How to talk to a company as a prospective contractor vs. employee

Question

Background: I am a software engineer. Throughout my career I have been a salaried employee.

My brother's company has some imminent deadlines and they could use some extra help with things that I have a lot of experience with; I recently discussed with his boss about possibly doing consulting and she seemed very excited about the idea. I already told them that while I'd love to help them with 10-20 hours per week, I'm not interested in leaving my current job nor moving (he and his company are in a different state).

The question: I have never "applied" to work as a contractor before, and I'm wondering what is different about the process. A few questions:

• Resume: My brother asked me to give their HR department a resume. I think of myself more as a vendor than as an employee, is this request typical for contracting?

• Compensation:

  • How much should I quote my hourly rate to be? I'm not asking for a number, I'm asking for the markup from what my time is worth, the fact that I need to pay extra for social security, etc. In other words, should I ask for 20% more? 50% more? Other?
  • Should I try to negotiate a bonus in advance? I know they are really pressed by deadlines, should I ask for something like "if we get done by this calendar date, I'd like a speed bonus of X% more". Is that sort of thing normal or should it just be a simple rate?

• Expenses:

  • If I need to buy a commercial software tool, how do these costs get calculated? Should I just roll this into my hourly rate? Should I expect them to pay for it and expect to give them the license when the project is complete?
  • I want to buy a new laptop. I was going to do this anyway even without this consulting gig. My brother's boss seemed skeptical about giving me VPN access on a personal laptop, but it didn't seem like a dealbreaker. How should this factor into the negotiations?
  • They want me to form an LLC for myself. The fees are reasonably high to do this. Should I attempt to build this into my hourly rate as well?

• Is there anything else I should know?

P.S. If this question is too broad or off topic, please let me know in the comments and I will do my best to edit to address these issues.

Answer 1

Having been down this path before, here are some thoughts:

Resume

• Since you are not an established contractor and likely can not share any work from your current employer, your resume is the next best thing to show to the company that you are qualified to do the work. While your brother may have vouched for you, the managers involved will need to see something to help justify bringing you on.

Compensation

• As always compensation is up for negotiations, you need to find a number that you would be happy to work for and they are willing to pay. Using your current salary as a basis is as good start. It is good that you are already aware of the increased costs you will incur, like Social Security. You should analyze what you want to take home and account for the added costs of taxes, social security,etc and come up with a number. This can be your starting point for negotiations. Be forewarned though, as justifiable as it seems to you, at some point they may consider your rate so high that they might as well hire a fulltime developer. This is were you will need to negotiate if you really want the work.
• If you are only willing to work 10-20 hours per week, I would not include any bonus incentives based on completion time. You need to remember that you still have your regular job. What will happen if you decide to put in more hours to achieve this bonus payout and your regular job suffers. I think a bonus clause can create a bad situation with conflicts as long as you are a full time employee somewhere else. Current employer should be priority one, unless you are willing to lose that job.

Expenses

• I usually provided a simple document spelling out types of expenses and who was responsible for the cost. Both sides signed the document and off we went.
• Any standard development software that has general purpose value, you should probably by for yourself,as you may use it again and it is not appropriate for them to pay for it if they are not the only company you use it for. Any special software, that they require, they should pay for. For example, I always owned my own copy of Visual Studio as I needed it for most of my work. However, one of my customers required that I integrate with their source-control system whoich was required a per user license. Since I did not need/desire this software for any other jobs, I had them pay for the license and uninstalled the software when the job was done.
• Any travel that was required and was not to their office was to be covered by them. I did have one client who needed me to meet with some of their clients off-site and that was their cost. I consider travel to visit my client in his/her office as part of the cost of doing business.
• I would say since the laptop is for you, you should buy it. If they require that your development machine be managed by them for security reasons, like VPN access, then they should be responsible for that machine.
• LLC fees don't need to be that high, although that certainly depends on the state and country you are working in. I was able to form an LLC in the US in New Jersey for a recurring state fee of approximately $60 (if memory serves). I didn't use a lawyer, you should check to see if there is a legal requirement to do so in your area. I would suggest that for you own sake, forming an LLC or some other legal entity is a good idea. This can help separate any work finances/obligations from your private finances.
• In the end, I would say anything that is general use and/or valuable to you, should come out of your pocket, any special requests that apply only to them should come out of their pocket. Of course all of this can be negotiated.

Answer 2

Usually, companies seek for a contractor because of three main reasons:

• contractors usually do the job better and quicker.
• almost always is cheaper than a permanent employee.
• a contractor can be fired easier.

Why you should know this?
Because any investment from your part will end up by lowering your profit margin and make the risk bigger.

My point of view is this one:

1. Create a resume and a cover letter with the power to show the benefits the company will have by employing your services. In short words: "show them the money".
2. Don't spend any money. If you start by spending money on a laptop, new software, or something else, your risk goes up and the profit margin goes down. The hourly rate can't get any higher than what will cost by employing other contractor or no contractor at all.
3. Leave all expenses be handled by the company (software, licences, laptop, etc.) The less you will spend from your pocket, the more you can focus on the job. Usually it costs less the company to buy you a laptop than to pay for your personal computer. And, as you already saw, they prefer to have the control. If you don't have to, avoid undesirable problems (obstacles). Keep the cash in your pocket. You can spend it later after you end the relationship with the company.
4. You should focus on what the LLC costs and how much you have to pay in taxes and social insurance. My opinion? After you expense all the taxes a 30%/h more than you get at your actual job should be the minimum hourly rate. Obviously, you can go as high as 100%/h if the situations allows such a thing.
5. You are a contractor. Bonuses are for employees. If you need more money, increase your hourly rate. But, remember, the best practice is to be clear about your rates right from the beginning.
6. Milestones are made to get the job done in time and to the required standards. You can ask for more money if you have to work on extra features, at an increase pace or a longer period of time. You cannot ask for more money or a bonus just because you delivered on time.
7. Don't dream too much. Being a contractor isn't an easy job.
8. Pay attention to the negative effects it can have overall. Under no circumstance leave the part-time negatively influence your current full-time job or your personal life.