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.

Master Services Agreement (MSA)

What is an MSA?

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

Why do you need an MSA?

An MSA is essential for creating a solid foundation for your business relationships. Here’s why:

#1 Establishes a clear framework

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.

#2 Prevents misunderstandings

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

#3 Manages multiple projects

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.

When to use an MSA?

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:

• Long-term relationships: Use an MSA when you expect to have multiple projects or transactions with the same party over an extended period. This helps streamline your operations and ensures consistency in terms and expectations
• Regular interactions with vendors, suppliers, or service providers: An MSA is beneficial when you frequently work with the same vendors, suppliers, or service providers. It sets the overarching terms, allowing you to focus on the specifics of each individual project or order without renegotiating the main agreement each time

Also read: What are Vendor Agreements? (+ Free Template)

Which terms to include in an MSA?

An MSA includes several important terms that help clarify and govern your business relationship. Here are the key terms you’ll typically find:

• General terms: These cover confidentiality, indemnification, liability limitations, and dispute resolution. You ensure sensitive information stays protected with confidentiality clauses. Indemnification spells out who handles damages or losses. Liability limitations cap the amount you can be held responsible for, and dispute resolution outlines how you will handle any disagreements
• Governing law and jurisdiction: You specify which legal framework and location will be used to interpret the agreement and resolve disputes. This provides clarity on which laws apply
• Payment terms and conditions: You define how and when payments will be made. This includes invoicing, payment schedules, and penalties for late payments
• Intellectual property rights: This section clarifies who owns any intellectual property created during your relationship. You ensure that both parties know their rights and how the IP can be used
• Termination clauses: You outline the conditions under which the agreement can be ended. This includes how much notice you need to give and any penalties for early termination

Also read: Managing Contract Terminations: The Ultimate Guide

Download a free Master Service Agreement (MSA) template

SpotDraft’s legal team put together a free master service agreement template that you can download and quickly put to use for your contracts.

How to use this MSA draft

1. Download the MSA template.
2. Fill in relevant fields and adjust the necessary details according to your industry and proposed terms.
3. Send it across to stakeholders and let the negotiations begin!

Download the template

Statement of Work (SOW)

What is an SOW?

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.

Why do you need an SOW?

An SOW is crucial for ensuring the successful execution of a specific project. Here’s why it’s important:

#1 Clearly defines the scope

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.

#2 Sets clear expectations

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.

#3 Prevents scope creep

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.

When to use an SOW?

An SOW is especially useful in certain situations to ensure detailed project management and accountability. Here’s when you should use one:

• For individual projects or tasks: Use an SOW for specific projects or tasks that fall under the broader terms of an MSA. This helps keep each project organized and clearly defined
• To specify project details: When you need to outline the specific details of a project without renegotiating the overall relationship terms, an SOW is the perfect tool. It allows you to detail the scope, deliverables, timelines, and costs for a particular project while adhering to the general terms set by the MSA
• For detailed project management and accountability: An SOW is ideal for managing projects with precision. It provides a clear roadmap for what needs to be done, by whom, and by when, ensuring everyone involved is accountable for their part of the project

Terms in an SOW

An SOW includes several key terms that ensure the project is well-defined and managed effectively. Here are the essential terms:

• Project scope and objectives: Clearly outlines the project’s purpose and what it aims to achieve. This sets the foundation for all subsequent project activities
• Detailed deliverables and milestones: Specifies what will be delivered and when. This includes interim milestones that mark significant points in the project’s progress
• Project timeline and deadlines: Defines the overall project timeline and sets specific deadlines for each deliverable and milestone. This ensures the project stays on track and meets its goals in a timely manner
• Roles and responsibilities of each party: Details who is responsible for what. This ensures that everyone involved knows their tasks and obligations, promoting accountability
• Payment schedule and costs: Outlines how and when payments will be made. This includes the total project cost, payment terms, and any milestones tied to payments
• Acceptance criteria and quality standards: Specifies the standards that deliverables must meet to be accepted. This ensures that the project outputs are of the required quality and meet the agreed-upon criteria

Download a free Statement of Work (SOW) template

SpotDraft’s legal team put together a free SOW template that you can download and quickly put to use.

How to use this SOW draft

1. Download the SOW template.
2. Fill in relevant fields and adjust the necessary details according to your industry and proposed terms.
3. Send it across to stakeholders.

Differences between SOW and MSA

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.

Key differences

Scope

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.

Terms

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.

Flexibility

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.

Use case

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.

Frequency

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

Make the right choice between MSA and SOW

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:

• Automated contract review: Tired of manually sifting through lengthy contracts? VerifAI does the heavy lifting for you. It reviews contracts automatically, spotting potential issues quickly so you don’t miss critical details
• Customizable playbooks: Ensure every contract meets your business needs and compliance standards with customizable playbooks. Tailor VerifAI to fit your specific requirements effortlessly
• Risk identification: Stay ahead of potential problems. VerifAI highlights risk areas in your contracts, helping you address them before they become bigger issues
• Efficient collaboration: Work with your team in real-time to review and edit contracts. VerifAI makes it easy to ensure everyone is aligned and up-to-date

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.

Try AI contract review now