Could Statement of Work (SoW) be a potential solution to IR35's private sector rollout?

With April 2020 looming, private sector organisations are discussing the impact of IR35 rules. For smart businesses, outcome-led Statement of Work will become a big part of the discussion.

When HR professionals, procurement experts and hiring managers discuss the upcoming IR35 rollout in the private sector, few make the logical jump to consider outcome-led Statement of Work as a potential solution. 

A Statement of Work is not a new entity by any stretch. In the IT and tech sectors especially — where hardware or software implementation is inherently outcome, rather than output-based —  SoWs are commonplace. But for other industries, making the leap to an outcome-led (time and material) SoW will see them enter new territory. 

The current state of contractors

IR35 is encouraging us to think differently. For many businesses, hiring in contracted labour is a matter of closing talent gaps, driving organisational change and implementing new technology. The situation is (especially in large businesses) fraught with complexity. 

For example, in a multinational business, two separate contractors can be engaged in, say, the same CRM implementation in two separate departments in two global regions. On the surface, there’s nothing amiss. The issue? Quite often, the two contractors are paid different day rates, assessed by different managers with different levels of expertise, and complete their work inside different time frames. 

This essentially leads to a lack of clarity and consistency, with little high-level oversight. What and who defines success?

Taking our example further: which contractor has objectively done the best job? The cheap contractor that has completed the project in a month or the more expensive one that has taken four months? 

Initially, you may pluck for the contractor who delivers greater financial value, in the shortest timeframe. But what if the quality of work is substandard? Similarly, the more costly contractor could be deliberately delaying the project for their own financial gain.

It’s this level of oversight and consistency that can lead to project misalignment, inconsistent quality and variable costs. When we consider that most businesses aren’t engaging with just two contractors but hundreds, the costs, both organisational and financial, are extensive. And with the IR35 legislation set to be introduced in the private sector, these costs are set to increase.

An outcome-based Statement of Work has the potential to answer all of these issues. 

What is an outcome-based Statement of Work?

Rather than focusing on the individual outputs of contractors, an outcome-based Statement of Work focuses on the end result — the outcome. 

If we come back to the hypothetical example of the two contractors, an outcome-based Statement of Work ties everyone involved in the implementation of the CRM. 

Instead of engaging with multiple contractors on a personal level, across different departments and regions, the business instead signs a single SoW with their service provider to complete the project, end-to-end. 

Why does this make a big difference? 

For one reason, the business ensures that quality will be consistent, with expert oversight of the whole project. It is also the service provider who hires the contractors necessary to carry out the work. 

Under an SoW, the project is delivered in a pre-agreed, fixed timeframe, with milestones set prior to launch. If the project overruns, the service provider faces financial penalties. If the project is not delivered to the required standard, again the service provider is responsible.

It doesn’t take a great deal of imagination to realise why such a performance-based approach makes so much sense for businesses. Shifting responsibility within an SoW ensures performance at every level. Not only can this strategically optimise the way a business interacts with contractors, but it could also have a big impact post-IR35.

How does Statement of Work help soften the impact of IR35?

IR35 is, of course, quite a complex issue for most large businesses. The biggest concern lies with the potential increase in PAYE Tax and National Insurance contributions that businesses will have to make for all of their contractors where IR35 applies. 

For clarification, this is all contractors working under a personal services company who are in some form embedded within a business. This covers any active interaction with contractors, any change in responsibilities during a contract period and any contractor who is in some way part of the company culture — for example, receiving company perks or being invited to work drinks.

Let’s consider again the direct hired contractors discussed earlier in this article. Both of these workers would likely fall under IR35 (if they are based in the UK). If the contractors are part of a Statement of Work, the business has no interaction with the workers directly.

From 2020, utilising outcome-based SoW contracts will allow businesses to engage contracted talent outside of IR35. It also means that they can rethink the way they construct their workforce plan to achieve maximum efficiency. 

With the expected additional costs that businesses are likely to see as a result of IR35 rollout,  for smart businesses, both of these factors will be powerful enough to warrant SoW being a big part of the conversation around workforce planning.

For an in-depth take on the potential impact of IR35 rollout in the private sector, download our report today by completing the form below.