Pros and Cons: Independent Consultant vs. ContractorMay 12, 2023
Table of contents
- What you will learn
- What is the difference between a contractor and a consultant?
- What is an independent contractor?
- What is an independent consultant?
- Why do companies hire consultants instead of contractors?
- How to make the switch from contractor to independent consultant and realize your potential
- Get expert help to make the switch from contractor to consultant and grow your independent consulting business
What you will learn in this article
Are you stuck working in staff-augmentation-type roles when you want to be consulting?
This is a common challenge for consultants.
You take on contractor roles because they’re the type of roles that land on your desk, and you don’t want to leave money on the table. You land this contractor work and feel stuck working for an hourly bill rate, knowing it’s possible to make more money while working fewer hours on more challenging projects.
But, you’re not sure how to move forward to land consulting engagements.
You’re not alone.
So many consultants get stuck in this same spot.
In this article, I’ll:
- Walk you through the differences between contracting and consulting so you know how to avoid continuously booking contractor roles when you prefer consulting engagements.
- Then, I’ll share the five (5) steps to switch from contractor to independent consultant so you realize your full potential as an independent consultant.
What is the difference between a contractor and a consultant?
The difference between a contractor and a consultant is subtle, but important, for anyone who wants to create a sustainable, predictable consulting business. The terms are commonly confused and used interchangeably. You want to be clear on the difference between contractors and independent consultants so you don’t get trapped doing less fulfilling, lower-paying work. When you get stuck or pigeonholed working in contractor-type positions as an extra pair of hands, you miss out on the higher-paying, higher-impact, and more autonomous consulting clients.
To help you avoid getting stuck working as a contractor, let’s first start out by defining the two terms contractor and consultant.
What is an independent contractor?
A contractor is typically a non-employee who’s working for a client to complete specific tasks.
Common indicators that someone is working in a contractor capacity are:
- Paid by the hour
- Working for a client through a 3rd party, such as a staffing agency or marketplace
- Work (including tasks, deadlines, responsibilities, etc.) is directed by the hiring manager
- Filling a gap in the full-time workforce as an “extra pair of hands”, also known as staff augmentation
What are the pros and cons of being a contractor?
Some may look down on being a contractor, thinking that working as an independent consultant is better. And, while it’s typically true that working as an independent consultant is more lucrative and more autonomous, there can be advantages to working as a contractor.
Advantages of being a contractor vs. an independent consultant
When you’re first starting your consulting business, it can be easiest to start with contractor work.
- Easier to find contractor opportunities to pursue: You’ll find that opportunities are published through recruiters and on LinkedIn and, as a result, it can be more straightforward to find opportunities to pursue.
- A lower learning curve when you’re starting out: Contractors submit themselves to contract positions in a method that’s very similar, if not identical, to applying to a full-time role where you’ll submit a resume and interview. This is what you’re used to if you’ve been a full-time employee and so the learning curve is lower.
- A proven launching pad for independent consulting: Starting out as a contractor is a proven way to start generating revenue/income as a consultant when you first start. Then, as you gain more experience, you can evolve into higher-paying, more autonomous independent consulting roles.
Disadvantages of being a contractor vs. an independent consultant
There are disadvantages to being a contractor, especially as you accumulate more experience being on your own (versus being a full-time employee). The disadvantages of being a contractor are:
- Contractor roles can be competitive. When you’re a contractor, you typically find roles through recruiters, marketplaces, or on job boards. By their nature, these roles are more competitive because it’s easy for contractors to find them and apply. You don’t have an advantage of the “know-like-trust” factor you build when you uncover consulting opportunities in other ways such as networking.
- Contractor roles are typically lower-paying. Contractor roles typically pay by the hour and are seen as highly negotiable. Hiring managers compare what they would pay an equivalent employee without factoring in benefits and other intangibles. And, on top of the lower rates the hiring managers typically want to pay for a contractor, contractors also end up paying for the recruiter or marketplace fees because they take a percentage out of the bill rate to cover their fees.
- It’s harder to take time off from contractor roles. Because your income is tied to the number of hours you work, it can be difficult to take time off. Contractors face the dilemma of taking time off unpaid or maximizing their contract by continuously billing. I’ve met many contractors who tell me they’re burned out and haven’t taken real time off in years because they don’t want to leave money on the table.
- Less autonomy. Contractors have less autonomy compared to their independent consultant counterparts. Because a contractor is viewed by the hiring manager as an extra pair of hands, they typically are asked to take on overflow-type work, fill in for gaps in full-time employees, and do work not explicitly included in their scope. Because they’re being paid by the hour (or sometimes by the day), the hiring manager feels justified in asking a contractor to take on more.
