Time-and-material statement-of-work agreements have been under heavy scrutiny for the past several years. Many industry professionals argue that T&M SOWs are often just a disguise for staff augmentation. Best practices typically recommend avoiding or reclassifying them altogether.

This perspective isn’t without merit. Studies show that upwards of 40% of SOWs are actually misclassified staff augmentation, leading to significant financial and project-completion risks for organizations. But is this black-and-white stance too rigid? Is it possible that a gray area exists where T&M SOWs can fulfill a distinct purpose?

To offer a slightly different perspective, let’s explore why the answer could be yes. When managed effectively, T&M SOWs can meet the agile demands of organizations, offering flexibility and control that deliverable-based SOWs sometimes cannot.

Here’s why:

Flexibility for evolving requirements. Project flexibility becomes critical as companies increasingly adopt agile methodologies. In agile workflows, where iterative development and continuous improvement are the name of the game, deliverable-based SOWs can hinder agility.

In agile projects, deliverables shift regularly, requiring frequent rescoping and renegotiation of deliverable-based SOWs. This administrative burden is taxing on an organization’s resources and can delay a project’s momentum — ultimately impacting time-to-market and revenue. Forcing these types of projects into static contracts often results in vaguely written deliverables loaded with assumptions. To cover the number of unknowns and variables in these fixed contracts, service providers charge higher fees. And despite tying payments to outcomes, when deliverables are vague, the risk ultimately shifts back to the business, leading to delays and increased costs.

By contrast, T&M SOWs allow for real-time adjustments as project requirements evolve, making them ideal for agile projects like software development or research. This flexibility helps control costs and keeps projects on track without the contractual rigidity.

Specialized services. Certain projects, such as specialized consulting engagements, demand highly specialized expertise and rely on the provider’s proprietary knowledge, methodologies and tools to complete. These engagements often involve complex deliverables that evolve throughout the project, making it difficult to define outcomes upfront. When forced into rigid deliverables-based contracts or staff augmentation, service providers often inflate pricing or overestimate project hours, ultimately increasing costs for the buyer.

This is not to suggest that T&M SOWs are without risks such as misclassification and challenges in project completion. However, these risks can be managed through strategic planning and careful contract drafting.

Risk Mitigation Techniques

Clearly defining engagement guidelines. Establish and communicate clear guidelines for the different worker engagement types within your organization. Further, put in place a decision-making process to direct managers toward the most appropriate engagement type based on the nature of the work. Consider implementing a strong exception policy for managers who choose to bypass the recommended engagement type; this ensures value is maximized while minimizing misclassification risks.

Stakeholder and provider education. Educate managers to spot misclassification red flags, such as SOWs referencing staffing services agreements, contracts with only one or two resources, or language indicating buyer-directed supervision. Communicate the risks and the missed benefits that come with engaging a misclassified worker. Your providers should also be trained to understand your organization’s distinction between staff augmentation and SOW engagements as well as the consequences of audits that lead to reclassification (e.g., reduced rates, contract termination, removal from program).

Create a T&M SOW template with accountability clauses. Develop a T&M SOW template that captures the project’s high-level objective and includes performance incentives, penalties for delays and regular progress reviews. These elements help maintain project momentum, ensure both parties are aligned on expectations and share responsibility for the risks involved.

Competitive bidding and market analysis. Regularly conducting competitive bidding and market rate analyses of T&M SOWs ensures rates are aligned with market conditions, preventing overpayment and supporting efficient budget management.

Transition to deliverable-based SOWs as needed. A T&M SOW may be necessary at the outset, especially for projects with evolving or unclear requirements. However, as the project progresses and objectives become clearer, regular checkpoints can facilitate a smooth transition to a deliverable-based SOW, ensuring a more structured approach once outcomes are better defined.

Audit cadence for misclassification. Implement a regular audit cadence to review T&M SOWs for potential misclassification risks. This enables early detection of misclassification, ensuring compliance and timely corrections to address inflated costs and business risks associated with improperly engaged T&M SOWs.

Simplify and incentivize proper engagement. Make it easy and attractive for managers to engage talent through the staff augmentation program by simplifying processes and offering clear, tangible benefits. Ensure the staff augmentation program is not only efficient and user-friendly but also genuinely responsive to your managers’ real needs and pain points, rather than relying on assumptions about what those may be. By addressing these concerns directly, you reduce motivation to circumvent the program with T&M SOWs and minimize the risk of improper engagements.

To conclude, while T&M SOWs have gained a negative reputation, the issue lies not in their existence but in how and when they are used. With careful planning, clear guidelines and a solid understanding of the risks, T&M SOWs can be a powerful tool for managing agile, flexible and cost-effective projects.