SOW Misclassification: Is it Costing You?

Tight labor conditions and a strong focus on cost control have resulted in the increased occurrence of statement of work (SOW) misclassification, meaning engaging contingent workers via an SOW instead of through a centralized managed service program.

What Is Driving the Increase in SOW Misclassification?

There is little doubt that the engagement of labor-based services via SOW is a critical component of most organizations’ workforce management strategies. Even if it is not part of a comprehensive talent strategy, SOW workers are engaged at a significant volume because it is simply an effective way to get work done. With clear benefits, this workforce segment has seen a significant increase in recent years. In a 2024 Beeline survey of 150 senior HR and procurement executives, 64% of organizations are considering adding independent contractors and SOWs to their workforce in the coming few years. In addition, Everest Group reported compound growth of services procurement spend of over 20% between 2023 and 2028.

With an unemployment rate of just 4%, 6.8 million unemployed people and 7.6 million job openings at the end of 2024, sourcing talent is still at a critical level. In addition, we are on the brink of the next great resignation, with quitting rates and retirements at a historically high level. These metrics indicate that sourcing talent has hit a critical level, and most markets are facing strong competition and wage inflation.

When organizations tighten controls around traditional staff augmentation programs, hiring managers’ need for talent does not disappear and the market price for labor does not decline. Oftentimes, that avenue is the engagement of labor through service providers via an SOW, which often do not have the same controls in place as a staff augmentation managed service provider (MSP) program. Which, according to the Beeline study, can be expensive – with SOWs frequently listing rates 70% higher than the same roles via a managed contingent staffing program.

To contain costs and compliance, workforce leaders should partner with an MSP that keeps business leaders’ needs top of mind and make user adoption a top priority. This was a key component in this IT company’s success with AGS as their MSP.

How to Identify SOW Misclassifications

An SOW is an effective engagement mechanism when work is deliverable- or milestone-based and, most importantly, when the supplier is bearing the risk of the results. However, SOWs are increasingly being used to simply engage workers as a workaround to staff augmentation controls. In many cases when an SOW only contains named workers or job titles at hourly rates – albeit at higher rates than may have otherwise been negotiated for the same roles, see earlier Beeline study – it is often the telltale sign of a staff augmentation engagement masquerading as a SOW. To complicate matters, many staff augmentation suppliers are now offering SOW-based services, creating even more gray area in how workers are classified.

There are a few things to look for in the way an engagement is structured that can lead to a quick identification of misclassified staff augmentation work and the potential for significant savings. When you are evaluating an SOW for potential misclassification, ask yourself the following questions:

1. Does the SOW only have named resources and associated hourly rates? If there is minimal definition to the project scope, or if there are simply role titles and descriptions, it is likely to be staff augmentation masquerading as an SOW.
2. Who owns the solution creation process? If the onus is on the client engagement / project manager to do the bulk of the work, it probably doesn’t belong on an SOW.
3. Is there financial risk to the supplier for non-performance? This could be payment upon approval of deliverables or payment when work is complete. If it’s simply a recurring fee regardless of what’s being delivered or outcomes, you should question the appropriateness of an SOW.
4. Who is directing the workers? Is there a supplier-provided project manager or does the internal engagement manager have responsibility for dividing and overseeing work among the service provider’s team? If the supplier doesn’t own the direction and output of their workers, it’s probably not a legitimate SOW engagement.
5. Who owns the schedule? Will the supplier provide a work plan and be held to it, or does the engagement manager have that responsibility? Again, if the onus is on the internal team, it’s better suited for a staff augmentation engagement.

Download a free copy of this checklist here

Case Study: Cost Savings Realized

For our global fintech client, identifying and fixing misclassifications yielded significant cost savings. Using Brightfield TDX tools, the AGS team evaluated the misclassifications and reduced them from an industry standard of 75-80% to under 10% within two years. After the initial reduction to 10%, continued measures further reduced misclassifications to 5% just a year later. In the first year, our interventions yielded approximately $20 million in cost savings. We continue to conduct evaluations of the client’s SOWs in order to maintain a low percentage and the cost savings they needed. The total spend managed over the course of the partnership, so far, exceeds $2.1 billion. You can find the full success story here.

Mitigating SOW Misclassifications for Future Cost-Savings

Engaging workers via a labor-based SOW is a necessary and important talent option for the workforce of many organizations and is expected to continue to increase in upcoming years. Competitive sourcing conditions and ongoing cost-savings goals in contingent workforce programs will cause organizations to continue to struggle with misclassification of staff augmentation workers on SOWs. By deploying recruitment tools such as Brightfield and Globality – with AI-powered data collection and greater visibility of the entire workforce – businesses can better manage their teams and make data-led decisions that could mitigate costly misclassifications.

Businesses must strive to create realistic expectations for cost management and savings in their contingent workforce program, to avoid driving additional costs to their organization by misclassifying SOW workers and not have a fully visible workforce.