- You turn into a pseudo-employee. It’s common for a contractor to feel like an employee but without the benefits or inclusion in the company structure and culture. As a result, you end up serving as if you’re an employee but without any of the benefits that come with being an employee.
- Not learning business development skills you’ll need for longevity as a consultant. When you’re working as a contractor taking on work you find through 3rd parties, you miss out on the opportunity to develop marketing and sales skills that are required when you evolve your business into a true independent consultant model.
What is an independent consultant?
An independent consultant is a business owner (either LLC or S-Corp) who:
- Predominately sells work directly to their consulting clients (versus relying on 3rd parties to land work)
- Is paid based on fixed-fee or value-based pricing models that don’t directly tie to the # of hours worked
- Develops a specific consulting agreement, typically in Statement of Work format, where they specify the outcomes and process by which they’ll achieve those outcomes
- Directs themselves and their client to achieve the outcomes they agreed to in a consulting agreement
- Is engaged by the client for their knowledge and subject matter expertise
What are the pros and cons of being an independent consultant?
Independent consultants are typically paid more, have more autonomy, and have the opportunity to take on more fulfilling work.
Advantages of being an independent consultant vs. a contractor:
- Higher-paying engagements. Independent consultants generally make more money because they’re able to charge based on the value of the outcomes they help their clients achieve. They’re also seen as experts and thought leaders who are able to charge a premium for their services.
- More flexibility. Because of their pricing model, independent consultants are able to take more time off on a weekly, monthly, quarterly, and yearly basis without worrying about leaving money on the table.
- More autonomy. Independent consultants are seen as the owner and CEO of their own company. They set the rules of engagement with their clients instead of waiting for the client to take the lead on when, where, and how they work.
- Shorter, less hands-on type of work. Independent consultants are able to take on strategy-type work where they come in, help diagnose problems, and build out plans and roadmaps to address those problems. They don’t need to be the ones doing the implementation work unless they want to do it themselves.
- More impact and professional fulfillment. Because independent consultants have the ability to pick and choose the clients they work with, the type of engagements they take on, and the nature of the work they agree to do, they have control over the level of impact and fulfillment they enjoy.
- Additional revenue streams. Independent consultants are able to set up flexible delivery models where they bring in subcontractors and even their own employees if they wish, in order to satisfy the client’s Statement of Work.
Disadvantages of being an independent consultant vs. a contractor
Some might say there’s a disadvantage to being an independent compared to being a full-time employee because it can be less stable and predictable when you’re an independent, whether it be a consultant or contractor.
When it comes to the disadvantages of the contractor versus independent consultant models, there truly isn’t a disadvantage to being an independent consultant. Whether you’re an independent consultant or a contractor, you’re ultimately responsible for finding new clients and generating revenue and income for yourself.
With this in mind, there aren’t any disadvantages to being an independent consultant versus a contractor.
Why do companies hire consultants instead of contractors?
It’s important to point out that companies often don’t know what they want. They don’t necessarily think specifically about hiring a contractor vs. a consultant. This lack of experience in hiring consultants creates an opportunity for the independent consultant. You have the opportunity to educate the hiring manager or buyer on the various models and why leveraging an independent consultant versus a contractor would be advantageous.
Companies typically hire contractors when they need to fill a gap in their full-time workforce or when a project is behind schedule and they need additional resources and capacity in order to successfully complete the work.
Companies typically engage consultants when they’re looking for specific expertise that they don’t have internally. Companies that engage consultants may specifically know what they want to accomplish, such as an ERP upgrade. Or, the companies may have a problem but aren’t sure of the best way to solve it. In either case, whether they know the specific solution, or have a more general problem they want to solve, or a goal they want to achieve, it’s common for them to look for a consultant to help them navigate through their issue to reach the ultimate outcome.
How to make the switch from contractor to independent consultant and realize your potential
The process of switching from contractor to independent consultant so you can make more money, have more autonomy, and feel more fulfilled is more straightforward than most contractors assume.
I describe the process in Episode 098 of the Grow Your Independent Consulting Business Podcast. Click here to listen to the episode on Consulting vs. Contracting.
To summarize, here are the steps:
Step 1: Create your consulting offering
For the first step, get clear on your service offerings, go-to-market approach, and positioning to the market. When you’re clear on your specific consulting niche, you will stand out and ultimately become known for and sought after for the specific solutions you provide to your ideal client types.
Most contractors are generalists. They’ll take on almost any work that they’re offered in order to consistently generate an income for themselves.
As you evolve into becoming an independent consultant, you can be more selective about the nature of work and the type of clients you’ll agree to work with.
