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Accept Cookies Manage Preferences Announcing the Formation of SpotDraft’s Advisory Board Find out more Contracts 101Discover the differences between MSAs and SOWs. Learn when to use each to reduce legal risks and boost business clarity.
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Contracts are the backbone of any business relationship because ineffective contract management can cost companies up to 9% of their annual revenue. That’s a huge financial hit, which is why having the right agreements in place is crucial. But how do you decide whether you need a Master Services Agreement (MSA) or a Statement of Work (SOW) for a new project?
Think of an MSA as the foundation of a house. It sets the general terms and conditions for your relationship with a client or vendor, providing a broad framework that covers multiple projects or transactions. On the other hand, an SOW is like the detailed blueprint for a specific project within that house. It outlines the tasks, deliverables, and timelines for individual projects.
Knowing when to use an MSA versus an SOW can prevent legal pitfalls, reduce misunderstandings, and enhance clarity. This blog post will clarify the differences between these two types of contracts, helping you choose the right one for every situation. With this knowledge, you’ll streamline your contract processes, mitigate risks, and contribute to your company’s success.
A Master Services Agreement (MSA) is a contract that outlines the general terms and conditions between two parties for future transactions or projects. This foundational agreement serves as a blueprint for the overall relationship, ensuring that both parties are on the same page regarding the key terms and expectations.
An MSA sets the stage for future interactions by laying out the legal framework within which all subsequent agreements or projects will operate. It typically includes provisions on confidentiality, indemnification, liability limitations, dispute resolution, and other critical legal elements that apply broadly to all engagements between the parties.
Also read: Checklist to a Good Master Service Agreement
An MSA is essential for creating a solid foundation for your business relationships. Here’s why:
An MSA sets the foundational terms for your business relationship. It defines the general rules and expectations for both parties. This clarity helps ensure that everyone understands their roles and responsibilities from the start.
When expectations are defined upfront in an MSA, it significantly reduces the chances of misunderstandings and disputes. Both parties know what is expected of them and the consequences of not meeting those expectations
Also read: Finding Common Ground: How to Resolve Contract Disputes
An MSA provides the flexibility to manage several projects under a single agreement. This means that once the general terms are agreed upon, you can quickly start new projects without having to negotiate the foundational terms each time. You end up saving time and resources, scaling operations and maintaining consistency across projects.
An MSA is particularly useful in scenarios where you need a solid foundation for ongoing business relationships. Here are some key situations when you should consider using an MSA:
Also read: What are Vendor Agreements? (+ Free Template)
An MSA includes several important terms that help clarify and govern your business relationship. Here are the key terms you’ll typically find:
Also read: Managing Contract Terminations: The Ultimate Guide
SpotDraft’s legal team put together a free master service agreement template that you can download and quickly put to use for your contracts.
A Statement of Work (SOW) is a detailed document that outlines the specific tasks, deliverables, and timelines for a particular project or job. It provides a clear roadmap for what needs to be done, by whom, and by when.
An SOW is usually created under the framework of an MSA. While the MSA sets the general terms and conditions for the overall relationship, the SOW focuses on the particulars of a single project. This detailed approach ensures that both parties are on the same page regarding the project’s scope, objectives, and deadlines.
An SOW is crucial for ensuring the successful execution of a specific project. Here’s why it’s important:
An SOW spells out the specific tasks, objectives, and responsibilities for a particular project. By providing detailed descriptions of the work to be done, it ensures everyone understands their roles and what is required to complete the project successfully.
It ensures all parties are on the same page about what is expected, by when, and at what cost. This clarity helps prevent misunderstandings and disagreements, as each party knows their deliverables, deadlines, and budget constraints.
By defining the project scope upfront, an SOW helps avoid scope creep, which is when a project expands beyond its original objectives. An SOW sets clear boundaries for the project, making it easier to manage changes and keep the project on track. This helps maintain focus and ensures that the project stays within its defined limits, saving time and resources.
An SOW is especially useful in certain situations to ensure detailed project management and accountability. Here’s when you should use one:
An SOW includes several key terms that ensure the project is well-defined and managed effectively. Here are the essential terms:
SpotDraft’s legal team put together a free SOW template that you can download and quickly put to use.
When you understand the difference between an MSA and SOW, you can better manage your contracts and ensure that both your long-term relationships and individual projects are effectively governed. Use an MSA to establish a solid foundation and SOWs to provide the necessary detail for each specific project.
MSA
An MSA covers the overall relationship between the parties. It sets out the broad terms and conditions that govern the ongoing business relationship.
If a software development company enters into an MSA with a client. The MSA outlines the general terms such as confidentiality, intellectual property rights, and dispute resolution that apply to all projects they undertake together.
SOW
An SOW, on the other hand, focuses on specific projects or tasks within the broader relationship defined by the MSA. It provides detailed descriptions of the work to be done, including objectives, deliverables, and timelines.
Under the same MSA, the software development company creates an SOW for a specific project to develop a mobile application. The SOW details the project’s scope, including design, development, testing, and deployment phases.
MSA
The MSA sets general terms that apply to all engagements between the parties. These terms are typically broad and cover areas such as payment terms, liability limitations, and termination conditions.
For example, the MSA may include a clause that payment for services will be made within 30 days of invoice receipt. This term applies to all projects covered under the MSA.
SOW
The SOW details specific project terms. It includes precise information about the project scope, objectives, deliverables, timelines, and costs.
The SOW for a mobile application project may specify that the design phase will be completed in four weeks, with a detailed timeline for each subsequent phase.
MSA
An MSA provides the flexibility to manage multiple projects under a single agreement. Once the general terms are agreed upon, you don’t need to renegotiate them for each new project.
With the MSA in place, a software development company can quickly start new projects with the client, simply by drafting a new SOW for each project without renegotiating the core terms.
SOW
An SOW is detailed and specific to individual projects. It lacks the flexibility of an MSA as it focuses on the particulars of a single project.
For example: Each new project, such as creating a new feature for the mobile application or providing ongoing maintenance, requires a separate SOW outlining the specifics.
MSA
MSAs are ideal for long-term partnerships where multiple projects or transactions are expected. They create a stable foundation for ongoing collaboration.
A software development company and its client expect to work together on various projects over several years. The MSA sets the stage for this long-term relationship.
SOW
SOWs are used for specific, time-bound tasks or projects. They provide the necessary detail to ensure the project is completed as expected.
Each time the client needs a new project, such as a website redesign or a custom software tool, the company will create a new SOW under the existing MSA.
MSA
An MSA is typically signed once and remains in place for the duration of the business relationship. It is only updated if the overall terms of the relationship need to change.
The MSA between a software development company and its client might have a term of three years, during which it governs all their projects.
SOW
An SOW is created for each individual project under the umbrella of the MSA. Each new project or task requires a new SOW.
Over the three-year term of the MSA, the software development company and the client might create multiple SOWs for various projects, such as developing different software modules, each with its own specific terms and timelines.
Also read: How to Create an MSA Playbook
Wrapping up, it’s clear that knowing when to use an MSA versus an SOW can significantly streamline your contract processes and prevent legal issues. But there’s an even more efficient way to handle your contracts.
Meet VerifAI, SpotDraft’s cutting-edge AI-powered contract review tool. VerifAI is designed to simplify and speed up the contract review process, making your job much easier. Here’s why you should give it a try:
Why struggle with contract review when you can streamline the entire process with VerifAI? Try it today and see how much time and hassle you can save.
