Outsourcing

The difference between contracting and consulting, and why it matters

Meredith Little offers basic definitions for a contractor and a consultant and explains why it matters what you call yourself. She also provides tips on how not to get burned when dealing with project bidding.

 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, you can basically define each this way:

  • A contractor 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.
  • A consultant is brought in when the company has a need and either isn't able, doesn't wish to, or doesn't know how to take care of it -- and doesn't have time or desire 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, support professionals, 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 the resident experts can't figure it out), 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. Many consultants bill by the project, thereby increasing their 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 the systems 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 $975. 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's important not to bid work by the project until you're confident that you can estimate projects with enough accuracy that you don't get burned. 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.

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 supervision -- but 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, one consultant was contacted 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 someone to shape their vague but urgent needs into something concrete and deliverable. On the other hand, there was no way a consultant could make any reasonable estimate of how long this project would take. In such situations, you can quote the client two rates: One is a consulting rate for a period of time in which to assess their needs and deliver a detailed plan for the solution, followed by a somewhat lower rate for the time to complete the projects scoped in the first phase. It would have been nice for both the client and consultant to have been able to plan on a fixed, per-project price, but the project was so vague that one would have almost certainly ended up losing money.

Don't let that happen to you. Once a project's price is set, clients frequently (consciously or not) attempt to add to the project's scope. For this reason, project parameters must always be well-described in writing within a project plan.

Walk the walk

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.

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6 comments
Sterling chip Camden
Sterling chip Camden

... that how you bill distinguishes between contractor and consultant. I bill by the hour, but I'm definitely a consultant. The main difference is that people ask me what to do, rather than telling me what to do.

JohnMcGrew
JohnMcGrew

...almost 100% of the time. The difference I see is that most "contractors" charge a fraction of what I do. The "knowing how" is usually built into the hourly.

PMPsicle
PMPsicle

Like Chip, I don't think being a contractor or being a consultant has anything to do with billings. My early background was in construction and I tend to use them to clarify terminology like this (which after all originated with the trades). So is the way the work is billed relevant? No. Billing techniques vary based on the type of work, the information available and the desired assignment of risk. In construction (and almost all other consulting businesses) it is the contractor who bills by project. Consultants deal with less straightforward projects and so usually bill by the hour. But both do fixed and variable pricing. So is who you work for relevant? Sort of but not in the way this article indicates. A contractor always deals directly with the end purchaser (thus the reference to contract). A sub-contractor works for a contractor not the purchaser. Sometimes a contractor is a project manager who co-ordinates the various trades but doesn't do any actual work. A consultant can work either way and is often brought in by a contractor since the purchaser may not know of the need. Is who is giving the orders relevant? No. That's relevant to employment and to self-employment. Contractors typically are given a project specification (blueprint) which they then segment into the work that needs to be done. Consultants typically are given a problem which they need to solve. Neither is given detail orders -- or more correctly are given only the level of detail they need, require or have available. In fact, consultants are more likely to be employees than contractors. Having said all the above. there are some relevant items. The types of work is relevant. Consultants usually are troubleshooters and solution identifiers. Contractors are usually solution providers. Marketing is relevant. Consultants are usually perceived as experts in their niche/discipline. Contractors are perceived as specialists in their niche. Rate is relevant. Consultants usually get paid more than contractors on a per-hour basis. The product is relevant. Consultants usually give a knowledge product (e.g. a report, advice or letter of opinion). Contractors usually produce an end (physical) product (e.g. a program, software suite, a kitchen, a house). My own take is twofold. First is that if the client (or someone else) is responsible for actually producing the end result, you are a consultant. If you are responsible for the end result then you are a contractor. In IT that means you're probably a bit of both. Second is that if the client will pay you more for saying you are a consultant then you are a consultant. If you'll end up with greater income as a contractor then contractor is what you are. Bottom line ... the only thing that matters is your bottom line. Glen Ford, PMP http://www.trainingnow.ca

Sterling chip Camden
Sterling chip Camden

a Consultant consults -- i.e., shares his/her wisdom and experience. a Contractor contracts -- i.e., does a job for a fee. Of course you can be both, but it's the emphasis that matters (on your bottom line, as Glen pointed out).

Gabby22
Gabby22

I started with mainly 'fixed' fee and moved to hourly rate, with the rate varying considerably with the client, job and skills expected. I've found this is mainly a matter of trust, and I truly believe that we both get a better outcome with hourly rate. Generally the product will be better. Unlike a lot of consultants, I provide detailed timesheets to 5 minutes and send them weekly by default. Never had a problem with this, and it increases the trust. I sometimes work with a cap on the hours, which is negotiated if I look like going over. Doesn't worry me, because if it takes longer (for any reason), the client normally agrees. In any case, most of my ongoing work for clients is usually not even estimated. I just do it and bill monthly. I know that it's needed, and I know the client will think so too. Often the 'labour contractor' is referred to as 'warm body hire', which I guess is another reason to prefer 'consultant'. But the big issue of a consultant is not how they bill, but the fact that they provide good value for money with specialised skills and can solve problems that other staff can't.

Sterling chip Camden
Sterling chip Camden

"if the client will pay you more for saying you're a consultant, then you are a consultant." And I think that is generally the case.

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