Resources to help you create your consulting offering:
- Megatutorial on how to price your consulting services: How Independent Consultant Rates and Retainer Fees Work
- Develop a consulting business plan: How To Create A Consulting Business Plan (Incl. Free Template)
Step 2: Shift the way you think of yourself, so you’re thinking as a consultant instead of as a contractor
The next step to transition from being a contractor to being a consultant is to start thinking of yourself as an independent consultant instead of as a contractor. You can’t expect a potential client to think of you as a consultant when you don’t.
The way you think about yourself impacts what you pursue, how you show up, who you talk to, and how you speak. As the saying goes, you teach other people how to treat you.
For example, a contractor thinks about themselves:
- From an employee lens as opposed to from a business owner lens.
- Specifically, the employee lens can look like breaking down your hourly rate based on the equivalent of what you’d be making if you were full-time.
- As a subordinate to their client
- That they don’t have control over their own business results. So, for example, they think “I don’t want to leave money on the table. I’ll take this role and make it work.”
Alternatively, the independent consultant thinks about themselves:
- As a business owner who is responsible for their own business development, marketing, and sales.
- When you’re thinking about yourself as a consultant and business owner, you will approach everything differently, including where you’re finding potential clients, what type of work you’re proposing to them, and how you’re pricing that work.
- Independent consultants think:
- I’m a business owner who is in control of what I offer, how I offer it, who I work for, and how I work.
- I’m not someone who fills in the gaps for clients. I help them identify the gaps and define solutions to fill the gaps.
- I’m a trusted advisor
- I’m an impartial 3rd party
- Guiding questions to ask and answer for yourself:
- How am I thinking of myself as a contractor?
- Who am I as a consultant?
Step 3: Shift the way you think about and approach your consulting clients
The way you think about your consulting clients impacts how you engage with your potential clients, how you set expectations, how you reinforce boundaries, and how you feel when you’re engaging with potential clients (e.g. whether you shrink and react versus feel confident and lead).
- Contractors typically think:
- They’re interviewing me
- I need to explain how my experience matches what they need
- The client should set me up for success
- Whereas independent consultants typically think:
- I offer a certain set of services that ideal clients engage me to deliver
- Clients see me as an independent, 3rd party who will advise them without having an agenda or political goal
- Guiding questions
- How is the way I’m thinking about my clients putting me in the “contractor”/staff aug zone?
- As a consultant, how do I think about my clients?
Step 4: Shift the way you think about your business
When you think about yourself as a contractor, you’ll likely overlook the important aspects of being a business owner. As a result, contractors neglect to define a sales process, position themselves, and create visibility through marketing so they’re sought after for what they do.
To shift from being a contractor to being an independent consultant, you’ll want to start thinking like a business owner.
You aren’t your business.
You and your business aren’t one and the same.
Instead, when you adopt an independent consultant perspective, you’ll
- Clearly see the separation between YOU and your business
- You’ll build and refine intentional processes for marketing, sales, and delivery
- You’ll define and set expectations and boundaries with your clients
- You’ll outsource lower-value tasks such as administrative or project management
Guiding questions to start the shift in the way you think about your business from contractor to independent consultant:
- How am I thinking about my business that’s creating a staff aug result?
- How does my future self, who is fully thinking as an independent consulting business owner, think about my business now that I no longer take on staff aug work?
Step 5: Sell your consulting services
Contractors typically let the consulting buyer lead the process to engage them. Those consulting buyers, or hiring managers, most commonly treat the process like an interview for a full-time employee and you’re left explaining your background and negotiating a rate based on comparable full-time salaries.
This is not the position you want to be in.
Instead, as a consultant, you take the lead in helping the client to understand what they want, what they need, and how the project is best approached.
Lead the process to uncover, define, and price the solutions you recommend to your consulting buyer. When you take the lead to navigate the client to clearly understand their problems and best solutions.
Resources to help you sell your consulting services:
- How to get consulting clients: How to Get Consulting Clients With This Weekly Routine
- Consulting sales: Consulting Sales: Tips & Tools To Help You Get More Clients
- Consulting lead generation: The Ultimate Guide to Lead Generation for Consultants
Get expert help to make the switch from contractor to consultant and grow your independent consulting business
The next steps to switch from contractor to independent consultant:
For more on how to move out of contracting and into consulting, listen to Episode 098 of the Grow Your Independent Consulting Business Podcast. Click here to listen to the episode on Consulting vs. Contracting.
Get the help of an expert. You know your clients benefit from your expertise. The most successful independent consultants take their own advice and hire an expert to help them uncover their blindspots, minimize their mistakes, and make the conversion from contractor to independent consultant more quickly. Click here to learn more about Coaching for Consultants.
Hear from other independent consultants who have made a successful transition from contractor to independent consultant, and to growing their consulting business. Click here to listen to other independent consultants’ stories.