• Startups
  • March 04, 2022

What is a Statement of Work?

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In this article, we will be helping SMEs, agencies, and freelancers understand a Statement of Work (SOW); why they are needed, how one should be created and its effect on IR35 status.

What is a Statement of Work (SOW)?

A Statement of Work is used by Project Managers to set out the scope, timeline, milestones, targets, fees, and deliverables for a particular project. Both sides will agree to the SOW, which is a legally binding agreement, and the deliverables will dictate when payments are made.

Project Managers can use a Statement of Work as a framework on which to build the details of their project upon. It is important to use a template when creating a SOW to ensure all elements of who, what, where, why, when, and how (in terms of budgets) are covered.

 

Free Statement of Work Template

 

How to write a Statement of Work for any industry

The amount of detail required in a Statement of Work can be daunting, therefore, taking professional advice and using a pre-designed template is advisable.

There are three types of SOWs:

  1. Design/Detail – sets out to the supplier how the work is to be done.
  2. Time, Materials, and Unit Rate – used mainly on small projects, this type of SOW defines the materials needed and how much it will cost per hour in terms of service time.
  3. Performance-based - focuses on the purpose of the project, the resources needed, and the quality level expected of the deliverables. As it does not set out the process of how the project will be achieved it provides maximum flexibility for project managers to implement their own work practices.

Once you have chosen the structure of your SOW, you will need to include the following:

  •   Set out the purpose of the project and the key stakeholders in an introduction
  •   Outline the purpose of the project
  •   Define your project scope
  •   Break down the project and clearly set out the tasks, milestones, and deliverables
  •   Create a project schedule for the identified tasks, milestones, and deliverables
  •   Define the project requirements and acceptance criteria
  •   Set out payment terms and conditions

As a Statement of Work is a legally binding document it is important to have the contents reviewed by an experienced Solicitor who can provide legal advice and highlight any potential issues and/or missed points.

What are the advantages and disadvantages of a SOW?

The advantages and disadvantages of a Statement of Work are as follows:

  • A SOW provides a vehicle for agencies and freelancers to expand their offering into full project management and charge a premium for their expertise
  • When services are fully contracted out to a third party, that third party determines the IR35 status, rather than the employer

Of course, there are disadvantages of a statement of work, including:

  • If deliverables are not met the liability will fall on the agency/freelancer
  • The responsibility for entering into contracts with suppliers and providing the necessary labour also falls on you, as the agency/freelancer

The disadvantages of a Statement of Work can be eliminated/mitigated by undertaking comprehensive risk management and project planning exercises before creating your SOW.

How does a SOW affect IR35 status?

For freelancers/contractors, and agencies, putting in place a Statement of Work moves the provision of services from simply providing skills and/or labour to managing and delivering the end-hirer’s project and/or deliverables.

The below example highlights the difference.

Example A – supply of labour – The end-user company, S, contacts a marketing agency as it needs two extra people with specific skill sets to assist with the delivery of the project. S supplies the necessary equipment such as computers and phones and provides pre-determined job descriptions and deliverables to the agency’s workers, who are in turn paid an hourly fee for their services.

Example B – outsourcing which constitutes a SOW – The end-user company, S, contacts a marketing agency to scope out, plan, and deliver on a marketing project. S fully owns the project and controls all matters concerning meeting the required service levels and deliverables including strategy, workflow, and engaging suppliers.

If you are given control over determining the IR35 status of workers involved in a SOW you will need to ensure that the correct tax is paid. Furthermore, the amount of control you exert over those who work on the project will impact their IR35 status, therefore, it is important to manage workers to a level that ensures the deliverables of the project and quality measures are met without micro-managing to the point that it becomes difficult to hire the talent you need.

Always keep in mind that if HMRC chooses to investigate your workers’ IR35 status the management of workers and how assignments are carried out will be taken into consideration. Simply having a Statement of Work in place is not, on its own, enough to prove the correct IR35 status has been assigned.

 

IR35 contract review service

 

Wrapping up

A SOW is one of the most important documents in the sphere of project management. For SMEs that are end user companies and agencies/freelancers who provide outsourcing services, it is vital that the drafting of a SOW is overseen by an experienced Commercial Law Solicitor.

Furthermore, if either party is unsure of the IR35 status of certain workers, obtaining legal advice will provide protection against a potential HRMC investigation.

Get legal assistance from LawBite

Need assistance with creating a Statement of Work? Find out more about our contract review service.

LawBite has experienced lawyers, we are friendly and can help you with all commercial, corporate and employment legal matters. We have successfully handled tens of thousands of enquiries from SMEs and are proud of our 98% positive feedback rating.

 

Book a free 15-minute consultation

 

Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.



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