Thursday, March 13, 2008

Contract Rates or Pay Rates

This note is not about me, it is showing a general principle.

However, for other contractors at the client, those who work on longer term projects, there is a balance between two conflicting management strategies. To simplify a complex area, let's look only at a simple case where on conclusion of a contract, or after a short period away, the client wishes to re-engage the contractor.

One approach would be treat the contractor as completely disposable anonymous resource. There is no obligation to give even the slightest hint of benefits outside of contractual terms. Consequently, at conclusion of one contract, any new contract is simply negotiated at new market conditions. If the prevailing conditions have got worse, if the contractor's own effort has made the subsequent work easier, tough luck, next contract is at a lower rate. A pay cut. Tough.

Another approach could be to treat contractors a bit more humanely, I mean more like humans. After one contract, if the next set of work is similar to the previous one, the next contract could more or less hold the same conditions as before, with rates that would change approximately in line with normal pay increases for the industry.

However, it is double standards bordering on hypocrisy to treat a particular contractor as a resource in one direction, giving rate cuts whenever possible in tough times, but then not permitting a rate rise when resource is scarce on the grounds that "that would equate to x % pay rise, that's more than employees get". This dichotomy is not just a little inefficient, it is expensive lunacy, it simply means the client can't keep the people that it urgently needs.

Again, this note was not about me.


Ann Cardus said...

I think the thing missing from this analysis is the contractor's choice to accept, or reject, any offer available at any point in time.

If a rate is below the market rate then the contractor has the choice to accept, or reject.

I know that the employer considers this. They will also consider the value of the comfort factor of working for a company where there is previous experience.

It is still, always, a matter of supply and demand.

Rana said...

Sorry, but I maintain that it is not missing from the analysis, supply and demand do not just perfectly align. Of course the contractor can take or leave the offer, but the distorted asymmetry of offers will sometimes result in a sub-optimal match

i.e. if market rates increase, an irrational fear of giving a "high pay rise" to a particular contractor means that the client does not keep an experienced person at the market-defined rate but would rather get an inexperienced person at the same market-defined rate.