Should You Work as a Contractor?

Understand the tradeoffs you will face.

By Dirk Willard, contributing editor

Many people in our profession now seem upbeat about their work and job security, as indicated by our recent cover story “Chemical Engineers Keep On Smiling." However, business goes through cycles, and the “hot” jobs change. So, keeping yourself marketable all the time can pose a challenge.

A key aspect of marketing yourself is deciding whether you want to work as a direct hire or contractor. Direct is attractive if you can stand the competition. The average hiring period is about 60 days; one job cycle took 28 weeks. Interviews resemble job fairs when 16 candidates show up for two positions. Contracting is tempting but you need at least three years of project experience to appeal to companies in engineering/procurement/construction.

So, what are the pros and cons of being a direct hire? The advantages include: 1) a 401(k) retirement plan; 2) no worries about being billable every minute — so you can initiate improvements if you have an understanding boss; 3) paid vacations, generally 10 or more days per year; 4) perhaps a better health-care plan; 5) some opportunities for formal training; and 6) sick leave. The disadvantages include: 1) a 401(k); 2) reduced marketability if you over-specialize; 3) lower net take-home pay than from contracting; 4) usually less travel; and 5) possibly limited on-the-job training experiences.

Why did I list a 401(k) as both a pro and con? If the plan forces you to buy company shares at $54 each but you eventually can sell them only for $13/share, then you know the downside. I’ve actually worked at companies where I invested in mutual funds instead of the firm’s stock because the outfit was a loser. Here’s another thought: unless the company matches your contributions, a 401(k) is merely a tax-deferred account.

Over-specialization often is a problem in manufacturing. It can mean lower pay than peers and bouts of unemployment when your specialty is out of favor with the marketplace. It’s perfectly legal for companies to make offers not based on your achievements and actual value but exclusively on the basis of your past salary — typically, only 0–10% higher than your last job’s pay.

So, what are the pros and cons of contracting? The advantages include: 1) higher take-home pay; 2) more travel; and 3) the opportunity to gain broader experience. The disadvantages include: 1) perhaps lower pay; 2) bouts of unemployment; and 3) just on-the-job training.

A contractor will get substantially greater take-home pay by maximizing the per diem to 50% of overall compensation. Based on this, I came up with the following correlation: monthly take-home pay $ = 34.43 × hourly rate + 528. The curve is contingent on tax deductions for health care and moderate living costs that won’t cut into the per diem. (By the way, the Affordable Care Act requires everyone, including contractors, to carry health care insurance. Some employment firms will offer decent plans to meet this obligation. Without it, you’ll be stuck with paying at least $450/month.) Here’s one comparison: at a contract rate of $60/h and assuming a 40-h work week, the breakeven point for net pay compared to an annual salary of $95,000 with benefits is nine months.

Lower net pay is a factor if you’re working as a “1099 contractor” — i.e., the client reports payments on Internal Revenue Service Form 1099 rather than a W2 without per diem. A rule of thumb is that your tax-rate skyrockets to 50% of income for that sense of independence we all crave. (For more on money-related issues, see my previous column “Avoid Financial Blunders.”)

The bouts of unemployment are a challenge because they’re hard to anticipate. My experience over the past eight years of contracting is that there’s a 50:50 chance that a 6-month assignment will be cut short; other contractors agree these are typical odds. One of the tough questions you must ask during the phone screen is: “Am I being hired for one job or are there other jobs I can be re-assigned to while my project is under review by the client?” If no re-assignments are possible and the job is more than 800 miles away, my advice is to decline it.


dirk.jpgDIRK WILLARD is a Chemical Processing contributing editor. He recently won recognition for his Field Notes column from the ASBPE. Chemical Processing is proud to have him on board. You can e-mail him at dwillard@putman.net

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