WHAT IS A STATEMENT OF WORK (SOW)?

Posted by Ashleigh Beer-Vineyard | Jun 20, 2022 | 0 Comments

A statement of work or scope of work (SOW) is a standard document that sets forth project-specific terms. SOWs accompany master service agreements and incorporate the terms and conditions of the master agreement by reference. These documents are commonly used in project management among many other industries.

The length and complexity of an SOW depend on the relationship between the parties and the nature of the services to be rendered. The SOW and master service agreement are entered into contemporaneously. In many companies, the person drafting an SOW is an employee and not an attorney. Because of this, it is important to have an effective statement of work template and outline to lead the drafter. Consequences of poorly drafted SOWs include unexpected obligations, avoidable breaches, and inevitably financial loss. Considering this, it may be wise to consider utilizing legal counsel to review SOWs prior to entry.

Parties often enter into SOWs simultaneously with the execution of the master service agreement; however, they may be entered into at any time during the term of the master service agreement. SOWs should be as clear as possible to avoid disagreements, unintended liabilities, and avoid potential litigation.

Common subjects of disagreement include, but are not limited to a change of price, the time and method of services performed, along with the scope of work to be performed.

To best explain the necessity and functionality of an SOW, we have broken down the SOW by heading and provided notes, explanations, drafting, and negotiating tips for each. These headings are generally representative of headings included in an SOW, though headings are subject to variation depending on the nature of the transaction.

How to Write a Statement of Work

Below are the headings typically used in a statement of work. This is a good place to start but is not totally exclusive. Let's dive into key elements.

Preamble
Definitions Clause
Scope of Work Provision
Acceptance Criteria
Delegation
Work Schedule
Deliverables
Pricing
Representation and Warranties
Indemnification Rights
Personal Provisions
Precedence Terms

Element 1. PREAMBLE

The preamble includes the timing of the transaction, and which legal terms cover the services performed under the SOW (generally, a reference to the master service agreement). The SOW should include an “effective date” and may contain an “expiration date.” Including a definite performance period is important as timing impacts the project's cost and can provide the non-breaching party leverage to pursue remedies.

A definite expiration date is not appropriate for every type of service, therefore often SOWs expire upon the completion of a milestone or some contingency. Because the SOW may not contain legal terms, it is important that it properly references the master service agreement, and that the terms of the service agreement are appropriate and adequate for the project.

Failing to properly reference the master service agreement in the SOW could potentially affect either party's ability to enforce any provision of the SOW. The master service agreement should also reference the SOW. The master service agreement should include an integration clause. This provision ensures that the parties' intentions for the master service agreement and the SOW are the only terms to govern the transaction/relationship.

Element 2. DEFINITIONS CLAUSE

The definitions clause of the SOW should be used to define project-specific terms used in the SOW. Examples of terms that may be included are abbreviations, acronyms, and company-specific and industry-specific terms. Definitions and terms used should be consistent with the master service agreement to prevent unnecessary confusion. This provision is particularly important for parties engaging in business that commonly utilize terms outside of the common vocabulary, for example, technology companies.

Element 3. SCOPE OF WORK PROVISION

Arguably the most important provision of an SOW, the scope of work provision, often requires the most amount of editing between transactions. This section should contain a general overview of the work to be performed and the work's objectives.

A properly defined scope sets expectations for the parties involved and prevents conflict. If the deliverables must conform to specifications including technical, design, and/or functional specifications they should be included in the SOW. The SOW also provides the opportunity to list project assumptions and constraints.

Element 4. ACCEPTANCE CRITERIA

Another important provision of the SOW, this section is due special consideration from the drafter. The project manager should specify objective completion criteria for deliverables, dependencies, and any additional responsibilities. For completion criteria, be sure to specify the method and process for acceptance, including the person designated to accept work and the time frame in which the person must determine if the deliverables meet the specified criteria.

While drafting acceptance criteria provisions, it is important to be realistic and avoid committing the delivering party to perfection. Both parties should consider the other's limitations and dependencies to prevent a situation where one party is at constant risk of breach. Neither party benefits from unrealistic expectations, however, both parties will benefit from mutual expectations.

Element 5. DELEGATION

This section should be included in an SOW if the master service agreement allows for subcontracting or delegation of any work to be performed under the agreement. It is here that the parties can list approved subcontractors or methods of approving subcontractors/individuals approved to delegate work to.

For example, the service provider may be required to acquire signed writing from the other contracting party before delegating any work to persons not listed as pre-approved in this section. This section is not necessary if the master service agreement disallows delegation or subcontracting.

