So you want to… get into contracting?

Farmers and contractors work in partnership to get the biggest and most specialist jobs done throughout the year.

As machinery and labour get ever expensive and difficult for an individual farmer to justify, contractors have an opportunity to provide an ever-larger number of services to businesses looking to cut capital expenditure to a minimum.

However, before you jump on a tractor and agree to work 18-hour days at any price, there are a few things to consider to make sure you haven’t simply inherited a loss-making job from someone who has figured out the real cost of it before you have.

See also: How contractors achieved substantial year on year growth

Andrew Meredith spoke to Jill Hewitt of the National Association of Agricultural Contractors, and Brian Thompson and Rachel Timms of contracting firm BTAC to run through the essentials.

Contractors can potentially offer to do almost any job that needs doing. How should I decide where to specialise?

Identify a market for your services, before you invest in machinery. Try not to just offer the same services as your local, already established, contractors – a niche market is ideal.

Competition is healthy but if your local contractor has loyal customers you may struggle to get work unless you seriously undercut – and that is usually dangerously unsustainable.

Once you’ve identified a gap in the market, find out exactly what it costs to deliver it. Make sure they are your costs as everyone’s business is unique.

What costs should I include?

Be certain you account for everything, including depreciation, fuel, maintenance and tyres.

Make sure to count the cost of your own labour if self-employed, and account for ‘dead time’ when you are not directly earning money.

As a contractor, especially if employing staff, you can have considerable time travelling or doing repairs and maintenance work, or standing in the yard waiting for better weather.

Costs need to be worked out to know the rate at which each job needs to be charged to break even. A margin must then be added.

You should not be tempted to undercut other contractors just to gain swathes of hectares as it can quickly degenerate to just a short-term numbers game.

Vast amounts of hectares worked mean little if there is no profit or income to reinvest, making the business unsustainable and inevitably fail.

I’m already in a farm business. At what point should I set the contracting business up as separate company and in what form?

There are a number of implications to consider when deciding how to structure your business, which an accountant will be able to advise on, including whether or not to become a limited company that pays corporation tax not income tax.

Remember that you are required by law to become VAT registered in the month when your total VAT taxable turnover for the past 12 months was over £85,000 or if you expect it to in the next 30 days.

I’ve heard farmers are not the swiftest at settling up a bill. What tips do you have for invoicing?

Invoice promptly – there is nothing to be gained by doing 60d-plus hours a week in the tractor seat if your paperwork is weeks out-of-date and invoices are not being sent out.

Prompt invoicing is a sign of a well-organised, professional business. If there is the opportunity, get invoices out as soon as a job is completed. If you are too busy, consider getting outside help to keep on top of the paperwork.

Chase payment if it has not been settled. Your customers will expect to pay when a professional job is completed.

A creditor’s money is a far cheaper source of cashflow to a contractor than a bank overdraft!

I’m worried about the consequences of making a costly mistake for a client. Is specialist insurance available?

Yes. Inevitably things can go wrong and it is necessary to be properly insured for the operations you carry out. We all make mistakes, but in contracting these can be expensive.

Rural insurers often create a bespoke quote based on the type of work you are doing so be prepared to go into detail about what jobs you intend to do.

They will then create a package which should offer:

• Public and product liability – Cover for a claim made against your business by a client or a claim made by a member of the public in the event that your work results in injury or property damage
• Employers liability – This is a legal requirement for any business that uses any type of worker, up to and including friends and family that chip in on a casual basis and receive no payment
• Legal protection – insurance against unrecoverable legal costs
• Tools and equipment cover

You may also wish to consider personal accident cover – compensation paid to a business owner in the event they are unable to work due to injury that will cover the cost of paying for someone to do work on their behalf.

I’m in line to succeed to a tenancy. Could other income jeopardise this?

If you stand to succeed an Agricultural Holdings Act tenancy then setting up an additional business can raise issues.

One of the four statutory tests that enable you to qualify for succession is the livelihood test.

This stipulates that the primary source of livelihood for five of the past seven years must have been made from agricultural work on the tenanted holding, unless they have the landlord’s written agreement to the contrary.

A breach of this could allow the landlord to take the farm back in hand when the current tenant retires or dies.

What is the best way to get the word out about my business?

Word will quickly spread about your firm if you are doing good work, and even faster if it is bad.

Spending on marketing can be a good way to reassure potential new clients that you are a legitimate, trustworthy business.

A marketing firm will be able to design branding for workwear and machinery.

Most businesses now regard a website and social media presence as essential, but don’t feel like you have to be across every platform – Facebook is still by far the biggest driver of new leads to most businesses.

How do I know I’m ready to run my own business?

Taking the decision to venture out on your own instead of working for someone else is a big step and as well as assembling a convincing business case, people should take a close look at themselves to decide if they are up to it.

If you are offering to do complex or wide-ranging work, around 10 year’s experience will likely be needed to give customers confidence you are up to the job.

Also have a think about your reputation in the area – are you known and respected?

A good personal relationship with people will win business more rapidly through word of mouth and lead to fewer issues with settling bills.

A good amount of resilience is also required. If the thought of taking on all the additional responsibilities of being the boss, not the worker, is daunting, then this may not be the right decision for you.