You can draft the most protective contract in the world, but if the statement of work (SOW) fails to adequately describe the deliverables, projects can fail.
You can draft the best, most protective contract in the world, but if the statement of work (“SOW”) fails to adequately describe the deliverables and the services to be rendered, projects can fail, cost can overrun results and project schedules can be delayed. It is amazing how much time and effort goes into drafting an appropriate agreement for an engagement, but so little time is spent on the key business documents, particularly the SOW. Based on many years of experience in hundreds of transactions, I can say that the primary cause for project failures is a poorly drafted SOW.
The SOW is the roadmap for the engagement. The parties should take appropriate care in ensuring it accurately reflects the specific tasks and obligations each party will have during performance. In particular, the following six tips are critical to drafting better, more effective SOWs:
1. Plain English statement
In complex SOWs, consider including a brief “plain English statement” at the beginning of the SOW that explains in easy to understand terms what the SOW is all about (e.g., why the parties are entering into the SOW, what is expected to be achieved, what the goals are, etc.). Avoid excess use of jargon and our terms, unless such terms are clearly defined in the SOW. This statement can be extremely useful to ensure both parties are in agreement and to easily educate a third party, like a judge or arbitrator, who must quickly understand the SOW. Consider having someone unconnected with the project read and critique the statement. Creating the plain English statement will take only a brief amount of time and will provide significant additional protection.
2. Detail, detail, detail
In the overwhelming majority of instances, SOWs, even for multi-million dollar engagements, seldom have the appropriate level of detail. In fact, they frequently read as “outlines” of intended services as opposed to a clear and objectively worded set of tasks to be performed by each party. Taking the time to clearly identify all tasks and responsible parties is critical. All too often, however, there is insufficient information at the outset of an engagement to truly draft to this level of detail. In those cases, consider conducting a limited duration scoping SOW to better define the parties’ respective obligations and the services to be performed.
3. Remember high school grammar
Avoid passive voice in writing SOWs. Passive voice refers to statements in which the responsible party is not identified (e.g., “The interface will be created”, as opposed to “The Vendor will create the interface”). To be more accurate, every statement in an SOW should be written actively, clearly identifying the party to whom a task is assigned. Remarkably, the majority of SOWs contain dozens of instances of passive voice. The lack of clarity as to the responsible party has led to disputes, delays and increased costs.
4. Guesses vs. estimates
If I asked you to tell me the size of the desk on which I am typing this blog entry and you had never visited my office, you would be guessing. But consider the same situation where you are sitting in my office with me and then asked to tell me the size of my desk. In that case, the size you give me would represent a reasonable estimate. It is the difference between these two examples that trips up many SOWs. Frequently, engagements are priced by providing an overall estimate of the fees for the services. In most instances, however, there is no basis whatsoever for those estimates. There is no breakdown of expected personnel hours, no identification of applicable hourly rates, etc. Without any basis in the SOW for calculation of the fee, the vendor is likely taking a guess as to what the expected fees are. Now, consider the alternative: an informed estimate. This is typically achieved by including language in the contract that the fees identified in the SOW represent the vendor’s best, good faith estimate of all effort required to complete the services and deliverables in the SOW. That kind of statement, supplemented by specific back-up for how the fee was calculated, can ensure the customer has confidence the stated fees can be reasonably relied upon.
5. Read assumptions carefully
One of the most common sources for cost overruns is the extensive lists of assumptions many vendors include in their SOWs. While some assumptions are reasonable and appropriate, the list of assumptions all too often becomes an easy means for vendors to demand additional fees. Carefully review and limit any “assumptions” in the SOW. The vast majority of contingencies are very general in nature and would create a substantial “out” for the contractor or at least provide the means for the contractor to charge additional fees.
6. Ensure consistency with the primary agreement
Ensure the terms of the SOW do not conflict with the overarching agreement (typically a Professional Services Agreement or Master Services Agreement). This means checking all defined/capitalized terms to make them consistent with the main agreement. Common errors found in many SOWs are as follows: the parties are referred to by different defined terms in the SOW than in the primary agreement, the SOW fails to cite the correct primary agreement and the SOW contains additional legal terms that undermine or conflict with the negotiated terms of the main agreement (e.g., warranty disclaimers, limitations of liability, statements about intellectual property ownership, etc.).
While the tips identified above may seem fundamental and obvious, in my experience, 70% of all SOWs fail to address them, regardless of size or sophistication of the parties. When businesses have the discipline to ensure these issues are properly addressed, they will have gone a long way to keep their projects on budget and schedule, avoid disputes and minimize the risk of unpleasant surprises.