BUSINESS ESSENTIALS: KEY COMPONENTS OF CUSTOMER CONTRACTS–THE STATEMENT OF WORK
August 16, 2012
By James Forrest
Businesses need a solid set of contract templates in their arsenal to manage their risk in the marketplace. In our last Business Essentials installment, we outlined key components of the master services agreement (MSA), the document containing legal terms that effectively govern the relationship between a company and its customer. Today, we will outline the key drivers of a critical component of a MSA, the statement of work (SOW).
While master services agreements offer the general parameters for the business relationship between service companies and their clients, SOWs are critical to developing a specific understanding for the services provided. Statements of work lay a foundation for a good-faith management of expectations for both the service provider and the client. While MSAs must cover some very important ground at a higher level, SOWs offer the opportunity to drill down into the relationship as it lives and breathes, month after month, year after year.
Statements of work offer versatility, in that they can dictate on-the-fly changes in the relationship, without threatening the integrity of the MSA, so that companies on both sides of the agreement can manage the services they need to provide and receive, as well as the timelines and compensation expected for services delivered.
When business attorneys work with their clients on SOWs, a hallmark of these documents should be specificity. Precise SOWs should effectively outline three areas: services to be rendered in compliance with the MSA, compensation for outlined services, and other terms needed.
Companies must be careful in outlining proposed services. In many cases, if left unlimited in the document, companies can find that clients have greater expectations than the level of service actually proposed. Attorneys can guide clients in the drafting of SOWs to both ensure proper limits on expectations and avoid causing offense to the party buying the services. For example, a software company offering software design and development would need to clearly define client expectations within the proposed services for both the software deliverables and any ongoing support (if any).
Also, the SOW offers the ability for companies to go deeper than the terms outlined in the MSA in defining compensation expectations tailored to its own needs and those of its clients. Specifically, companies can outline expectations for phased payments to adjust for cash flow-impacting investments required to perform the work. For example, a research company may dictate a 50 percent up-front payment needed to deploy its employees for a specific project, with the remainder due at successful completion of the work. Thus, the SOW can put forth appropriate mile-markers for both service delivery and expected payment.
Lastly, it is essential that both the MSA and the SOW cross-reference one another so that both documents will be interpreted together rather than as two separate and distinct contracts. A SOW, used in conjunction with a MSA, provides a business a great tool. The MSA provides optimal legal protection, while the SOW provides the business the ability to write in (often in day-to-day business terms) the scope of services and the related pricing structure.