It’s likely that, as a contractor, you’ve not heard of a Statement of Work (SoW) before and there’s not really a reason why you should have. Until recently, they weren’t particularly commonplace but as we hurtle towards the implementation of IR35 reforms in the private sector, they’re very much on the rise.
There is one very good reason for this; SoW agreements – formal arrangements put in place to guarantee work carried out by a contractor for a client is delivered in line with particular standards and expectations – heavily suggest an outside IR35 status, and can even act to move any potential IR35 responsibility and liability down the supply chain away from the end client.
So, now we’ve piqued your interest, sit back while we explain all about Statements of Work and why you might use them.
What is a Statement of Work?
A Statement of Work is used in place of a traditional contract and timesheet method by businesses engaging the services of a contractor. Put very simply, it states that “You are responsible for delivering X. In exchange, you will be paid Y.”
However, a SoW is more in-depth than just that. A business will use a SoW to lay out how work should be completed during the course of a particular project. It’s a formal document that defines the scope of work and is often used by recruiters in order to engage contractors for a project.
A proper SoW will clearly define the services that the contractor is expected to deliver. This includes:
- Details of the work
- Expected outcomes and outputs
The complexity of a SoW varies from client to client. Some produce fairly simple, straightforward statements, while others will provide detailed specifications that cover every last detail. They can be used for any type of project too, ranging from a simple, one-off freelance copywriting gig to a huge engineering project.
Why are Statements of Work on the rise?
It’s well-acknowledged that contracting and freelancing is growing in popularity. In fact, analysts such as Accenture believe this market will grow to represent 30% of Britain’s workforce in the next few years. More and more businesses are also looking for the flexibility and expertise that contractors can provide and this is boosting the growth of SoW arrangements thanks to these factors:
As a contractor, you’re probably already aware that flexibility is a big driving factor in taking the plunge into self-employment. Well, this works both ways. Businesses are also beginning to prize flexibility, since so-called elastic resourcing helps them work more cost-effectively by allowing them to size their workforce up and down as required by the needs of their business. Statements of Works are an easy way to keep this elasticity while maintaining productivity at the same time.
Traditional time-plus-materials agreements don’t allow clients a great deal of control over the costs and delivery of a project. As SoWs are a more formal arrangement, they give the client a bit more control over these factors, allowing for better budgeting and forecasting while keeping the engagement outside IR35.
The ubiquitous IR35 reforms are another big factor in the rise of the Statement of Work. As mentioned, they’re a good indication that an engagement is outside the IR35 legislation. This is because IR35 rules don’t apply when a service has been fully contracted out to another party, rather than a contractor providing a service personally. This means your client isn’t required to pay your tax and National Insurance on your behalf and removing any liability they would otherwise have. For this reason, we can safely expect to see more and more SoW arrangements in the post-IR35 world.
How will Statements of Work affect your business?
Having a SoW can have a positive impact since a well-written SoW not only protects your client, but you as well. They leave little room for misinterpretation of the scope of work, measurements, materials, tolerances and quality control so you will have a clear picture of what is expected of you.
That said, SoW’s can present a higher level of risk to you as you only get paid when the work is completed. They make undeniable responsibilities that have to be fulfilled, so it’s easier for a client to identify when there has been a failure in the delivery. This is good from an IR35 perspective as a SoW carries a genuine business risk if money is held back pending sign-off, or if you have to make any rectification works at your own cost. This is also where having your own professional indemnity and public liability insurance is essential.
Ensure you avoid SoWs which are too broad or generic as they could leave you open to disputes in the future. Furthermore if they aren’t genuine your IR35 status determination could be called into question and be ineffective in the event of an IR35 investigation.
Worried about IR35? Check out our IR35 Protect package. Our Standard or Premium IR35 Protect Insurance then you will have access to either one or unlimited IR35 Status Reviews from IR35 Specialists Larsen Howie. As part of this you will get access to their SIFT tool, an accurate, industry-recognised alternative to the CEST.