Statement of Work, Proposal, Contract: What's the Difference?

Written by ScopeStack | May 22, 2024 1:00:36 PM

Imagine a scenario: A small business owner asks her IT professional friend for data migration help. Impressed by the work completed, the business owner recommends her friend to a fellow entrepreneur for the same service. The IT professional, now freelancing, agrees to take on the new client. However, this shift requires formalizing the engagement to ensure a smooth process for everyone involved. The question becomes: which documents are most appropriate? Should they use a statement of work (SOW), a proposal, or a contract? What about all three?

As managed IT businesses gain traction, these questions become critical. Distinguishing between a statement of work (SOW), proposal, and contract is crucial to set expectations from the start. The clarity leads to a smoother project management process and helps avoid common pitfalls like budget overruns.

Understanding the confusion between SOWs, contracts, and proposals

These three terms sometimes get used interchangeably, though they refer to three distinct documents. Confusion often arises because the use of these documents varies with each client/business engagement, depending on the scenario. Also, while most people know what a contract is, some industries (like IT) use statements of work more than others, while proposals are used less frequently outside sales pitch scenarios.

Let’s break down what each of the three types of documents involves.

What’s a SOW?

A statement of work notes all requirements for an upcoming project so stakeholders can review the objectives and align expectations. This document focuses on project-specific activities, deliverables, and timelines. IT professionals compile this information in the SOW after discovery sessions, where they learn about the client’s aims and desired outcomes.

Sometimes a SOW is correct from the outset. Other times, it can go through a few rounds of back-and-forth editing as the client clarifies their desired outcomes and the managed IT company balances deliverables with its resource allocation. Discussion can focus on anything listed in the SOW, like budget, timeline, and even feature prioritization. Once all stakeholders agree, the next project management phase begins.

Parts of a SOW

Every IT professional and MSP can customize the format of their SOW based on what works best for their needs. However, most SOWs have the following parts in common:

Executive summary: Clarifies the project’s overarching goals. It summarizes what the SOW aims to achieve and what readers expect to find in its contents.
Solution description: Describes the technical solution for the project in paragraph or bullet point form.
Scope of work: Lists all tasks and deliverables required for completing the project. For example, a SOW for an Azure SSO project would list implementation tasks such as “create custom roles” and “register Azure active directory in-app.” Some SOWs also clarify what is out of scope.
Client responsibilities: States what responsibilities, if any, a client must complete during the project. For example, a client may need to gather past documentation on an existing hardware system to share with the IT team.
Key assumptions: Outlines any assumptions to date. Sometimes, an IT professional may have only some pieces of the puzzle when creating an SOW, but documenting the assumptions can help prevent future misunderstandings.
Deliverables: Describes the project's work results. Here, the service provider, such as the MSP, promises specific tasks to the client, ensuring clarity and preventing ambiguity about the work.
Payment details: Lists all relevant details around the price per deliverable.

What is a contract?

A contract forms a formal agreement between two (or more) parties that outlines the rules of engagement. It includes terms and conditions that specify how each party will cooperate during the project. The contract establishes an overarching legal framework for all of the work.

With a contract, all parties understand their rights and responsibilities, focusing on the relationship's nature at a macro level. The binding language of the contract commits the parties to the agreed standards, enabling them to take action if one side fails to honor the agreement.

Parts of a contract

Contracts should be clear and understandable, avoiding dense 'legalese.' The goal is to agree on the nature of the business, any commitments made, and obligations incurred. Each section of a contract addresses these elements:

Parties involved: Lists the organizations or individuals engaged in the project and bound by the contract terms.
Terms and conditions: Set out the general rules and guidelines of the engagement.
Rights and responsibilities: Outlines the expectations for each party, clarifying what they should and should not do. This section helps prevent misunderstandings and provides a legal basis for evaluating compliance with the terms.
Confidentiality clause: Preserves anonymity and protects proprietary information. While not included in every contract, signatories sometimes request anonymity through a confidentiality clause in legal proceedings.
Termination clause: Specifies how parties may end the relationship, including the conditions under which termination is allowed.

What is a proposal?

