Statements of Work (SOWs) and staff augmentation are common services provided by staffing suppliers. The use of SOWs has risen in recent years, gaining more prevalence and traction amidst a competitive labor market. Companies are searching for ways to identify cost savings, leading to an evaluation of their contingent workforces, particularly, SOWs.
With the rise of Managed Services Provider programs (MSPs) and contingent workforce management programs, organizations without well-run programs lack the correct processes and knowledge to properly engage workers. This leaves vendors and hiring managers to their own devices, and unfortunately, can often lead to the unintentional misclassification of SOWs.
At Dahl Consulting (DAHL), we understand the key differences between SOWs and staff augmentation to offer comprehensive workforce solutions for each. In this article, learn about the rise of SOWs and the ramifications of misclassifying work arrangements. Plus, discover how organizations are determining what should be classified as staff augmentation and the criteria that define a true SOW.
The Rise of SOWs
Many workers who should be categorized as staff augmentation are being mistakenly categorized as SOWs instead. Staffing providers aim to provide simple and direct solutions to hiring managers, but sometimes this is not executed properly. With the rise of MSP programs, staffing providers may find themselves under scrutiny. To avoid diminished margins, placing workers under a staff augmentation solution as opposed to SOW management is a natural solution. However, this can lead to program mismanagement. When programs run amok, hiring managers often seek other solutions. This is where SOWs come into play.
SOWs have risen as an easy way for managers to get the resources that they need without the rules and oversight of a Managed Services Provider program. But once again, this often results in the misclassification of these workers.
It is important to note that the misclassification of SOWs is not intentional, but rather due to miscommunication, misunderstanding, or unclear guidelines for the work that is to be completed. Staffing providers and the company’s internal managers should aim to avoid misclassification at all costs due to the negative consequences of misclassifying workers, which we explore more below.
The Ramifications of Misclassifying Workers
To be clear, SOWs are a legitimate and effective option for work that has defined milestones and deliverables. They are especially beneficial for companies when suppliers are accountable for the success and cost control of the project. However, SOWs can become very costly and unmanageable. Additionally, they offer limited visibility for workforce management programs. Instead of having defined project milestones and deliverables, some SOWs are being billed purely on a time and materials basis. With unmanaged SOWs, staffing markups can exceed two times the markups in a managed contingent labor program.
Not only can the misclassification of staff augmentation as SOWs be costly, but it can also cause other issues, including a lack of visibility and compliance issues. Misclassification can obscure the real expenses associated with hiring these workers, making it difficult for companies to accurately track and manage their labor costs. This lack of transparency can lead to budget overruns and inefficient allocation of resources.
There are also compliance risks associated with misclassification, specifically as it relates to onboarding and management. Misclassified workers might not go through the same onboarding processes as regular employees or properly classified independent contractors, which can result in gaps in training, security access, and integration into the company’s systems and culture.
Furthermore, misclassification can lead to legal and regulatory complications, such as violations of labor laws and tax regulations. Companies may face fines, back taxes, and other penalties if authorities determine that workers have been improperly classified. This not only has financial implications but can also damage the organization’s reputation and relationships with both consultants and regulatory bodies.
Identifying Misclassified SOWs
Simply put, staff augmentation involves adding resources to your existing workforce, whereas SOW management involves the completion of a specific project or work package. When trying to spot misclassification, here are the key areas to assess and the differentiators for each solution.
Management and Risk
Defining who manages the workers employed is a key indicator of whether they should be classified under staff augmentation or as an SOW. If your company’s manager is responsible for overseeing the work being completed instead of the supplier/vendor, then it is likely not a true SOW. Essentially, if you are responsible for the success, schedule, and associated financial risks of a project instead of the vendor, this is a strong indication of staff augmentation.
Project Scope, Flexibility, and Cost
Having a solid understanding of project scope and flexibility is essential to avoid misclassification. With staff augmentation suppliers now also offering SOW services, defining project scope and flexibility can help decipher any grey area surrounding proper classification. In cases where there is no defined project scope, just job titles and an hourly fixed rate regardless of project progress, it is likely staff augmentation. True SOWs include defined project deadlines and deliverables, where payment is approved as milestones are completed.
The graph included below illustrates a quick side-by-side comparison for each of these areas that you can easily reference to help identify misclassified SOWs.
Classifying Your Workforce with DAHL
In conclusion, while SOWs and staff augmentation both play crucial roles in workforce management, it is vital to understand their distinctions to avoid the pitfalls of misclassification. Misclassified SOWs can lead to significant cost overruns, lack of visibility into workforce expenses, and serious compliance risks.
Understanding the nuances of both SOWs and staff augmentation and implementing the right workforce solution is essential for achieving sustainable growth and maintaining a competitive edge in today’s dynamic labor market. Proper treatment of SOW workers can drive better project outcomes, cost management, and overall organizational success.
At Dahl Consulting, we are committed to providing comprehensive workforce solutions that address the unique needs of SOWs and staff augmentation. As an attorney-led organization, we pride ourselves on integrity and compliance, and these values are our guiding light when serving our partners. Questions about SOWs? Get connected with one of our employment experts today!