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.
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.
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:
Once you have chosen the structure of your SOW, you will need to include the following:
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.
The advantages and disadvantages of a Statement of Work are as follows:
Of course, there are disadvantages of a statement of work, including:
The disadvantages of a Statement of Work can be eliminated/mitigated by undertaking comprehensive risk management and project planning exercises before creating your SOW.
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.
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.
Need assistance with creating a Statement of Work? Find out more about our contract review service.
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