How to Create Better Contracts: MSAs & SOWs
Using well-drafted contracts can help you reduce risk and improve your odds of success. And when trying to start a new business, you can use all the help you can get.
One way to make things easier on you and the people you contract with is to use the MSA/SOW format. In this post we’ll explain what that means and how to do it.
WHAT IS THE MSA/SOW FORMAT?
The MSA/SOW format is simply a method of using certain documents to create contractual obligations between two or more parties.
Here are the two elements:
- Master Service Agreement (MSA): The MSA outlines the legal terms and other default rules between the parties.
- Statement of Work (SOW): The SOW outlines project-specific deal terms–usually a description of the services and the payment terms. An MSA can have just one SOW, or it can have multiple SOWs attached to it over time.
WHY YOU SHOULD USE THE MSA/SOW FORMAT?
There are a lot of reasons entrepreneurs might want to use the MSA/SOW format:
- The most obvious benefit is it saves you time and money–once you and the other party have signed the MSA, you don’t have to continually negotiate all the legal and default rules again for each project.
- Often, you can negotiate and sign SOWs without having your attorney involved.
- Sometimes you might want to terminate just one project and not your entire relationship with the other party. In this case, you can terminate one SOW while leaving the MSA and other SOWs in place.
WHAT TO SAY IN YOUR MSA?
You can put all kinds of stuff in your MSA. However, the big-ticket items are as follows:
- Properly identify the parties–use their legal names and, for businesses, include a reference to the state in which they are incorporated.
- Make it clear that the MSA is, in fact, an MSA and that SOWs will be attached.
- Outline how long the MSA will last and how the parties can renew it.
- Be sure to cover all the default legal terms such as default payment terms, ownership of intellectual property, confidentiality, etc.
- Since you’ll be signing two sets of documents, be sure to establish which will control (the MSA or the SOW) if the terms in the two documents conflict with one another.
- State how, and under what circumstances, a party can terminate early. And if someone can terminate early, detail what will happen if they do (for example, what payments will be due).
WHAT TO SAY IN YOUR SOW?
While you can include a lot of things in your SOWs, here are the things you should almost always cover:
- Always include a reference to the MSA (its title and date) which governs the SOW.
- Make sure the SOW has a date or other SOW number, so you can refer to it in other documents.
- Include a description of what the service provider is doing under the SOW. And when relevant, what they are not doing (for example, a web developer might state that they are not responsible for hosting).
- If the MSA’s default payment terms will be used, then you can state that in the SOW. Alternatively, you can write in different payment terms for that one SOW.
- And last, always sign the SOW!
NEED HELP STRUCTURING YOUR DEALS?
Starting a business is hard! But there are a lot of resources out there to help you succeed.
If you haven’t already, you should check out the free Kauffman FastTrac program. It’s an online course that will help you organize and manage your new business.