How to Draft Better SOW Requirements to Improve Contract Performance

KEY TAKEAWAYS:

• There is a clear connection between clear and unambiguous work requirements and supplier performance.
• There are three often overlooked concepts in work requirements that once clarified ensure value to the parties.
• You do not have to be a Subject Matter Expert to enhance the work requirements and ensure value from the relationship.

According to a 2011 report conducted by the World Commerce and Contracting Association, 88% of respondents indicated that raising the quality of requirements was the number one factor to improved contract performance.

Requirements are usually drafted and approved by the business folks. So, what should contract professionals focus on to improve supplier performance? Afterall, most are not subject matter experts (SMEs) and may, therefore, be relying on another team member for the review of requirements clauses.

However, having worked on performance-based contracts for over 20  years, I believe that contracts professionals can add immense value by taking the time to review Statements of Work (SOW) requirements. If you want a better understanding of performance based contracts, I recommend reading the pervious article in this series.

There is a clear and tangible connection between the quality and completeness of SOW requirements and value. Those organizations that provide complete and unambiguous SOW Requirements ensure the suppliers’ work is performed to plan, on time, and on budget. Suppliers are more profitable because they know at the outset what is required of them and can plan resources accordingly.

This article identifies three areas in a performance-based SOWs that all contract professionals should review, regardless of subject matter expertise.

1. Business Objectives

Business objectives, aka the customer’s needs, drive the specific work requirements in the SOW. They also dictate the contractual relationship. The relationship type, in this instance a performance-based contract. That means that the contract professional chooses the legal terms and conditions to drive supplier performance outlined in the SOW to meet the business objectives.  Therefore, the SOW Requirements and the Terms and Conditions combined establish the level of supplier performance and customer contract management.

To  identify the business objectives, it might be helpful to look at some examples:

• Growing revenue, saving money, meeting a schedule, performing a service, speeding new products to market, customer/community satisfaction, creating innovation, corporate social responsibility, etc.
• Meeting internal challenges to the customer’s goals of saving money, meeting schedule deadline, satisfying community needs, etc.
• Solving external challenges to the customer’s goals of growing revenue, meeting schedule deadline, speeding new products to market, satisfying community needs, creating innovation, etc.
• Serving a critical level of need of one of the customer’s communities.

As you look at the SOW requirements, look at the business objectives for the relationship. These goals should be clearly and simply stated in a couple of sentences. If they are missing, unclear, or ambiguous, take a moment to work with your stakeholders to ensure the business objectives included in the SOW are clearly and succinctly written.

2. Milestones

SOW Requirements cannot be completed in one shipment of goods or one software installation. To complete the work, suppliers often must work in phases. Each of the phases usually requires some sort of milestone.

Milestones are clear markers that establish a starting point, a completion point, or a critical check in point in a very lengthy implementation process. In addition, these points can trigger a payment too, but not all milestones need to trigger a payment.

The checkpoints help the customer ensure that the work is being performed according to schedule and budget by tying partial payments to the completion of phases of the work. Partial payments ensure that suppliers remain fiscally solvent during months’ long projects allowing suppliers to pay for goods, personnel salary, and/or subcontractors.

These crucial completion points can easily be overlooked by business SMEs. In my experience, the business instinctively know what milestones they want for a particular project, but simply forget to include them in the SOW Requirements. Not only pointing out the need for milestones, but also listing them and pairing with meaningful partial payments will provide both the customer and the supplier with more control over the performance of the work. You can list them in the SOW Requirements, or in very long implementations, I’ve used tables to outline the milestones and the corresponding partial payments.

3. Acceptance Criteria

Acceptance is a legal term, but it does not have to intimidate you. Acceptance means that the customer accepts the goods or services because the goods or services demonstrably meet the SOW Requirements. Many, if not most, commercial performance-based contracts contain conditional acceptance.

Conditional acceptance, as broken down into legal terms, follows a simple formula. The offeree tells the offeror that it will agree to the offer, but only if certain conditions are met. To put this into the business context, conditional or qualified, acceptance happens when the customer tells the service provider that it will agree to the service provider’s offer, provided that some changes are made in the terms or that some condition or event occurs. These events could be as simple as meeting certain contract requirements or milestones.

That very last part of the definition from above (or that some condition or event occurs) directs your attention to the scope of work or any other contract provision that lays out the specific requirements for the goods or services.

The customer has to make sure that the suppliers understand and meet the work specifications (acceptance) in the SOW Requirements before the supplier starts work. If the supplier does not meet the SOW Requirements, the goods or services are not accepted. The customer may reject the goods and/or services, ask the supplier to re-perform the services and replace the goods (Corrective Actions), or accept the substandard goods or services for a discounted price (typically through levying a service credit that effectively provides liquidated damages for poor performance).

Most well-written contract templates have Terms and Conditions referring to the customer’s right to accept the work. However, those Terms and Conditions do not specify the technical specifications for the goods or services or the acceptance criteria. Those specifications are included in the SOW Requirements.

For newer SME’s, writing acceptance criteria can be challenging because it sounds so legalistic. I often redirect SMEs to describe to me how they will know if the goods and services meet expectations. From there, we can often craft clear acceptance criteria.

Tips for Contracts Professionals:

To ensure that your company sees value from its performance-based contracts, ask yourself three simple questions as you review SOW Requirements:

1. Is the business objective(s) for the relationship clear and unambiguous? If not, how can I work with SMEs to include the business objective(s)?
2. Are there milestones for work that takes many months to complete? Are some of those milestones tied to partial payments to ensure that the supplier is solvent?
3. Do the SOW Requirements describe what the supplier must do to meet work specifications for both goods and/or services? If not, how can the SME outline the specifications?

Are you intrigued to learn more? Each month right here, I will provide more information to help you draft, negotiate, and manage performance-based contracts through my Contract Nerds guest column, Negotiating Performance-Based Contracts.

If you want the manual to learn at your own pace, purchase your copy of The Contract Professional’s Playbook: The Definitive Guide to Maximizing Value through Mastery of Performance- and Outcome-Based Contracting.