What is the difference between a contractor and consultant?

Over the last decade, the UK’s technology workforce has continued to evolve, and the allure of flexible working hours coupled with a higher earning potential has resulted in more people opting to become self-employed.

The latest statistics show that there are 4.24 million self-employed professionals in the UK as a whole, but not being exactly granular, the stats can lead to confusion if you’re trying to identify specific roles.

So let’s explore the two most prominent members of this atypical workforce -- contractors and consultants -- and clarify the key differences between these well-paid, highly skilled contingent professionals, writes Michael Clarke, client development manager at leading STEM recruitment specialists Matchtech.

Self-employment in tech sector terms...

First, let’s understand what and who we mean by ‘self–employed.’

In the tech space, the term ‘self-employed’ refers to contractors, freelancers, and consultants who all work individually, for themselves, rather than being employed by the end-user organisation.

Typically, a self-employed professional will be responsible for managing their own business, including contracts, work schedule, finances, taxes, and overall business decisions.

Now, because the terms ‘contractor’ and ‘consultant’ are used so interchangeably when discussing self-employment, there is a great deal of confusion around both terms, but it is crucial to understand the key differences as they could impact overall project success. They might even impact which opportunities you go forward for!

Generally, the term “contractor” and “consultant” can mean different things depending on the organisation hiring, and their requirement for a contingent worker. Likewise, they can often be referred to as meaning the same individual. 

Contractor versus consultant: overview

But for simplicity’s sake, contractors are usually individuals or companies hired to complete specific tasks or projects.

The contractor’s primary focus is on execution and delivering tangible results, depending on what is required or contractually agreed.

By contrast, a consultant is usually engaged to offer strategic insights, solve complex problems, guide corporate decision-making, and offer a fresh perspective to help the end-user organisation make informed decisions.

Unifying both contractor and consultant, before engaging with either contingent worker, an employment business needs to clarify the end-user’s exact requirements, to help ensure they are going to put forward the more suited worker for the job.

Why hire a contractor?

From a recruiter’s perspective, a ‘client’ (the end-user or organisation) typically hires a contractor for their expertise in a specific, narrowly-defined area.

The contractor brings specialised skills and experience that may not be available within the client’s full-time, internal staff. The contractor can ‘hit the ground running,’ reducing the requirement for management and training. 

Currently, in such a candidate-short market -- especially within the Science, Technology, Engineering and Mathematics (STEM) sectors, we see clients hiring contractors to support project or milestone demands that wouldn’t warrant hiring a full-time member of staff.

This is particularly beneficial to organisations that are facing recruitment freezes.  

What’s in it for contractors?

For the contractor candidate, ranging from a more varied career to entrepreneurial independence, there are some clear advantages, including:

• Clear scope of work - Contractors often have well-defined project scopes and ‘deliverables,’ which can make their assignments more focused and task-oriented.
• Specialised skills utilisation - Contractors are typically hired for their specific skills, and they get to apply their expertise directly to complete projects or tasks.
• Short-term commitment - Contract opportunities are often temporary, providing flexibility for individuals who prefer not to be tied to long-term commitments.
• Variety of projects - Contractors may work on a variety of projects and with different clients, which can offer exposure to different industries and challenges.
• Quick entry into the workforce - Contracting can be a way to enter the workforce quickly, as companies often need specific skills for immediate or short-term projects.
• Entrepreneurial freedom - Many contractors work independently or through their own businesses, giving them greater control over their work and business decisions.
• Variety of clients - Contractors can diversify their client base, reducing the risk associated with being dependent on a single employer or client.
• Income potential - Some contractors can command premium rates for their specialised skills, likely leading to higher earnings versus their permanent counterparts. However, it’s important to note that a contractor isn’t entitled to the same benefits as the client’s employees, and has less ‘job security’ than their full-time employed equivalents.
• Independence - Contractors have more autonomy in how they complete their work and manage their schedules.

Why hire a consultant?

Consultants are hired to provide advice, analysis, and recommendations that help companies make strategic, and informed decisions or solve more complex problems.

The primary role of a consultant is to offer expert insights and support high-level decision-making with a comprehensive and holistic approach.

Clients typically engage consultants for advisory consultancy to meet ongoing organisational needs, and to support business strategies by providing solutions.

