Back to Blog
Hiring different types of non-employee workers allows businesses to access critical skills, ramp up their workforce during busy periods and take a flexible, agile approach to workforce management.
These days, more and more companies are expanding the scope of their contingent workforce programmes by taking on workers through statement of work (SoW) engagements.
Although SoW workers are part of the non-employee workforce, it would be a mistake to group them with staff augmentation workers sourced through staffing agencies and engaged on time-based contracts.
In this article, we’ll take you through what a statement of work contract is, when it should be used, and some of the challenges and pitfalls involved. We’ll also share our advice for approaching SoW management in a strategic, well thought-out way that can help you cut costs and reduce compliance risks.
What is a statement of work (SoW) contract?
First, a definition: a statement of work (SoW) is a business agreement between two parties in which one party agrees to provide certain services to the other. A SoW’s purpose is to outline a project’s goals and parameters so that both parties know what’s expected of them.
Companies use SoWs when they hire non-employee workers like freelancers, consultants or contractors to work on a project basis. The client company typically has little control over how, when or where the work is completed.
Creating a thorough SoW ensures that both you and the worker understand precisely what a given project will look like. SoWs typically include details about the project deliverables, key deadlines, payment terms and conditions and anything else necessary for the project’s successful completion.
SoW labour vs. traditional contingent workers: key differences
The traditional method of engaging contingent workers is to source them through a staffing agency. These workers are typically brought into the business on a fixed-term basis and paid an hourly rate based on timesheets they submit to the company.
In the US, these workers are often classed as W-2 employees, meaning they are employed by the staffing agency that supplies them to clients. That means they’re entitled to certain rights, like unemployment benefits.
On the other hand, workers that are engaged under a SoW are usually freelancers, consultants or independent contractors. They’re considered to be self-employed, which means they’re not subject to the same payment or tax requirements as agency workers.
SoW workers are usually paid on a milestone basis rather than for the hours they work — although there are some exceptions. This type of worker often comes at a higher cost, but they’re also more invested in project outcomes, and their focus is more on providing longer-term value and alignment with the goals of the business than that of traditional contingent workers.
Types of SoW
Every SoW is different because it’s based on the specifics of the project you’re hiring for. That said, there are three main types of SoW that you’re likely to run into:
- Design SoW
A design SoW is the most detailed type of SoW you’re likely to come across. It provides a clear description of the project’s goals, as well as the specific tasks that will be required to achieve them.
This type of SoW includes step-by-step breakdowns of each phase of the project, as well as the tools, materials and best practices that the contractor should use to complete it. It leaves very little room for flexibility on the part of the worker.
Design SoWs are typically used when there’s a specific, tangible deliverable being produced — which could be anything from a building design to a new website.
- Level of effort SoW
A level of effort SoW is a more flexible type of SoW. Although it still outlines expectations for the work that’s being performed, it’s less detailed when it comes to the specifics.
This type of SoW is typically used for contractors who work on an hourly basis. While the contractor may have more control over the process than they would with a design SoW, a level of effort SoW still contains guidelines that they need to follow.
- Performance-based SoW
A performance-based SoW provides details about the expected outcome of the project — not necessarily how that outcome will be achieved. In it, the company describes the metrics by which they will measure the success of the project so the contractor knows what’s expected of them.
However, the how, what, where and when is primarily left up to the worker. That means that it gives them a lot more flexibility to complete the project as they see fit.
The misclassification conundrum: Mastering the complexities of SoW engagements
A SoW engagement is usually only appropriate when you need to hire a freelancer or independent expert on a one-time project basis. However, some companies use SoW engagements for different types of work — which can lead to problems.
For example, some companies find that hiring managers use SoW engagements to hire workers who are engaged on a time-only basis and paid a daily rate regardless of whether they achieve specific outcomes.
They might do this to circumvent formal contingent workforce processes and policies, like approved vendor lists, tenure restrictions or rate limits. Plus, SoW workers may not be counted as headcount and can often be paid for using a different budget than traditional contingent workers — which can make it a tempting workaround.
However, this can lead to a number of inefficiencies and risks. For one thing, businesses that engage workers on an SoW basis when they are really traditional time-based contractors might end up paying inflated rates. Because this happens outside of the company’s official contingent workforce programme, it can also lead to problems with visibility.
There are also legal implications to this approach. Temporary workers and contractors may have labour rights that SoW labour typically doesn’t have access to. This means that companies who try to hire contractors through the back door through SoWs may face claims related to missed benefits like sick pay or unemployment protections.
Strategic approaches to SoW management
Part of the problem with SoW engagements is that they often occur outside of the company’s official contingent workforce processes and policies. By creating a strategic, structured system for these engagements, you can better control your costs ,mitigate the risk of things like worker misclassification, and maximise the ROI of the SoW engagement.
The idea is to stop managers from using SoW engagements as a workaround for your existing contingent workforce policies and processes. That doesn’t mean that managers should never be able to engage SoW workers — but this should be reserved for situations where it’s truly appropriate, like when there’s a specific deliverable to be created.
Ultimately, it’s about fostering an organisational culture where everyone understands the value and nuances of SoW engagements.
Here are a few tips to help you:
- Find strategies to enhance visibility: Understanding exactly what your contingent workforce looks like is critical, but many organisations lack the technology and resources to maintain full visibility. Using a tool like a VMS can help you capture the workforce data you need to build stronger processes and get more out of your SoW management programme.
- Get buy-in from key players: If you want your SoW management programme to work, you need your company executives and other stakeholders on board. You should identify these people early and involve them in the development and execution of stakeholder engagement, communication, and change management plans as your programme develops.
- Evaluate your hiring and procurement processes: In many organisations, hiring managers source SoW talent from their own networks, which can lead to many problems. Without going through the proper channels, there’s no way of knowing if a worker is actually a good fit for the job — and there’s a risk of misclassification, too. You need to set up structured hiring processes that managers can’t go outside of if you want to keep control over your SoW management programme.
- Build compliance checks into your process: Compliance risks abound when you hire SoW talent. And, if you want to avoid putting your business at risk, you need to build the appropriate checks into your process for engaging workers. If you don’t have the necessary expertise in-house, you may need to consult with external legal experts or work with a workforce solutions partner (like CXC).
- Continuously review and iterate: Your SoW management strategy might not start out perfect — and that’s OK. You should seek regular feedback about your processes from hiring managers, procurement, HR and even the workers themselves, and then adapt your programme as needed.
Streamlined, compliant SOW management with CXC
At CXC, we provide a range of workforce solutions — including SoW management.
If your organisation is suffering from rogue SoW engagements, we can work with you to determine which of them are legitimate and which should be reclassified through a different model.
In short, we can help you manage your entire contingent workforce — including your SoW workers — compliantly through one streamlined, cost-effective solution.
And did we mention that we’re experts in compliance? With CXC, you won’t have to worry about risks to your business related to worker misclassification, co-employment or taxes.
Want to learn more? Speak to our team to get started.