Element 6. WORK SCHEDULE

Included in this section are, place of performance, timing of performance, timing of deliverables, and timing for inspection of completed work. Any inspections allowed or warranties provided should be detailed in the master service agreement. The drafter should also ensure that the timing for inspection is also included under the acceptance criteria heading and that both provisions are consistent with each other.

Element 7. DELIVERABLES

Regardless of whether warranty and/or inspection provisions of the master service agreement are applicable to a particular deliverable, they should be listed separately in the SOW. This will prevent the situation where the party expecting deliverables is lost as to what tangible or intangible “things” they should expect from the party performing the work or delivering the goods. This also provides the opportunity for the parties to reiterate deadlines.

Depending on the nature of the transactions this provision may be less or more detailed. In a contract for the sale of goods, it is much easier to define deliverables whereas it may be more difficult in a service agreement.

Element 8. PRICING

While parties may and often do specify pricing in the master service agreement, the SOW is the opportunity to specify pricing for individual project components. Including a more detailed price breakdown in the SOW can prevent disputes regarding project value because it outlines both parties' understanding of the value of each individual component. This may also be helpful in the situation where the project is never completed in its entirety and partial payment is due based on the value of the work completed.

The SOW is where small details such as a method of payment (cash, bank transfer, etc.), should be specified. Payment terms should also be included here. If the price is variable, the SOW should specify the timing and method of price determination.

Element 9. REPRESENTATION AND WARRANTIES

Though the master service agreement should contain all the necessary terms and conditions, these terms are often generally applicable to all projects. The SOW provides the opportunity to detail project-specific terms. Depending on the specific project needs, the SOW may simply recite the terms and conditions of the master agreement. An example of additional representations or warranties to include in an SOW is delivery specifications.

Element 10. INDEMNIFICATION RIGHTS

Indemnification clauses provide for the indemnified party the right to compensation from the indemnifying party, usually arising from liability to a third party. Indemnification clauses can be drafted to protect against direct claims as well. An example of an indemnification clause that protects against liability to a third party is one that specifies the indemnifying party will reimburse the indemnified, for all costs suffered in defense of a claim for liability to a third party arising in any way out of indemnifying party's performance of the contract.

An example of an indemnification clause that protects against direct liability is a clause that states an indemnifying party will reimburse for any loss suffered by indemnification resulting from the indemnifying party's performance of the contract. Though an indemnification clause should also be included in the master agreement, and its term should be consistent with the SOW, including an indemnification clause in an SOW is important nonetheless to ensure the parties intentions are clear.

Where issues of contract interpretation arise, it is the intention of the parties as demonstrated by the terms of the agreement which are most important. Clear, consistent, and thorough indemnification clauses in both the SOW and master service agreement ensure when a dispute occurs, the intentions of the parties to be bound to the indemnification clause are apparent on the face of the agreements.

Element 11. PERSONNEL PROVISIONS

Depending on the nature of the services provided or goods sold, this provision may or may not be necessary for your SOW. A client/customer may want to ensure the quality of the work done/product received, in this case, personnel provisions may be included. In this provision the person(s) who agreed to perform the services will be specified. This ensures not only are both parties in agreement regarding the services/goods to be delivered/performed but the person who will be performing the work.

Element 12. PRECEDENCE TERMS

When the SOW has legal terms, it is important to specify which agreement the SOW or master service agreement should prevail where the two conflict. It is important that both parties' desires and expectations are satisfied when both the terms of the SOW and the master agreement are read together. Though the SOW should not conflict with a term of the master service agreement, it is important to make a specification as to precedence in the event a conflict is found.

Element 13. INTEGRATION CLAUSE

Because the SOW may not contain legal terms, it is important that it properly references the master service agreement, and the terms of the service agreement are appropriate and adequate for the project.

Key Takeaways

Since the individual drafting the SOW is often not an attorney, it is important to utilize a high-quality template. Beyond the template, consulting with an attorney should be strongly considered to review pre-drafted SOWs prior to signing.

Though the detailed requirements of an SOW are dependent on several factors including the nature of the business and the value of the transaction. Potentially the most important factor is the pre-established relationship between the contracting parties. This factor is often overlooked by traditional business law attorneys. Despite this, the relationship between the parties is useful in drafting every provision of the SOW.

The attorneys at DZ Law are dedicated to taking the time to learn the needs of business clients to draft the most useful templates and review pre-drafted SOWs.

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