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Issue Resolution and Escalation Procedures
The potential for disputes is present in every professional services engagement. The SOW should detail how problems will be escalated to ensure prompt resolution.
■ Define the escalation process to be followed in the event of a dispute and parties who need to be involved.
■ Include specific timeframes for escalation and resolution.
■ Where appropriate, include mechanisms to ensure the contractor will cooperate with joint dispute resolution in multi-vendor environments.
■ Tie this process to any dispute resolution process included in the agreement.
The SOW should include, where appropriate, a listing of relevant risks and requirements for the mitigation of those risks.
■ Describe relevant risks (e.g., sensitive data at risk, critical delivery dates, dependencies).
■ Define the level of risk (high, medium, or low).
■ Define the category of the risk (resources, testing, etc.).
■ Define the mitigation plan for each risk (what will be done, what the backup plan is, etc.).
■ Are there any unique security risks posed by the contemplated SOW? If so, have the relevant stakeholders within the customer’s organization been contacted and is these an agreed-upon plan to mitigate these security risks?
■ Is additional due diligence required? If so, what is the scope and which party is doing it?
Pricing and Cost
The SOW should detail exactly what fees and costs are to be paid and when. Language should be included to ensure no hidden costs are present and that budgets cannot be exceeded without prior written authorization.
■ Total project cost should be based on negotiated rates. The negotiated rates should be fixed for the duration of each project.
■ Time and materials projects are generally disfavored. Fixed-fee arrangements are preferred. If time and materials must be used, ensure the “estimate” provided is not a guess. Include a “not-to-exceed” amount. Estimates should clearly state they are based on the contractor’s best, good faith belief of the fees required to complete the services, which is based on the contractor’s experience in rendering services of this kind. Consider mechanisms for sharing of risk if the original estimate falls far short of the actual fees (e.g., if final fees are more than 10% greater than the original estimate, and the excess is not attributable to the customer’s actions or inactions, the excess fees should be split 50/50 between the parties; in this way, the contractor shares the risk of providing a “guess,” rather than an educated estimate).
■ Define and, if necessary, negotiate reimbursable expenses (capped whenever possible). All expenses should be subject to the payment terms in the underlying agreement.
■ Define the invoicing schedule and payment terms. The agreement should include general terms and conditions associated with invoicing requirements and payment terms. Typically, contractors should bill on a monthly basis for time and material engagements. For fixed-fee projects, milestones and deliverables should be used to establish billing timeframes, which should be included in the SOW. Consider holdbacks (e.g., 10%—20% of each invoice) until final acceptance at the conclusion of the project or major milestone or phase.
■ Associate all payments with objective project milestones or deliverables. Except in certain time and materials engagements, avoid linking payments solely to the passage of time.
■ Include a cap/limit on fee increases for future professional services (e.g., initial negotiated rates are fixed for two years and then may increase no more than by the CPI, Employment Cost Index (ECI), or a fixed percentage).
■ Include a cap or limit on fee increases for ongoing support, if applicable. In addition, include specific renewal rights for support.
■ Review, identify, and limit all possible revenue streams under the SOW. That is, identify all possible circumstances under which the contractor could charge additional fees and ensure those circumstances are controlled and that additional fees must be preapproved in writing.
Service Level Agreements
Service level agreements (“SLAs”) describe the specific performance levels to be achieved by the contractor. SLAs are not relevant in every engagement. For example, SLAs would typically not be required for services relating to the development of product documentation, but would be critical in ensuring hosting services are available when needed.
■ Include expectations, metrics, and measurement period.
■ SLAs and the associated remedies must be very clearly defined and capable of objective verification.
■ Define the contractor’s obligations for reporting of SLA performance.
■ Include additional remedies for repeated failures (e.g., root-cause analysis, additional termination rights, heightened credits).
During the course of performance of the services, it may become important to the customer to make changes to the services being rendered. Those changes are made through a formal process known as a “change order.” Having a clear and documented change order process will reduce the likelihood of cost overruns and project schedule slippage. They also ensure that every modification to the services is fully documented.
■ How will changes to business requirements and work be handled?
■ When do they affect deliverables and costs of the project? The agreement will generally include general terms and requirements for change orders.
■ Beware of contractors that use multiple change orders to “make-up” for underbidding a project.
■ Beware of change orders that modify the original scope of the project in such a way that the initial assessment of the risks or business case may no longer be valid. In these instances, the original stakeholders that reviewed the SOW should also review the proposed change order. In some instances, additional due diligence may be required.
While having an excellent overarching agreement in a professional services engagement is clearly important, those legal terms are meaningless without a properly drafted SOW. Businesses must develop procedures to ensure these key documents are given the attention they deserve and not treated as an afterthought to the negotiation. By developing a checklist for SOWs based on the content of this chapter, revised to reflect the business’s own unique requirements, and requiring personnel responsible for drafting SOWs to use that checklist in every engagement, businesses can greatly decrease the risks presented in professional services engagements and have far greater confidence that they will receive the services and deliverables they expect.