The case for outcome based work

Last month, Forbes Project Solutions, A Korn Ferry Company ’ parent organisation, Trilogy International, A Korn Ferry Company , conducted a series of surveys of its vast network of IT and transformation contractors to understand attitudes towards deliverables-based statement of work (SoW) contracts vs traditional time and materials based contracts.

Background

Since legislation changes to off-payroll rules (IR35) were introduced to the UK Private Sector, there has been a gradual but steady increase in popularity of work being awarded to IT and transformation independent contractors via SoW contracts.

In some cases, up to all of the contractor’s pay is dependent on them meeting deliverables that are outlined as the delivery scope within the SoW contract.

In 2020, an estimated $14bn was spent via Statements of Work in the UK.

Whilst more recent figures are not yet published, this number has expected to grow considerably over the previous 3 years – largely due to the increase in contractors operating via this engagement model. ?

Whilst this type of engagement does offer benefits throughout the supply chain, it also contains a level of risk to the contractor and / or intermediary (such as agency or consultancy).

Time & materials vs deliverables-based contracts

Traditionally, IT and transformation contractors in the UK have been predominantly engaged at their clients on Time and Materials (T&M) based contracts. This means that they will invoice their clients directly based on how many hours / days they have accrued in the calendar month and any expenses incurred.

A deliverables-based contract is a model where a % of payment to the contractor can only be made once a deliverable or series of deliverables have been met, meeting a pre-defined success criterion.

These deliverables are usually documented in a Statement of Work and the scope is managed and governed between all parties, often with the support of a service delivery / engagement manager working for an intermediary between the contractor and end client such as an agency or consultancy.?

What are the benefits of a deliverables-based contract to the contractor?

When executed effectively, a well-defined SoW offers considerable benefits to both the contractor and the client.

IR35 compliance

A clear benefit of operating via deliverable-based engagements is a clear indicator that a “business-to-business” relationship exists as a true outsource of services to the contractors’ limited company. Therefore, it is very likely that off-payroll rules will not apply (i.e. the engagement will be deemed “outside IR35” which is tax beneficial).

Greater flexibility

By definition, clients typically care less about when and where the work is done, as long as the deliverables are completed within the required timeframes and to the required standards. This means increased flexibility to contractors who are not confined to the clients regular working hours and / or location.

Greater level of supplier support & oversight

Consultancies often provide project management and oversight services, ensuring the smooth execution and monitoring of the SoW. They can handle administrative tasks, performance tracking, and issue resolution, supporting the contractor through the full engagement lifecycle.

But what are the risks?

Whilst there are benefits to working in this way, there is a level of risk associated, particularly if scope / deliverables are not well defined from the outset and / or there is limited engagement support from an intermediary.

Delivery risk

Contractors take on risk of not being paid in full if they fail to meet deliverables outlined in the contract.

Added governance overhead

Any changes to the scope should be agreed in writing and this can create extra governance. Failure to govern changes to the scope could result in disputes in agreeing the successful completion and payment of deliverables.

Dependency management

Often the ability for the contractor to successfully deliver SoW deliverables is dependent on factors outside of their control. Unless these dependencies are tracked and agreed with the client and managed accordingly, this can cause confusion and conflict when it comes to getting deliverables approved.

Time

If work / deliverables allocated to the contractor cannot be completed within the required timeframe, contractors may need to work additional days / hours to ensure that the deliverables are completed within the timeframe set out in the SoW.

Survey Results

Have you ever taken on a project whereby payment is dependent on the completion of pre-defined project deliverables?

The first survey in the series gives a good indication of how popular deliverables-based engagements are for contractors to date.

Interestingly, over a third of the participants of this survey stated that they would not consider deliverables based working.

Whilst this is telling – the survey did not differentiate between risk levels of the deliverables, and it is possible that some of the participants answered this assuming all fees were at risk depending on delivery of SoW deliverables….

This led to our next survey which digs a little deeper...

How much financial risk would you be prepared to take on completing deliverables if it meant being deemed outside IR35?

Interestingly, of the participants in this poll, only 23% stated that they would not be willing to take any risk on completing deliverables – likely because they were now presented with some other options.

Furthermore, the added incentive of clearly stating that an outside IR35 determination relied on working in this way is likely to have been a contributing factor to the reduction – this was not stated in the original survey.

Of those prepared to work on a deliverables-based contract, nearly half (47%) stated that they would be willing to put all of their fees at risk in exchange for the completion of deliverables provided that the scope of work was well defined.

The remaining 30% of the poll participants said that would prepared to take up to either 20% or 50% of the delivery risk if it meant working outside of IR35.

If you were to consider outcome / deliverables based project work, which of the following factors is the most important before agreeing?

The final survey of the series built on the idea introduced in the previous survey by exploring if any other factors other than scope definition were important to contractors if they were to consider deliverables-based engagements.

Perhaps unsurprisingly, 77% of participants stated that having well defined deliverables prior to starting the work was the most important factor.

12% stated knowledge of the client and 6% stated support from the agency / consultancy (5% other).

Learnings

The survey results provide some useful insights into the attitudes of the IT and transformation contractor community which could be useful for organisations who are considering deliverables-based SoWs as a possible route to engage contractors compliantly outside of IR35.

Tellingly, the first consideration end-clients should decide upon is whether this approach is likely to widen their reach of available skilled resource or in fact decrease it.

Of the 500+ contractors that took part in the poll, 23% of participants would not be prepared to take any risk on completing deliverables and would only ever consider traditional T&M contracts. On the face of it, this seems to limit the resource pool available.

But, clients should consider which is greater, this number or the number of contractors they are potentially losing out on if they operate inside IR35 via a traditional T&M contract.

The second striking takeaway is that if clients want to effectively operate in this way, having well defined project scope / deliverables prior to onboarding a contract resource is absolutely critical.

Without this, contractors are far less likely to engage in this way of working – and clients (and consultancies) should consider this prior to engaging in this way.

Therefore, clients should ensure that SoWs are created with defined project scope – and avoid creating vague or non-specific SoW deliverables as this will decrease engagement prior to and during the engagement.

To discuss more…

If you would like to discuss the findings of these surveys get in touch with Tom Dobson , Client Services Director of Forbes Project Solutions, A Korn Ferry Company .