Consultant vs. Contractor: What Is the Difference?

Updated November 27, 2022

With a rise in the demand for freelance professionals, it's important to decide how you market yourself to clients. To operate as an independent professional, you may choose to work as a consultant or a contractor. Both allow for flexible work schedules and provide excellent incomes, so understanding the key differences between these roles can help you decide which is best for you. In this article, we compare a consultant vs. a contractor, provide details regarding the differences between each role, share why organizations hire them, and explain the advantages of working as an independent professional.

Consultant vs. contractor

The fundamental difference between a consultant vs. a contractor is that a consultant is an expert who evaluates their clients' needs and develops insightful advice. In contrast, a contractor evaluates requirements and applies their findings. Here are the differences in greater detail:

What is a consultant?

A consultant is an independent professional with extensive experience and broad expertise within a specific industry. While they're self-employed, organizations may hire them to advise on significant company objectives. They have meetings with an organization's leadership team to understand the project and develop a plan to execute it. A consultant is a problem-solver who aims to improve a company's practices by providing expert advice. After advising their client, they leave the work of translating this advice into action to those with permanent positions within the business.

For example, a company might hire a consultant specializing in efficiency to improve various processes and reduce costs. After carefully analyzing how the organization uses its resources, the consultant can recommend how to increase team performance and save money. If the consultant determines that it's important for the organization to focus on manufacturing, they can make suggestions about how to do this. These suggestions may include encouraging the organization to implement automated systems that don't require employees to operate them manually.

What is a contractor?

Contractors are independent professionals hired by an organization to perform a specific job for a particular time. They meet with clients to understand their requirements and complete their tasks. As a contractor is self-employed and works for others for a certain amount of money, their contract ends when they complete the assignment. Organizations may hire contractors temporarily to perform simple jobs, such as organizing mail, or for complex work, such as programming applications. A contractor's value depends on their ability to perform a specific job and the demand for that work.

While it's important for a contractor to have relevant technical skills to complete their work, they only require a narrow understanding of an industry. For example, an organization might contract a writer to create e-mails for a marketing campaign. The organization expects the writer to understand how to create interesting copy and communicate with readers to be successful. For this project, understanding how to perform broad marketing tasks, such as analyzing data or organizing sales funnels, isn't a requirement.

Key differences between consultants and contractors

The following details the key differences between working as a consultant and as a contractor:

Scope of work

A consultant can show a client new and innovative methods to help them achieve their goals and overcome challenges. As a result, the client typically saves time, money, and effort. The consultant doesn't implement the strategies they suggest. The client puts the suggestions into action. On the other hand, a contractor performs the work for their clients. A typical contract stipulates that they're responsible for completing a defined set of tasks in the way the client wants.

Working hours

A contractor works for a client contractually. Their contract typically outlines the hours required to complete the assignment, depending on the client's budget. Consultants have no specific work time when offering their services. A consultant usually only works on a client's specific project when providing their services.

Rates and billing

Consultants bill clients on a project basis. Their expertise and experience usually determine how long a project may take and how much to charge to ensure it's worth their time. The consultant often sends a bid for a client's project, which can determine whether the client hires them. A contractor typically bills an hourly rate. The client hires them for a set time while completing their project.

Number of clients

Consultants can work with various clients simultaneously because they don't normally have specific work hours or dedicated time for their clients. High-performance consultants are popular for working with different clients without compromising their daily work quality. Conversely, a contractor usually works with one client at a time. This is because they normally have specific work hours, which means it's difficult to maintain multiple clients.

Why companies hire consultants and contractors

The following explains the reasons why companies may hire consultants and contractors:

Expertise: A consultant or contractor can provide companies with in-depth expertise on a specific topic. They can also give the company a different perspective because their skills align with the organization's current needs and objectives.

Daily operations: A company using its existing workforce during a project may require someone to manage the daily operations that the employees usually manage. By hiring an independent professional, the company can free up its current resources and ensure someone is supporting its daily functions.

Fixed costs: When hiring a consultant or contractor, a company often knows the exact charges they're going to incur. There aren't any overheads involved when hiring an independent professional, and the company can also extend their contract based on the results achieved during the initial contract.

Skill set: When a company hires an independent professional, it can introduce flexibility and necessary skills. For example, this can be especially true in companies that don't have the resources or team members with the right skills to complete an IT project.

Affordability: A company can expand and contract a workforce without creating unnecessary expenses. Hiring a consultant or a contractor may benefit a company's budget, especially when they require skills for an occasional project or a specific period.

Flexibility: Companies with changing workloads can decide to hire an independent professional because of the flexibility they provide. A company can choose to hire a consultant or a contractor for specific projects or tasks without a long-term commitment, which can help the organization budget for future projects.

Advantages of working as a consultant or contractor

The following are the advantages of working as a consultant or contractor:

You are your own boss

When working as a consultant or a contractor, you're your own manager, which comes with both risks and rewards. You can decide when, how, and where to work for as much time as you want. The amount of money you earn typically depends on the quality and quantity of your work. For instance, if you want to earn more money, you can find more work or increase your rates. Many consultants and contractors choose not to depend on a single company for their livelihood.

You can earn more than employees

Organizations often pay independent professionals more than employees who do the same work, so you can earn more when working as a consultant or a contractor than as an employee. For example, you might discover that your employer charges clients much more than your hourly rate for work you complete. This might encourage you to work as an independent professional and perform the same work for less than what your employer charges but more than what they're paying you.

This may fit into the organization's budget because they're not required to pay the typical costs incurred by permanent employees. They can save on costs such as compensation coverage, employee health benefits, or unemployment compensation. The amount you receive as an independent consultant or contractor depends on the negotiation between you and the client. Consultants and contractors with skills in great demand may receive higher compensation.

You can have tax advantages

The following are some standard tax deductions you may make as an independent consultant or contractor that employees cannot claim:

Home office: If you're working from a home office, you can deduct a portion of your utilities, rent or mortgage interest, and other expenses. The Canada Revenue Agency (CRA) has specific rules for calculating these deductions.

Vehicle costs: If you travel to clients' businesses to work or attend meetings, you can deduct a portion of the costs involved. It's important to keep a log of business travel, such as gas, maintenance, and insurance, to help you calculate the distance you drive for business and personal travel.

Business equipment: When working from a home office, you can claim the depreciation costs of your equipment, such as a computer or printer. If you use tools and supplies in your business, you may also include them as expenses.

Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.

Consultant vs. Contractor: What Is the Difference?