As discussed in Part 1, a SOW should tell a story with enough detail that a person who is unfamiliar with the deal could rely on it to understand the intentions of the parties, including such key terms as products/services, deliverables and pricing.
If you are the receiver of goods/services, the below list of issues will help guide your review or preparation of a SOW:
- Products and Services
A precise and detailed description of the services to be performed/products being delivered is critical; and it should include all relevant features, functionality, technical specifications, etc. For example, if a vendor is building a website for you, do not assume that site search functionality or other features are automatically included because they appear in other websites. Instead, provide a list of required features. A mere list of products or shortcut involving the use of a brand name is not a sufficient description (the “XYZ Software Suite”). As the receiver of goods/services, you will only be entitled to what is listed in the SOW. Moreover, in the event you believe you have not received what you bargained for, the SOW will be the best evidence on which to base your argument for breach of contract. To the extent your precise expectations of specifications, features or functionality are not listed in the SOW, you may not be able to claim the vendor is in “breach” for failure to perform. Overall, the key take-away here is this: take the time upfront to spell out everything that is critical to the performance of the contract; never assume anything.
- Timelines and Deliverables
List all key steps with specificity. For instance, will there be a beta test? Will the vendor provide training? Are check-in meetings or periodic reports required? Document when each of these steps should occur, as well as what, if any, deliverables (e.g. software, reports, data, etc.) must accompany them. Finally, it is also important to define what will be considered a “successful” vs. “unsuccessful” deliverable in order to avoid disputes down the road.
- Pricing and Payment
Separate different categories of cost – one-time vs. recurring costs, fixed vs. variable
in order to avoid repaying one-time set-up costs if you renew. Similarly, by separating costs for different deliverables, you will retain flexibility in the event you wish to renew or increase quantities of certain deliverables and not others. Discounts for increased volume (goods) or expanded use (services) should also be detailed in the SOW. For example, if you anticipate the possibility of adding more users, divisions, affiliates, groups, etc. to the service, pre-negotiate pricing discounts such as a tiered pricing structure with steeper discounts as you order more. Finally, if the situation allows, negotiate a fixed cost or cap on costs; or in the alternative, cost estimates with cap to encourage vendors to provide accurate estimates and discourage “lowball” estimates.
A payment schedule tied to milestones and deliverables will help to ensure that goods/services/deliverables are provided on time and in accordance with agreed upon standards. For instance, agree to pay $X upon receipt of a required interim progress report (or other work-in-progress deliverable); and $Y upon delivery, test and “acceptance” of the finished product/service. Well-defined acceptance criteria (e.g., acceptance must be in writing, vendor must fix unacceptable deliverables within a set time period) also protect you as the receiver.
- Ownership of Deliverables
As a general rule, if you only need access to the deliverables during the term of the agreement, you do not need to “own” anything. For example, licensing of off-the-shelf or SaaS software for the designated term does not require ownership. In this situation, you may simply want to clarify any limits on how you can use the deliverable. However, if the deliverable is customized to your specifications for use beyond the term of the agreement, then it is important to address this issue in the SOW by including a statement about ownership. For instance, custom code, custom design work, content creation, training modules to be used after the term, and other deliverables with a shelf life beyond the term of the SOW all require that an ownership provision be included in the SOW.
- Termination Rights
Think about the reasons why you might want to exit the deal (e.g., vendor fails to deliver goods/services, deliverables fail to meet agreed upon specifications, etc.). Turn these reasons into express requirements imposed upon the vendor, which, if breached, become grounds to rightfully terminate the agreement.
- Miscellaneous Tip
Since a SOW often accompanies a previously signed Master Services Agreement (MSA), beware of any language in the SOW that might undo what was agreed upon in the MSA. The SOW should focus on the services, specifications and economics. Notify your legal department if the vendor attempts to include other legal terms in the SOW which might impose new obligations on you.
Again, at the end of the day, the SOW should tell a story.
In Part 3 of this series, I will explore key issues from a provider's perspective to help guide its review or preparation of a SOW.