A potential client receives a proposal that outlines a problem, offers a solution, and persuades the client to select the proposer's services over a competitor’s. The proposal provides pricing, a timeline, and a strategic overview of a future project. It primarily aims to secure new business.

Typically, a new potential client (often referred to as a "lead" in sales) approaches a company, such as an MSP, with a query. The IT professional then creates a proposal document that addresses this need and outlines the associated costs. If the proposal impresses the client and they wish to proceed, the next usual step is a formal engagement leading to the production of a SOW.

Parts of a proposal

Executive summary or summary: Summarizes the contents and provides an overview of the suggested project solutions and expected outcomes. Occasionally, this section includes a brief introduction to the company.
Needs statement: Documents the client's needs to show an understanding of the assistance they require or the services they request. For example, a need such as "implement a data center firewall" would appear here. This statement is also known as “problem identification.”
Proposed solution: Presents a general overview of how the IT company plans to provide the requested service and outlines the IT professional's approach, methodology, and expected deliverables at a high level. This overview is not as detailed as the SOW because discovery sessions have yet to occur.
Pricing: Details the cost breakdown, payment milestones or timelines, and critical pricing information.
Terms and conditions: Defines the terms of acceptance, such as what the client can expect upon agreeing to the proposal and whether the proposal is negotiable. It’s typically brief since a contract will later detail specific terms and conditions more extensively.

When to use a SOW, contract, and proposal

Every industry uses a blend of these documents, each applying to a particular scenario. The service-providing business typically crafts and dispatches these documents to the client.

Proposal: Drafted during a sales or bidding phase, after the client has described the service they’d like, but before exchanging any money. Proposals typically occur before an SOW or contract is created. However, a proposal document can be employed when the business is pitching work to a client.
Contract: Created and signed when the client and business agree to enter an engagement with one another. A contract can be used whenever parties agree to legal circumstances. Within managed IT services, this can occur at various points during a project. Sometimes, clients sign it before a discovery session and SOW to outline important terms, conditions, and confidentiality statements. Sometimes, a contract is the last document signed after all parties agree to the SOW. When contracts are issued is up to the discretion of the IT service provider.
SOW: Used in situations requiring project management to define the project scope, deliverables, and timeline. Often, this situation arises at a project kickoff.

When using all three documents, a proposal typically comes first, followed by a contract and then the SOW. Although the documents share similar components, you should use them for different reasons.

Learn more: Quote vs. Proposal: Which One Should You Use?

Which is right for your business?

The correct choice between contracts, proposals, and SOWs depends on your business’s needs and the specific scenario. Use the following quick review to help guide your decision-making.

Is the project…

Pre-engagement? Use a proposal.
Post-agreement? Draft a contract, then nail down the specific work with a SOW.
Requiring a well-defined scope? Write an SOW to document the details of necessary tasks.
An ongoing service or retainer-based relationship? Add a contract to handle terms and scope adjustments, as the scope will likely change over time.
Still theoretical? Create a proposal showing how your business can solve a client’s needs.

Create templates for each document as a guideline instead of creating each document from scratch. Regularly update these documents after each draft to incorporate any new or needed changes to the template. Finally, double-check legal standards to ensure your documents employ best practices (especially with contracts).

Understanding how and when to use SOW versus contracts versus proposals helps your business run smoothly, and your projects stay on track.

Use a CPQ to alleviate the trouble of creating new SOWs

CPQ (configure, price, quote) software hastens the formation of a scope of work. Instead of asking an IT professional to pour through product catalogs and pricing worksheets and spend days attempting to account for every needed requirement, a CPQ can programmatically generate custom quotes and SOWs. The software accounts for all required parts of an SOW, adding and dropping sections according to each project’s unique needs. As a CPQ requires minimal input to generate thorough, accurate SOWs, using one of these software is a foolproof way to guarantee accuracy in quoting and SOW formatting.

If you are curious how CPQ software can help you create quality SOWs for managed IT projects, try Scopestack’s CPQ. It can generate detailed and accurate SOWs in under 15 minutes. Get in touch to learn more, or jump in and start your free trial today.