5 Signs You Might Have SOW Misclassification Issues Brewing

SOW misclassification represents a significant and growing risk as organizations rely more heavily on external talent. By understanding the warning signs and implementing proper oversight through comprehensive contract compliance assessments, companies can mitigate these risks while optimizing their workforce strategies.

Misclassification is a Growing Issue

By the end of 2025, nearly half (49.8%) of the average company's total workforce will consist of external talent, according to Ardent Partners. Professional services specifically will represent between 40% and 60% of all non-employee talent. This shift comes with significant challenges. Roughly half of businesses have centralized their services procurement processes, creating potential gaps in oversight and compliance.

Meanwhile, The Hackett Group's 2025 CPO Agenda reveals companies face mounting pressure to "do more with less," with procurement workloads projected to increase by 10% while budgets grow by only 1%, creating a substantial 9% efficiency gap. In response, many organizations are turning to technology, with executives projecting a 5.6% increase in technology spending, including investments in artificial intelligence (AI). In fact, 33% of procurement organizations plan to upgrade existing Gen AI technology, while 42% intend to invest in new Gen AI solutions.

Amid these pressures, some companies have adopted the risky practice of placing contingent workers under blanket Statement of Work (SOW) contracts to reduce procurement workload. However, this approach, lacking proper due diligence and decision support to determine optimal worker types, exposes employers to significant risks related to workforce misallocation and misclassification.

5 Warning Signs of SOW Misclassification Risk

Misclassification issues can be costly, resulting in fines, back taxes, and legal fees. They also risk damaging your organization’s brand, making hiring more difficult and leading to a loss of customers and investors. Here are five key signals that your company might have misclassification problems brewing:

Management responsibility. Are your employees directly managing workers who are classified under SOW contracts? These relationships often should be classified as contingent work.

Risk management. A sound SOW will allocate the majority of the deliverable risk with the provider rather than the client. How is deliverable risk distributed in your SOWs?

Use of blanket contracts for contingent workers. Placing multiple contingent workers under a single blanket SOW contract without clear deliverables, milestones, or project outcomes is a major red flag for misclassification.

Shifting supplier spend patterns. Is your contingent worker (CW) spend decreasing while SOW spend increases? Particularly if the same suppliers now provide SOW-type engagements, this could indicate an attempt to reclassify what should be contingent labor.

Poorly structured contracts. SOW contracts lacking clearly defined project start and end dates, specific deliverables, milestones, at-risk components, SLAs, or KPIs may be disguising what should be time-and-materials arrangements for individual contributors.

Addressing Misclassification Through Proper Contract Analysis

Proper evaluation of your SOW contracts is essential for identifying misclassification risks. When Guidant Global reviews client contracts, we assess and grade each SOW based on how well constructed the contract is in conjunction with specific client requirements. Key questions we ask include:

What type of engagement is this? Is it project-based with defined outcomes or time and materials (T&M)?

Who is managing the SOW outcomes? The supplier or a client manager?

Where is the work being completed? At your organization or at the supplier/offsite?

Is there a project plan with clear milestones? SOW contracts should include detailed project plans with specific milestones rather than ongoing, open-ended work.

Is there a specified project/SOW end date? Every SOW should have a clear end date. Open-ended arrangements suggest a staff augmentation relationship.

Is a defined rate card included? Well-structured SOWs should clearly outline pricing for specialized services rather than simply hourly rates.

Have service level agreements (SLAs)/key performance indicators (KPIs) been formally identified and detailed? Proper SOWs include formal SLAs and KPIs to measure success.

Does the SOW include fees at risk? SOW engagements typically include some element of financial risk for the supplier based on delivery of expected outcomes.

Regularly and systematically evaluating these elements across your contract portfolio will help identify potential misclassification issues before they become costly compliance problems.

What to Look for in a Partner

Many organizations, especially those operating globally, choose to outsource one or more of their source-to-procure-to-pay functions. When seeking an SOW/Services Procurement partner, innovation and cost structure is always top of mind. Additionally, consider the partner’s legal and regulatory expertise across multiple countries; reporting and analytics capabilities; tech stack, including AI; and experience with classification challenges across industries and regulatory environment.

An ideal partner will serve as an extension of your procurement team, understanding that each client has unique needs and cultures. This external expert will tailor their approach accordingly, customizing their solutions to your specific requirements.

If you're concerned about potential misclassification issues in your organization, or want to learn more about mitigating SOW misclassification risks, Guidant Global can help. Managing billions of dollars in incremental SOW spend under management annually, we have extensive experience analyzing worker contracts and creating customized solutions for procurement leaders.

The result? Lower costs, complete compliance, reduced procurement team load, and data-driven decision making for better overall business outcomes. Reach out today to learn more.

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