Contracting or Consulting - which is the best option?

Contractor or consultant? The difference is the level of risk they, and you, must expect to bear and pay for.
The differences between a 'contractor' and a 'consultant' go far beyond price and should be a pivotal factor when making outsourcing decisions. Organisations that do not fully understand the difference between 'contracting' and 'consulting' show a lack of understanding of risks, costs and business transactions. The blurring of contracting and consulting can be magnified where security clearances are required for the work, further distorting the cost associated with an outcome.

Firstly, what is the difference between a 'contractor' (PSP) and a 'consultant'?

A Contractor: Works on a time and materials basis, the host organisation usually manages the time of the person doing the work and the outcome. The host organisation of the contractor directs, manages and controls the day to day activities of the contractor, provides the materials for the contractor and takes responsibility of the outcomes; the contractor bears minimal risk.

The risk in this situation is managed by the client. The cost of a contractor should not include a consultant's risk premium, as outlined below. This sort of work is well suited to 'time and material contractors' and should be costed accordingly. An organisation that wants to manage contractors can usually find these resources directly from the market or through a recruitment/labour hire firm.

A Consultant: Consulting is where the risk for the outcome is borne by the person/organisation employed to do the job, and that person/organisation manages their own time and often brings their own materials to achieve these outcomes or performs the work at their own location. The risk of achieving the outcome clearly lies with the consultant in this scenario.

This sort of work is best suited for larger organisations and consulting firms for the "Delivery of Specific Services" and is usually costed accordingly due to the responsibility of achieving that outcome - ie the costs usually include a risk premium. A Consultant is outcome, delivery or task-oriented and usually the person involved does not fall under direct control of the host organisation or client, they are in effect one step removed.

The predominant issue here, particularly for some organisations, is the question as to who bears the risk. Our experience is that some organisations, particularly those who require higher level security clearances to achieve the outcomes are not good at distinguishing the difference between work that should be outcomes based (for consultants) or time and materials based (for contractors).
There are two primary problems for business and government caused by the confusion and blurring of the differences between the two:

* An organisation effectively only wants a time and materials contractor, but approaches a consultancy firm and is charged accordingly - in this circumstance, the organisation is paying more than they need to, as there is a risk premium included in the consultant's rates which does not need to be there. In this scenario, chances are the organisation is still holding all the risks and is directing the consultant, but paying excessively for the service.

* An organisation wants a consultant for an outcome-based solution, but approaches a recruitment company for a time and materials contractor, at a lower rate. In this circumstance, the recruitment or labour hire firm is bearing more risk than they need to (or can afford to). Should any problems arise their professional indemnity insurance may not cover the event and there is a risk that the project is not completed.

As illustrated by the above common problems, if the risk lies with the consultant or consulting firm, they will charge consulting fees, which tend to be higher than fees charged for time and materials contractors through recruitment services. In many cases we have noted that host organisations (clients) are managing the activities of personnel (and the risk) yet because they have approached a consulting firm to fill the position, they are paying higher fees and charges.

If organisations needing a job done could distinguish more clearly prior to seeking to engagement whether the activity is a contracted activity for "time and material services" or the "delivery of specific services" then this will go a long way to clarifying other associated issues such as professional indemnity, liability and other insurance. Fundamentally, the reward for the contract must match the risk, for both sides of the arrangement. If it sounds too good to be true, it will probably bite you in the long run.

In once again stressing the difference between a contractor and consultant, if the work is time and materials orientated (commonly referred to bums on seats), it is an acceptable risk that a supplier of personnel is held accountable for professionally carrying out the tasks of: presenting a shortlist of quality personnel to the client, undertaking reasonable checks on the claims made by the candidate and providing skilled personnel who are independent contractors, possessing the particular skill set requested by the client.

However for time and materials work, the indemnity should not extend to a contractor's delivery of services. If the hiring organisation elects a time and materials contractor, it is the hiring organisation's responsibility to select, direct, supervise and control the independent contractor in his/her performance of the time and materials work. It is the contractor's role to perform the work as directed by the client.

In conclusion, to save time and money, and to ensure your project doesn't end up in the newspaper for the wrong reasons, clarify whether the project needs a 'time and materials contractor' or a 'delivery of specific services consultant'. These are distinct roles. Understand where the risks lie and approach a consulting firm for a consultant and a recruitment firm for a contractor, and pay for what you are receiving. Not being clear on the two may cause long term issues and changes the landscape on the professional indemnity front.

Next month: State of Employment will consider the benefits and disadvantages of contract, permanent or consultancy when seeking employment solutions.

Kim Moeller is General Manager of Patriot Alliance, which provides recruitment solutions specialising in the placement of trusted and security cleared personnel. Kim Moeller is also a member of the ITCRA Recruitment board, and Australia's first ITCRA Certified recruitment consultant. For additional information about Patriot Alliance, please visit www.patriotalliance.com.au

By Kim Moeller, Canberra