This article was originally published on .cult by Apinya Dechalert. .cult is a Berlin-based community platform for developers. We write about all things career-related, make original documentaries and share heaps of other untold developer stories from around the world.
Switching from traditional full-time employment to contract work can be a bit of a transition — especially if you’re also throwing in remote work at the same time.
A lot is happening in the world right now and for many, going into contract work may offer more from a financial standpoint than sticking to full-time employment.
For starters, you can command higher rates based on the type of contract, and negotiate higher returns for your hours based on project size and the type of work.
If you end up on something you genuinely don’t enjoy, there’s a high chance that it’ll be over faster than it usually would be at a regular 9 to 5.
There are many perks that come with contract work, but one thing that no one really talks about is the long term financial sustainability of contract work as a developer.
Here are some things you should take into account before jumping into the world of contract work and how it all works.
The perks and quirks of contract work
The perks of contract work are obvious — you’re a freelancer and the boss of your own destiny. You’re not bound to a single company, giving you the freedom to pick and choose in addition to taking on as many clients as you have the capacity to complete work for.
However, the quirk of contract work is that your income is not always guaranteed. While the amount you get paid will mostly end up being more than what you’d get in a traditional environment, this perk is offset by the uncertainty and flow of clients that come your way.
Clients also tend to have a set budget, so you’ll have to play the negotiator with a minimum personal baseline set before you agree to take on work.
Working at a regular 9 to 5 kind of company will guarantee you a straight line income, while contract work can come in ebbs and flows.
What this means is that you have to be mentally and financially prepared for low periods and wise during your bump months.
The first year of contract work is also perilous because you don’t know what your income graph is going to look like. In addition to this, you’ll need to figure out and anticipate certain low periods that often accompany public holidays and days leading up to it.
While development work is industry-independent, the people hiring you will also have their seasonal cycles that will have an impact on when they will begin looking for someone to work on the projects.
The type of project will also determine how long you stay on as a developer and continuation is not always guaranteed. Meanwhile, you still have financial obligations to attend to such as rent or mortgages, in addition to other costs of living.
You need a decent cushion to cover your dip months or when you’re in between projects to maintain your current level of financial comfort.
So, how should I budget?
Well, it really depends. You need to take into account your month’s minimum expenditure first by adding up all the essentials such as rent/mortgage, utilities, transportation, food, subscriptions and anything else that results in money leaving your pocket.
This will be your monthly baseline.
The next step is to figure out how much risk you’re willing to be comfortable with before you have to cut back. During this time, you’re under the assumption that you’re not going to get paid at all.
For example, if you’re comfortable with three month’s risk, then have three months’ worth of normal expected expenditure saved up.
Why use the assumption that you won’t get paid?
This is because if you work for multiple clients, everyone has their own accounting cycles. Some pay at the beginning of the month, some pay at the end. Some forget to process your invoice. Some are good and pay right away. Some payments don’t come in until you’ve delivered certain parts of the project itself.
Usually, if they’re late on payments, a simple reminder email with increased frequency will often do the trick. If clients ignore your requests for payment, it’s not against the rules to withhold work deliverables or ask why they haven’t paid up.
As a result, you may feel like you’re getting paid erratically — which can be a change in your spending habits if you’re accustomed to having a regular paycheck hit your account every week or fortnight.
That’s why it’s good to have a holding account and pay yourself regularly out of it. Rather than taking the full amount out right away, you have a buffer zone and know that you’ll be alright to cover your bills and general day to day costs.
The types of billing
When you enter the world of contract work and unless you’re going through an agency, in addition to your work as a developer, you also play the accountant and business owner.
This is because when you’re freelancing, you have the opportunity to negotiate the type of relationship and payment expected. There are more options than just paying by the hour and other structures are available such as per project or feature.
The perk of billing by the hour is that you’re guaranteed to get paid for the amount you work.
However, the downside to this is that your income becomes linked to the number of hours you have at your disposal. In essence, you are selling your time.
Billing by project gives you the liberty to get paid based on your skills. This means that the client is shielded from your inefficiencies and you get rewarded for your proficiencies.
When you switch to contract work, there is slightly more admin overhead required to get things to run smoothly. This means remembering to send out the invoices on time, and working out your delivery schedule in conjunction with your payment schedules.
Big picture-wise, most clients are good at keeping their accounts — but lateness can happen, which can cause a negative ripple effect in your finances if you’re not prepared.
So before you jump into the world of contract work, be sure to assess your current financial situation. Most of the time, your income will no longer be a straight line effect but a curve of highs and lows, depending on the type of contract and how long they run for.
Not everyone is suited to freelancing life. One of my juniors gave it a try and it didn’t work out. She didn’t like having to ask people for money all the time and it weighed her down too much. She also didn’t like the dynamic change of being a one-man-band business owner versus just being a developer.
For me personally, I had a good financial runway to cover at least 6 months in bare minimum expenses, and that’s how I lived for a while until there was a steady flow of projects coming my way. This is something I’d strongly suggest because when you first jump into the world of freelancing, it can be quite unpredictable until you figure out where your clients are hanging out and how to increase your discoverability.
On a mental level, I was motivated to get into freelancing work because I wanted more freedom with the types of projects I worked on and cut out the commute completely.
Everyone has their reasons for getting into freelancing, these are mine. What are yours?