Statement-of-work engagements carry an assortment of business and legal risks that contingent workforce management programs must be prepared for when they assume oversight. While some are similar to risks for staff augmentation engagements, others are very unique for SOW engagements.
For example, a profound element of SOW engagement risk is based on the strategic importance of the engagement to the business. This element, known as a completion risk, can have severe business consequences and might be as or more important than legal risk for SOW engagements. It’s not that legal risks are unimportant, but the core value proposition of an SOW engagement is to create and produce a deliverable and/or solution. The client is buying a business deliverable/result; hence, part of an SOW engagement’s value is the service provider’s ability to complete the project and/or service being conducted. This is more a business-related risk than a legal/compliance issue.
Some SOW engagement risks are directly related to the pain points involved in managing the engagements, and their risk type might be a mix.
- Project/service engagement failure (business)
- Excessive change request orders (business)
- Talent engagement misclassification (legal and business)
- Intellectual property protection (legal and business)
- Overbuying/overpaying/underfunding (business)
- Missed engagement/deliverable deadlines (business)
- Poor quality of SOW deliverables (business)
Those pain points can then be translated into specific risk exposure when managing an SOW engagement:
- SOW engagement completion
- Quality performance
- Independent contractors misclassification
- Co-employment risk management
- Indemnification coverage
- Insurance coverage
- IP access management and protection
- Confidentiality management
- And more
Another general risk management issue involves the context in which the SOW engagement is being executed. Traditional SOW projects inherently have some unique risks compared to SOW service engagements. At a minimum, SOW projects have a beginning and end date, whereas SOW services are ongoing and cover a much longer period of time comparatively. SOW projects produce a deliverable that has a detailed product scope and a timeframe deadline associated with business-related milestones and acceptance criteria. For an SOW service engagement, the deliverable is the service as measured by service-level agreements and key performance indicator matrix standards. One could argue that the matrices are the actual SOW service engagement deliverables. (Note, SOW service engagements will also have detailed scope and standard operating procedures documentation.)
Two other key SOW engagement business-related risks are scope creep and acceptance criteria.
Scope creep. This is when a weak or poorly written project scope (a very prevalent risk in SOW engagements) leads to the emergence of uncontrollable/excessive change orders, negatively impacting the engagement in terms of unmet deadlines, additional required resources and unbudgeted costs.
Acceptance criteria. If the acceptance criteria is not designed and executed effectively, then the engagement manager’s wants and needs will not be met. But there is also a legal risk of deemed acceptance if you are not responsive or fail to support the execution of the stated acceptance criteria. Deemed acceptance, under certain circumstances — even if the buyer did not formally accept the deliverables — refers to legally implied acceptance and can be binding under the following conditions:
- Failure to notify
- Constructive acceptance
Engagement misclassification. Another important SOW risk management concept is that wrapping an engagement in an SOW does not insulate it from some prevalent legal risk issues. For example, if you wrap an independent contract talent/resources in an SOW engagement contract, that contractual structure alone does not protect your organization from employment misclassification risks. Depending on what jurisdiction the IC talent is operating in, state and/or federal statutes will apply; the SOW engagement contract will not protect the buyer organization from misclassification risks. Only adherence to the local jurisdiction’s requirements/classification tests will define that classification assessment. Note, there is some important value of an SOW engagement in the managing legal IC classification risk, that being the assumed limited control by the buyer in the execution of a typical SOW engagement. Execution control is a big classification element in most legal classification test, but it is not the only element defining talent classification.
As a detailed contract, an SOW agreement will provide important protection value for the business execution of the SOW engagement for both parties. However, there are some risk engagement issues that need to be clearly understood regarding key legal-related risk issues since the ultimate governance of these risks is mandated by local jurisdiction statutes.
The key risk management awareness for SOW engagements is that there are two major types of risk involved in these engagements; some are business-related, and some are legal/contractual risk issues. This is an important distinction in the execution of management of these types of risks — and most importantly, some risks are governed by local jurisdiction requirements that cannot be circumvented by an SOW contractual document.