Outsourcing

The difference between contracting and consulting and why it matters

Who makes the most money, a contractor, or a consultant? Read why the label you choose can make a big difference in the income and respect you earn.

Any businessperson knows that one of the keys to success is good marketing. If you’re a self-employed IT professional, do you call yourself a contractor or a consultant? It may sound like an issue of semantics, but what you call yourself can make a big difference.

Contracting vs. consulting
While you’re likely to get a different definition of consulting and contracting from every person you ask, I basically define each this way:
  • Acontractor essentially acts as a temporary employee. The contractor works under the manager’s supervision, probably with other employees, to help complete part of a larger project. He or she is told what to do, how to do it, and when it needs to be done.
  • Aconsultant is brought in when the company has an urgent need and either isn’t able or doesn’t know how to take care of it—and doesn’t have time to figure it out. The consultant analyzes the problem and decides how to solve it, often using methods or tools that the client hasn’t even thought of. The consultant is self-directed and does whatever it takes to deliver the solution that meets the client’s needs.

How do you think of your business? Really, it comes down to whether you simply offer your time or you market solutions to problems.

There are lots of talented programmers, network folks, tech writers, and so on out there who can follow directions and do what someone else tells them to do in order to create good work. But that’s a far cry from having the experience, creativity, and initiative to assess a client’s needs, determine the best way to solve the crisis (remember, companies don’t usually call for help until the problem is already on fire), and implement and deliver the solution. Plus, a consultant does all this without handholding—saving management the time and hassle of hiring, training, and supervising.

Why you should care
You may be wondering why what you call yourself matters. The bottom line about whether you’re a consultant or a contractor is the bottom line. Generally, a consultant is paid higher fees than a contractor. Of course, this depends on a lot of factors, such as the demand in your market, your skills, and the client’s need, but this is true more often than not.
  • A contractor generally bills based on time spent performing services. Invoices detail the number of hours worked multiplied by the set fee per hour. Contractors generally work onsite under direct supervision. They often work through agencies and don’t find their own work.
  • A consultant most often bills by project, charging for designing and implementing the solutions offered. Consultants rarely work through agencies, and they’re often responsible for drumming up their own work, either by networking or marketing.
  • A consultant sets pricing based on the quality of the solution and the demand for it, not just on time.
  • As a consultant, you can bill by project and increase your hourly rate breakdown by working faster and more efficiently. In addition, many clients like this approach because they know what they’ll end up paying for the project, and they know there’s no incentive for you to drag out the work.

Case in point
You may have heard this story before, and although it may not be strictly true, it still illustrates my point: A company was having problems with its systems crashing. It seemed they wouldn’t stay up more than an hour or so before another crash would idle all their people. So they called in a consultant. The consultant listened to the description of the problem, went to an admin computer, and did some work there for five minutes. One reboot later, the systems came back up and stayed up. The consultant was in and out in less than an hour.

However, when accounting received the invoice, they were shocked to find that the consultant billed them for nearly a thousand dollars. Accounting called the consultant and asked for a new invoice detailing the expense. The second invoice read:
  • Fixing computer crash: $50
  • Knowing how to fix computer crashes: $925

But don’t get burned…
If you’re new to working for yourself, you might start out as a contractor and gradually work toward being a consultant. It’simportantnottobidworkbytheprojectuntilyou’reconfidentthatyoucanestimateprojectswithenoughaccuracythatyoudon’tgetburned. After all, the point of consultant billing is that you’re in control of what your hourly rate turns out to be. If you’re wrong about the scope of a project, you could end up making far less money than you would have by billing hourly. (For hints on keeping a project within its initial scope, see my earlier article “How independent contractors can avoid getting burned by too many client revisions.”)

But what if you are faced with a consultant-type project—the client needs you to design and implement the solution with minimal client input or supervisionŸbut you can’t estimate the scope well enough to feel comfortable bidding on a project basis? You could make your bid high enough to cover all possible contingencies and changes in scope. Unfortunately, that number might be so high as to price you out of the project.

Another option is to bill an hourly rate justified by your consulting role. For example, in one of my projects, the client company contacted me for a bid on a project that spanned multiple groups and managers. The scope of the project and its deadlines changed from meeting to meeting. The contacts didn’t seem to have a clear picture of what they wanted.

Obviously, this was a consulting job—they needed me to shape their vague but urgent needs into something concrete and deliverable. On the other hand, there was no way I could make any reasonable estimate of how long this project would take. So, I quoted the client two rates: one was a consulting rate for a period of time in which I would assess their needs and deliver a detailed plan for the solution, followed by a somewhat lower rate for the time in which I would complete the projects scoped in the first phase. It would have been nice for both the client and myself to have been able to plan on a fixed, per-project price, but the project was so vague that one of us would have almost certainly ended up losing money.

Walk the walk
Of course, the moral of the story here is not to gain maximum profits from your client’s desperate situation. Nor is it to charge the most money you can get away with just because you call yourself a consultant. Whether a consultant or contractor or whatever your role is in the IT industry, your reputation and references are key to landing the next contract. If you consistently wow your clients by developing and delivering innovative solutions to their tough problems, you should be compensated for your expertise, experience, and creativity while you’re also working hard and using an ethical approach to running your business.
To comment on this article or to share your experiences, please post a comment below or follow this link to write to Meredith.

Meredith Little has worn many hats as a self-employed writer, including technical writer, documentation specialist, trainer, business analyst, photographer, and travel writer.

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