Ultimately, as a consultant your individual skillset and strategic approach will set you apart.

What’s in it for consultants?

Similar to contractors, consultants can enjoy more varied work, and a higher earning potential. If you’re considering becoming a consultant, here are some advantages:

• Expert status - As a consultant, you are often seen as an expert in your field, which can lead to increased professional recognition and credibility.
• Strategic impact – Consultants taken on by commercial organisations are typically involved in high-level decision-making and can influence the company's strategy and direction.
• Varied projects - Consultants often work on a diverse range of projects and challenges, which can keep the work interesting and intellectually stimulating.

Key differences between consultants and contractors

Higher earning potential - Consultants often command higher fees or salaries than contractors due to their specialised expertise and the strategic nature of their work.

Flexibility - While contractors also have flexibility in the day-to-day, consultants tend to have a greater level of control over their schedule and the projects they choose to take on.

Longer-term engagements - Consulting projects can be longer in duration than a contractor’s project, or assignment (typically three months), providing greater job continuity and potentially steadier, longer-lasting income.

Networking opportunities - Consultants often have the opportunity to network with high-profile clients and other experts in their field, as well as professionals in other parts of a client’s business, which can lead to additional opportunities.

Career development - Consulting can offer opportunities for personal and professional growth, as consultants usually have the chance to continually apply their expertise to new challenges. Some contractors, in contrast, are happy to stick to their specialism and may not invest in training, even though others will upskill once the technology which they specialise in develops or updates.

Intellectual challenge - If you enjoy problem-solving and strategic thinking, consulting can be intellectually stimulating -- as can contracting, but contractors should be prepared to accept more repetition in the tasks or services they perform.

Pay potential and IR35

Whether you are a contractor or a consultant, there is the opportunity for a higher earning potential, but there are some key things to consider such as the Intermediaries legislation (known as IR35).

Introduced in 2000, but updated in 2017 and 2021 in the shape of the Off-Payroll Working rules, IR35 is a complex area, and it’s essential that the end-user, any agency in the chain, and self-employed contractors /consultants do their utmost to understand it.

For a contractor, their pay potential will depend on the IR35 status of the contract which (unless it’s with a small company) is determined by the end-user. This determination by the client has applied at non-small company end-users since April 6th 2021 in the private sector. Public sector clients have similarly had to decide their contractors’ IR35 status since April 6th 2017 (although there is no corresponding exemption for ‘small’ taxpayer bodies).

In both sectors, if the contract is deemed ‘inside IR35’, then there are up to three ways in which the contractor can operate; Agency PAYE, Umbrella PAYE, or ‘Deemed Ltd.’

A contractor using their own limited company will have a higher earning potential when operating ‘outside IR35’ but these commercial, B-2-B assignments tend to be less available, in some sectors, than contractors would like!

Successful contracting/ consulting looks like…

Beyond getting to grips with IR35, the key to successful contracting is for a contractor to provide a service so trusted, reliable and recommendable that they build credibility in the market and therefore get hired time and time again by different clients.

It’s also important for contractors to keep their skills up-to-date and relevant, especially in the STEM defence market, where a large volume of clients design or build cutting-edge high-tech products that then require the most skilled engineers on a contract basis.

In terms of successful consulting, a consultant will arguably have a higher earning potential than a contractor, because they are often taken on as experts in their field. Of course, this ‘thought leader’ position and its equivalents are also applicable to subject matter experts who operate as contractors, typically on an ‘outside IR35’ basis.

Consultants and Statement of Works

Often, a ‘consultant’ is referred to as an outside IR35 contractor and this term is currently used when a client engages a self-employed professional on a ‘Statement of Work’ basis. This way of operating will have clearly defined milestones for the consultant to achieve over a fixed period, and payments will often be made once each milestone is signed off and accepted by the client. 

In this type of engagement, the consultant could face a greater financial risk, given that their payment is based on completion of these set milestones. And this is something consultants consider when providing their quotes. 

Finally, it’s horses for courses

Both consultants and contractors can experience excellent career opportunities, significantly more flexibility over conventional employees, and attractive remuneration. So much so, that we tend to find people will switch between these two self-employed titles throughout their independent careers! Ultimately, it’s all down to your individual aspirations, continuous learning, desired versus available working practices, and how good you are at building strong professional relationships.