handshake agreeing to contract renewal

If you’re a contractor or freelancer, you’ll already know that your client contracts have a fixed start and end date. If your fixed-term contract is coming to an end, there are a couple of things that can happen. First, if your client no longer requires your services, you’ll part ways when the contract ends, and it may be time to look for new contracts elsewhere.

In many cases, if the client is happy with your work and still requires your services, they will want to renew or extend your contract with them. When this happens, it’s time to think about successfully negotiating a contract renewal. For the self-employed, contract renewals are an opportunity to obtain better contract terms and pay-rises, so it’s essential to get it right.

The Difference Between a Contract Renewal and Extension

When discussing contracts, the first thing to understand is the difference between your contract being renewed or extended. In a contract extension, a new agreement is created that incorporates the original contract and extends its term for a specific period. The contract terms, pay rates, and other conditions will remain the same as the original contract, leaving no room for you to negotiate. In short, things will continue exactly as they are until the end of the extension.

On the other hand, a contract renewal means you will continue your business relationship with the client, but under a new agreement that replaces the old contract. A renewal allows contractors to negotiate terms and pay rates and is a favourable option for contractors who have a good working relationship with their clients and are looking to renegotiate their position.

There are times when an extension is preferable over renewal and visa vera. It will depend on your situation and the client’s project you’re working on.

lady working from home

Contract Renewal Strategy

If you’re in a position to negotiate a contract renewal, it’s a good idea to have a strategy in place to ensure you get the best deal possible for your business. Contract renewals should be approached not just as a deadline that needs to be met but as an opportunity to re-evaluate key terms in your agreement. You can use your renewal to update terms to reflect the economic climate and any changes within your business since the original contract started. Some common objectives contracts should have when negotiating a contract renewal include:

  • Obtaining a renewal within the first six months of the original contract. This can demonstrate to potential new clients that your business has staying power and good working relationships with its existing clients.
  • Increase your rates in line with inflation or the services you are offering.
  • Renegotiating terms to get yourself outside of IR35 if you are currently inside it. Take some time to learn how to determine IR35 status, if you haven’t already.
  • If your contract negotiations are unsuccessful, think about how prepared you would be to accept less favourable terms, or, if you decide to part ways with the client, how you can ensure you do so on good terms.

Having The Right Attitude to Contract Renewal

If you’re a relatively new contractor who hasn’t negotiated a renewal before, it can be easy to become anxious as the end date of your current contract approaches. If you’re not careful, that anxiety can turn into angst and animosity, which could affect the way you approach the negotiation process.

It’s important to remember that to manage a contract renewal successfully, you need to behave like a company. Remind yourself that you are a supplier of services. In other circumstances, it would be strange for a supplier to demand that a client continue using those services if they weren’t satisfied with aspects of the service.

freelancer looking at her contract

Preparing to Negotiate Your Renewal

Here are some of the key things your should do ahead of a contract renewal negotiation. As small business accountants, we would help you gather any supporting documentation or figures you require to help support some of these decisions.

Give Yourself Plenty of Time

As a contractor or freelancer, you’re probably very busy, but when it comes to contract renewal, it pays to stay ahead of the curve and not leave everything until the last minute. You should aim to avoid a situation where you are working on a project without having solidified terms for the renewal. In these cases, the client may not see the justification for any changes to terms or pay rate, since you are already working on the project.

As a benchmark, if your current contract is 12 months long, it’s a good idea to begin the renewal process 3 months before the current contract end date. For contracts between 3 – 6 months, 6 weeks before the end date is appropriate.

Keep Your Options Open

It’s a good idea to be realistic and not pin all your hopes on getting the renewal you want. It would be best if you accounted for the possibility that things might not go your way, and the client may not be receptive to your new terms. Research the market, and line up alternative clients if you can. This will also give you more bargaining power when negotiating with your current client.

On the surface, seeking alternative contracts to strengthen your position whilst you’re still under contract with a current client may feel like you’re showing your client disloyalty, but it is common practice and not unethical.

Keep a Buffer of Money

It can be beneficial to have a buffer of money available in your business bank account to safeguard against surprises like a failed negotiation or termination of the contract. Of course, we hope this doesn’t happen, but life and business can be unpredictable. You may find the client wishes to swap to someone cheaper or has a change of heart and decides they no longer require your services. As limited company accountants, we understand the myriad of factors that can impact contractor and freelancer finances. Many are beyond your control, so it helps to prepare for every eventuality.

