What are the risks with SOW, and how can they be mitigated?

Since the extension of IR35 rules into the private sector, statement of work (SOW) solutions have risen in prominence as businesses increasingly look to mitigate against liability by bringing on board top talent on a project-driven basis. Outcome-led SOWs also have the added benefit of enabling procurement teams to simultaneously reduce spend and ensure projects are completed on time and to the required standard.

However, while the theory behind this model is infallible, in practice there are still risks associated with this option.

Recognising SOW Risks

Misclassification of workers arguably remains the biggest statement of work risk for businesses, particularly those that are inexperienced in managing talent and projects in this way. The primary reason for this is that some decision makers mistakenly believe – or have been incorrectly sold – the vision that SOW is simply a ‘workaround’ to avoid IR35-associated risk, rather than a distinct means of procuring skills. SOW only works when the scope of work, and deliverables, can be clearly defined and measured – and status determinations must always reflect this.

One of HMRC’s recent Employer Bulletins includes a warning to businesses that may have misinterpreted the practice and value of statement of work services procurement. It reads, “We understand that in some instances, arrangements are being put in place that mean some client organisations would no longer be responsible for considering the off-payroll working rules. These may be labelled as ‘contracted out services’ or ‘statement of works’. It is important that you fully consider any arrangements you enter into in response to the off-payroll working rules changing. Be especially cautious of any that claim you do not need to consider the off-payroll working rules.”

It continues, “Whether a contract is for a fully contracted out service is a question of fact, based upon the commercial reality of the arrangements… As a first step we recommend looking critically at the services you require, and if it is a supply of labour then it is highly unlikely that the contract represents a fully contracted out service.”

With this in mind, it is crucial that decision makers always consider if a piece of work has a beginning, middle, and an end before they even contemplate if a project is suitable to be categorised as SOW.  

While status determination remains the biggest risk for those managing – or considering undertaking – SOW projects, there are other legal and logistical factors to consider. For example, in terms of compliance, providing systems access to external agents can be both tricky and risky. It is also worth remembering that SOW is not a silver bullet: the potential benefits of working in this way can only be realised if the project and the associated supplier are contracted and managed efficiently. 

There is a real risk that engagers can end up paying over the market rate, or be locked into unfavourable and varying terms, if service agreements are not reviewed and scrutinised – and once contracts have been signed, there is little option but to let the arrangement run its course.

In addition, even when agreed outputs and timescales offer good value to a business, it can be all too easy to let the project slip. Poor monitoring and management of deliverables, milestones and outcomes can quickly turn into a drain on budgets. Unless statement of work projects are supervised and benchmarked diligently, there is absolutely no guarantee that they will pay dividends.  

Mitigation of SOW Risks

Compliance is a moving target, and managers must ensure records and systems are continually updated to ensure projects are not only legally sound, but also running efficiently. Managing SOW service providers and contracts within a high-functionality VMS is not only the best way to ensure - and record – due diligence, but also bring the same checks and balances to SOW that businesses apply to other areas of contingent workforce management.

Outputs, timelines and costs can all be clearly defined, approved, updated and tracked within the system: at a glance, users can see exactly where they are with any given project. As well as creating an automated audit trail, today’s systems also provide added benefits to boost efficiency and productivity. Our VMS, c.net, for example, becomes more powerful the more it is used. As you populate it with information about your statement of work projects and suppliers, it gives you deeper insight into spending trends, service categories and engagement patterns.

In addition, working with an experienced MSP is the best way to make sure that terms and rates of SOW projects are favourable. By capitalising on a specialist provider’s market intelligence and supplier management expertise, procurement professionals can gain valuable insights that can both inform initial agreements and provide insight and analysis throughout the project.

Statement of work can be an ideal solution amid an increasingly complex legislative landscape - and for work packages that lend themselves to SOW solutions, procurement professionals can mitigate risk in several areas, not least in terms of worker classification.

However, as we’ve highlighted above, SOW is not without risk - and there is a need for full visibility in order to achieve maximum efficiency. By seeking expert advice regarding contracts and SOW management in the earliest days of a project, businesses can avoid common pitfalls and enjoy the numerous benefits that procuring skills in this way can bring.

Want to learn more about SOW? Get the guide

Remote working, the rapid on- and off-boarding of workers, the increased pressure to get value for money: these challenges are driving an increase in SOW adoption as organisations seek the visibility and control it brings to their services procurement.

But by managing SOW manually, many organisations are missing out.

In this guide, we demonstrate the transformative effects of managing SOW services procurement in a VMS, with the support of an experienced MSP. Get your copy to see how it could benefit you, and how it’s working for one Comensura customer in the public sector.