Finding the Right Balance in the Statement of Work in R&D Contracts

George Benaur, Benaur Law LLC

Human hand with pencil making notes in notepad

In many contracts, such as expensive software implementation agreements or R&D projects, for example, the statement of work is among the most important documents in the contract. Although the engineers, scientists or product developers involved in doing the work may clearly envision what the project is going to entail, the SOW needs to specify exactly what the expectations of the parties are in order to avoid disputes in the future. And such disputes, unfortunately, are not uncommon, precisely because the parties often fail to clearly articulate and document what the development is going to be in their SOW.

The SOW Needs to Have the Right Balance to Clearly Define Expectations

One type of dispute often arises because the SOW is not clear about what the requirements are for the particular project. For example, merely providing in vague terms that Company A is going to develop some unspecified product can lead and has led to major disputes over such matters as whether the product was developed on time, the expense of development, the specifications for the product, and various other important terms. Such disputes can lead to frustrating and expensive litigation, and often, delay or lead to the failure of the project.

Unless the SOW clearly defines material terms regarding the scope of work, the specifications for the new product, the time and resources to be devoted, and other aspects specific to the particular development, the parties risk fighting about these issues later on in their relationship. The SOW needs to state the parties’ mutual expectations, what constitutes project completion and deliverables, price, payment schedule, delivery milestones, who is doing the work, compliance issues, testing requirements, and other elements to make it clear how the relationship is going to operate in the specific instance.

As much as entering into a bare-bones, one-pager SOW can be extremely risky, there are also circumstances where the SOW becomes so complicated that no reasonable person can actually understand this document. There are some extremely long SOWs where the developers seek to specify every last possible contingency and wind up with a hundred pages of technical information, cross-obligations, change requirements and procedures that are extremely complicated, especially in circumstances where they were drafted by the technical experts without any understanding of the legal implications of the language that they include. This extreme is just as dangerous as having a bare-bones SOW, because it leaves much room for conflicting interpretation of the parties’ obligations.

One Option is Structuring Different Phases to Reduce Exposure

In circumstances where there are open and unknown items at the inception of the project, it is a good idea to consider structuring the SOW in phases. For example, phase 1 could involve an initial assessment of the requirements, costs and any other material terms at a fixed cost, and then, once these matters are determined, the parties could reserve the right to either mutually agree to proceed to a later stage or stop if they cannot agree on the material terms for the project. Doing so enables the parties to assess both the project and the capabilities of their prospective development partner before committing to a long-term open-ended development or implementation process.

The key in entering into a SOW is first to understand clearly what the parties expect and then try to find the right balance to state it as clearly as possible. It is definitely advisable to have counsel involved in the review before committing to a final SOW. The engineers and scientists involved in formulating the project need to understand that the SOW is the centerpiece of the contract and has to protect against future litigation risk, same as the main body of the contract. The business units, developers and scientists need to keep in mind that the SOW needs to specify the “what, when, where, how, how much” to clearly define the parties’ relationship in order to try to avoid disputes in the future.

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