A well-written Statement of Work (SOW) sets out what you and your project management team will and will not undertake to ensure an assignment is completed. It protects your precious time and bottom line and prevents stressful misunderstandings and disputes from developing.
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)?
Project Managers use a Statement of Work to set out the scope, timeline, milestones, targets, fees, and deliverables for a particular project. A SOW is a legally binding agreement, and the deliverables will dictate when payments will be made.
Project Managers can use a Statement of Work as a framework to build the details of their project upon. It’s essential 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.
Why is a Statement of Work important?
Nothing stalls a project faster than miscommunications, especially if they lead to a dispute. A SOW mitigates the risk of misunderstandings occurring between the project manager and vendors. It also protects Project Managers from vendors claiming they were brought on board for reasons different from those originally agreed to.
Is a Statement of Work a contract?
A SOW forms a legally binding agreement that that create an statement defining the key deliverables required to complete the project satisfactorily, and, therefore, payment is due.
What comes first, a contract or a Statement of Work?
Typically, a contract between an employer and a project manager agreeing to engage the project manager (and possibly their team) will be established before the SOW. The SOW is a document in the contract that defines the agreement's scope of work and Key Performance Indicators (KPIs).
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:
- Design/Detail – sets out suppliers how the work must be done
- 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
- Performance-based - focuses on the project’s purpose, 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 high level purpose of the project
- Define your project scope
- Break down the project and 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’s vital 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 common mistakes regarding drafting a Statement of Work?
SOW drafting mistakes that can lead to future problems include:
- The details concerning tasks, work practices, and deliverables are too broad, vague, and/or generic. It is almost guaranteed that this will lead to misunderstandings and potentially a costly legal dispute
- On the other hand, making the SOW over-detailed can lead to the project being stifled and unnecessary work being undertaken simply because the SOW stated it would be done
What are the advantages and disadvantages of a SOW?
The advantages and disadvantages of a Statement of Work are:
- 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
The disadvantages to a Statement of Work, include:
- 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 wholly owns the project and controls all matters concerning meeting the required service levels and deliverables, including strategy, workflow, and engaging suppliers.
If you’re 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 crucial 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 remember that if HMRC chooses to investigate your workers’ IR35 status, the management of workers and how assignments are carried out will be considered. Simply having a Statement of Work in place is not, on its own, enough to prove the correct IR35 status has been assigned.
Get legal assistance from LawBite
A Statement of Work (SOW) is an essential document in project management, outlining the project's objectives, deliverables, timelines, and budget.
For small and medium-sized businesses and agencies/freelancers providing outsourcing services, it’s crucial to ensure that a skilled commercial law solicitor oversees the drafting of your SOW. This will help to avoid disputes, misunderstandings, and costly legal battles down the line.
LawBite can help you draft your project’s SOW to help you protect your company's legal interests. To learn more about LawBite's contract services, book a free 15 minute consultation or call us on 020 3808 8314.