo-negotiation that happens around rates. I’d love to see open and honest three way discussion about rates and who is paying what and taking what cut.
“Which is why I like the directness and honesty in rate negotiations when working with a client directly, which I don’t ever get with an agency. I’m always aware of the conflict of interest between the various parties when an agency is in the mix too.”
Alan sees both the positives and negatives of agency work – but not all contractors have the same view. Jason Hyland, an experienced Microsoft developer, said the only positive thing he could think about going through an agency is the fact they come to you, and you don’t have to cold call anyone.
As for the negatives, he had a few. His biggest gripe was with the way rates are set. Jason said:
“Often agencies are marking you up by 20% or more, so the claim that agents offer a valuable service is a fallacy. I’ve often been surprised when working via an agency that the client is paying the agency consultancy rates and the agency is paying me developer rates – so the client inherently expects a higher level of service than you’re getting paid for.”
This is clearly not an ideal situation and could lead to a very unhealthy professional relationship.
Why use an agency?
So, if agency contracts are so bad, why don’t the two parties just ditch the agent? According to Jason, agents will often include a “handcuff” clause which prevents you from working with the client directly for between six months to a year after severing the agency contract.
The fact is that with over half of all contractors using agencies, the industry is massive, inherently giving agencies more power. Jason himself – despite his reservations – is currently employed through an agency.
Simply, agency work is a great way to get “bread and butter” contracts. If you have a decent amount of experience, all you have to do is stick your CV on one of the many work boards like Jobserve or Jobsite and wait for the agents to come to you. However, you’re more likely to find more stable and appealing work through a direct relationship. Jason added:
“I have probably sourced the majority of my contracts from agencies – as in number – but I have worked longest on direct client contracts. These have generally been more rewarding, both professionally and financially.”
What about umbrella companies?
Umbrella companies act as intermediaries between contractors, their employment agency and the end client. The umbrella company deals with a lot of the administrative side of things, particularly in relation to tax and payroll, since you’re an employee of the umbrella company.
You can check out the advantages and disadvantages of contracting through our “Sole trader vs limited company, or umbrella: what’s best for you?” article.
What about IR35?
You need to be sure whether or not your contract falls under IR35 rules. Determining whether IR35 applies to your contract is a complex matter, but we can check out our “Is my contract inside or outside IR35?” and our comprehensive IR35 hub for more information.