I know that having both allows you to add another level of privacy customization, since you can set stuff as "Friends only" or "Contacts only." It looks to me like it's a two-tiered system. Someone can be a contact of yours, but not be a friend. Someone can't only be a friend. If they're a friend they're both. You can set it so that friends can view more than just a contact. Friends will appear in the box of people on your profile; contacts won't. That's all I can gather.