Before entering into the negotiation, calculate the cost of the downtime you would have if you were to leave the client without having anything else lined up. You may find that the time without a contract costs you more than the rate rise you were going to push for.

Gauge the Strength of Your Position

When setting out your renewal terms, you’ll need to be realistic about what the client is likely to accept or decline, particularly if you’re asking for a raise in pay. You’ll need to justify any changes you’re proposing, so ask yourself the following questions:

  • Do you have a good relationship with the client, and do they seem keen to keep you around?
  • How reliant is the client on your services?
  • Are you unpaid when compared to the market rate?
  • Is the client in a position to pay you more?
  • Do you have other contracts lined up if this falls through?
  • How high is demand for your services, and what kind of competition would you face if you needed to look for new contracts?
  • How is your business financial health? Have your expenses risen since your last contract was formed that will need to be reflected in the new arrangement? All Gorilla clients receive access to FreeAgent accounting software, which makes assessing businesses finances straightforward.

Negotiating Your New Contract

Once you know what you want, it’s time to negotiate your contract renewal. Here are the things you’ll need to keep in mind during the renewal process:

Ensure You Pitch to the Decision Maker

This is particularly important if you are seeking a rate raise. Don’t waste time pitching to someone within the company who isn’t authorised to make a decision. Ideally, you should be negotiating with the person who holds the purse strings. There is little benefit to trying to convince someone other than the decision-maker as to why you want a pay rate increase and no guarantee that they will pass on your reasonings to the person in charge. A second-hand sales pitch from someone who doesn’t fully understand your skills and isn’t on your side is likely to leave little lasting impact on the decision-maker.

Sing Your Own Praises – Modestly

When negotiating, be sure to demonstrate the value of your skills, but do it gently. Reminding the client how you’ve helped them, the high standards you to work to and how you benefit their business can go a long way to assisting them in understanding your worth, but don’t be boastful. Avoid holding the client to ransom or making them feel like your departure would damage their business. You’re looking to strike a balance between demonstrating your worth and remaining indifferent, as appearing too keen could weaken your position, particularly if you’re negotiating a rate raise.

Be Prepared to Justify Your Rate Raise

This goes hand in hand with singing your praises. If a client wants to retain your services, you should not raise your rates simply because you think you deserve it. You’ll need to be prepared to explain why you’re raising your rates. Reasons akin to ‘you need me for this project, so pay me more’ won’t sit well with most clients and sound unprofessional. Instead, find legitimate reasons for your rate raise request. Whilst there is no tried and tested method, suitable reasons may include a change of your responsibilities or role as a contractor or that the market rate for your skillset has shifted.

Be Clear on IR35

This is very important for contractors currently working within IR35. Ensure that your working practices and terms fall outside of IR35. Given a choice between operating outside of IR35 and accepting a better rate, many find it beneficial to choose terms that place you outside of IR35. It will undoubtedly be more financially rewarding than a small rate raise.

Know When to Bow Out Gracefully

If it becomes clear during the negotiation process that you aren’t seeing eye to eye with your client and you will not be able to agree on the terms for a contract renewal, it may be in your best interest to part ways. You should choose the path best suited for what you want to achieve with your business, and sometimes that means saying goodbye to long-standing clients.

negotiating contract renewal

Why You’ll Succeed

Most successful contract negotiations are granted because the contractor is low maintenance, has good relations with the client company’s employees, is easy to work with, and skilled in what they do. These are all things that you can demonstrate throughout the term of your original contract.

A good contractor will show the client why they’re worth it, rather than telling them. Working hard for your clients is the best way to position yourself favourably ahead of contract negotiation, and that, coupled with the negotiation approach we’ve discussed today, will more likely result in the outcome you want.

Contract negotiation can be stressful, but if you stay professional and recognise that no one is irreplaceable, you’ll ultimately wind up with the best result – even if that result means parting ways with the client because they’re not willing to work to your terms. If you would like more information about how Gorilla Accounting helps its clients through contract renewals, contact us today, we’ll be more than happy to help.