Statement of Work Contracts: What You Need to Know
The issue of Statement of Work (SoW) contracts, and the rise in requests that many recruiters are seeing from their clients, is one that has been a point of discussion for some time.
In fact, at our recent Industry Insight event, the Q&A section was dominated by questions to the panel around SoW. This blog will focus purely on SoW contracts – what are they, do they work, and what you should say to a contractor who wants to go down that route?
To put it simply, a SoW contract is a document used to deliver a project. It defines project-specific activities, deliverables and milestones. It should list all the work that a supplier (in this case, the contractor) will carry out during the duration of a project usually with payments made on completion of milestones as opposed to payments made on a time and materials basis.
The document will cover the working agreement between the two parties (the amount of work, the expected outcomes, the expected quality of job performance, and the timeframe for completion), allowing both to understand the parameters of a successful project.
Our guests at the Industry Insight event reported that more and more of their clients were keen to follow the SoW route. With SoW’s becoming ever more present, it pays to understand the benefits and risks that come with them.
When applied correctly a SoW contract works well and ticks the boxes for each party involved. But that doesn’t mean that they come without risks. As Shane Little, Operations Director ANZ at Hays Talent Solutions, notes:
“If SoW resources are being engaged via a traditional consulting firm, that firm should be responsible for their quality of service and outcomes.
Yet in many instances, this isn’t the case. A SoW commits a firm to supply certain individuals at a daily rate, yet some suppliers also use it to absolve themselves of nearly all risk related to those individuals’ outcomes.”
Furthermore, SoW’s are not the nirvana solution to staying outside IR35 that many assume them to be. Both contractors and recruiters should be aware that HMRC’s IR35 assessment will be based on what happens in reality. Something documented in the clauses written into a SoW contract will not protect anyone involved if it is not a true reflection of the actual work carried out.
We are not suggesting that SoW’s should be avoided, but thorough risk analysis should be undertaken before advising any interested party to enter one. Any mistakes made, or a simple lack of understanding, are likely to be very expensive.
SoW contracts are only suitable for assignments that are not genuinely outcome or delivery based and independent. Therefore, as long as it is a genuinely outcome or delivery based fixed-price contract and the appropriate insurances are in place it is a perfectly legitimate supply arrangement.
If appropriately executed SoW likely fall outside the IR35 rules, compared with the traditional time-based contact on a set hourly or day rate. This is because the IR35 rules don’t apply where the services have been fully contracted out to a third party (like an outsourcing company) and the contractors don’t personally provide their services to the end client.
With the SoW conversation likely to be one that many staffing companies are going to have, it can be also be seen as a good opportunity to go in and open up discussions with your end clients.
They should be encouraged to carry out a complete audit of their flexible workforce – to understand where their contractors stand and how their companies are structured. Once a full risk profile has been completed a much more informed discussion can be had. Indeed, it could be seen as excellent opportunity for the staffing company to strengthen their relationship with the end client by offering to assist them with their audit, or even to complete it on their behalf.