Terms of Reference (TOR): Definition, Components, and How to Create It

In many organizations, project failures are often not caused by a lack of resources or technical competence. Instead, the root of the problem frequently lies in ambiguity from the initial stages.

For example, poorly defined objectives, overlapping roles, constantly changing scopes, projects expanding beyond the original plan (scope creep), and misaligned stakeholder expectations.

These problems often stem from one fundamental issue: the absence of a clear, written mutual agreement regarding what needs to be done, by whom, within what constraints, and for what purpose.

It is in this context that the Terms of Reference (TOR) becomes an important instrument.

TOR is not merely an administrative document, but a governance tool designed to create clarity, reduce risk, and ensure structured decision-making.

Thus, an organization can control a project from the very beginning of the execution of a project, collaboration, or program.

What Is Terms of Reference?

Terms of Reference (TOR) is a formal document that systematically defines the objectives, scope, roles, responsibilities, limitations, and working mechanisms related to a specific task, project, or assignment.

From a business perspective, TOR serves as an official working reference that serves as a shared reference for all involved parties.

Essentially, TOR has three primary functions:

• Work Reference (Frame of Reference): TOR serves as a single source of truth agreed upon by all parties regarding what must be done, the limits of the work, and the expected outcomes. Without TOR, execution often relies on personal interpretation.
• Common Understanding Agreement: TOR ensures that all involved parties share the same understanding of expectations and constraints even before the work begins.
• Project Control Mechanism: TOR provides an objective basis for evaluating progress, managing scope changes, and resolving disputes.

TOR is used in various organizational contexts, such as establishing special committees (e.g., a Digital Transformation Committee), launching major business projects, procurement processes, or engaging external vendors or consultants.

In other words, any activity involving more than one party and having a specific objective should ideally have a clear TOR.

Objectives and Benefits of Terms of Reference

Preparing a comprehensive TOR has strategic benefits that directly impact the health and success of an initiative. Some of these include:

1. Aligning stakeholder expectations

Each stakeholder has different interests and perspectives. Without TOR, expectations are often never explicitly aligned.

TOR forces organizations to discuss and document objectives, priorities, and constraints from the outset. As a result, the potential for conflict due to differing expectations can be significantly reduced.

2. Reducing miscommunication and conflict risks

TOR serves as an objective reference when disagreements arise. Instead of arguing based on memory or assumptions, parties can refer back to the agreed TOR document.

By clearly defining roles, responsibilities, and authority, TOR minimizes task overlap, accountability gaps, and future disputes.

3. Strengthening accountability and role clarity

With documented roles and responsibilities, there is no ambiguity about “who is responsible for what.”

TOR also establishes reporting lines and decision-making authority, which speeds up the escalation and resolution when issues occur.

4. Supporting cost, time, and quality control

A clear TOR is a prerequisite for effective planning. By defining deliverables and milestones, management can allocate resources effectively and measure performance objectively.

5. Establishing a legal basis and audit trail

In procurement or vendor collaboration, TOR often becomes an important annex to the contract. This document protects the organization by clearly defining in detail what is being purchased and how the results will be accepted.

Contents of Terms of Reference

The content of TOR is not rigid and can be adapted to the business context. However, an effective TOR generally includes several main components as follows:

1. Background and objectives

This section explains the business context and strategic reasons for the project or activity, along with the objectives to be achieved. The business objectives to be achieved must be clear and relevant to organizational needs.

Clear background helps all parties understand the strategic context, not just the technical tasks. Apply the SMART (Specific, Measurable, Achievable, Relevant, Time-bound) principle when defining the objectives.

2. Scope of work

It must clearly and explicitly define what is included and excluded from the work. Scope clarity is essential to prevent scope creep, which can impact cost and timeline.

3. Roles and responsibilities

TOR should specify who does what, who is authorized to make decisions, and who is accountable for specific outcomes.

The explanation of each party’s role is not limited to just main responsibilities, reporting relationships, and authority limits.

4. Deliverables and acceptance criteria

TOR should list all expected outputs that will be submitted, whether documents, reports, products, or services.

Deliverables must be concrete and measurable to support objective performance evaluation and acceptance. The more complex the project, the more important measurable definitions of deliverables become.

5. Timeline and milestones

Timeline and milestones are important for providing a realistic time frame. Milestones help management monitor progress and intervene early if delays occur.

6. Resources and budget

If required, TOR can provide an overview of allocated resources (people, technology) and budget estimates, including the expenditure approval process.

7. Reporting and evaluation mechanisms

Another component often overlooked but very important is the reporting and evaluation mechanism. TOR should explain how progress will be reported, to whom, and with what frequency.

A good TOR does not have to be long, but clear enough to reduce ambiguity.

How to Create Terms of Reference

Developing an effective TOR requires a structured, risk-based approach:

1. Define business objectives explicitly

TOR objectives must be derived from business needs, not just technical activities. Start by asking: “What business problem or value are we trying to achieve?”

Ensure the main objectives are aligned with organizational strategy.

2. Identify key stakeholders

The next step is to identify main stakeholders. Understand who is involved and impacted (both externally and internally).

Understanding stakeholder interests and expectations early helps create a TOR that is realistic and broadly accepted.

3. Establish a realistic and measurable scope

Next, the organization needs to establish a realistic and measurable scope. Scope must be aligned with available resources, budget, and time.

Use workshops to collaboratively define scope and exclusions. Challenge assumptions and avoid ambiguous language or terms that are too flexible without further explanation.

4. Define success indicators

Discuss and document how success will be measured. These indicators become the basis for performance evaluation, and it prevent subjective interpretations of success.

Start by asking questions such as: “Is success measured by budget adherence, user satisfaction, or revenue impact?”

5. Conduct formal review and approval

Consolidate all agreements into a TOR draft and obtain formal review and approval from sponsors and key stakeholders before execution begins. This strengthens TOR’s position as a governance document.

Simple TOR Example

As an illustration, here is a simple overview of a TOR example for GRC system implementation:

A TOR example like this helps all involved parties have the same understanding and reduces the potential for conflict during the collaboration.

Conclusion

In effective corporate governance practices, Terms of Reference is a critical instrument for creating clarity, control, and accountability of a project.

TOR acts as a risk management tool that helps organizations prevent conflict, miscommunication, and project deviation.

With a well-structured TOR, organizations have a stronger foundation for executing projects, procurement, or strategic collaborations.

For management, prioritizing a solid TOR before executing any initiative is a small investment with significant returns. You can reduce conflict, increase control, and improve the likelihood of success.

Don’t start the journey without a map. Create a strong TOR, and you have taken the most critical first step towards success.

FAQ: Terms of Reference (TOR)

1. What is Terms of Reference (TOR)?

Terms of Reference (TOR) is a document that defines objectives, scope, roles, and responsibilities of a project or activity to ensure shared understanding from the outset.

2. Why is TOR important in business projects?

TOR helps prevent miscommunication, role conflicts, and scope creep, enabling projects to run in a structured, controlled, and accountable manner.

3. When should TOR be created?

TOR should be prepared before a project or collaboration begins, especially for cross-functional projects, procurement, vendor engagements, or high-risk strategic initiatives.

4. What is the difference between TOR and a contract?

TOR focuses on objectives, scope, and working mechanisms, while contracts address legal and commercial terms. In practice, TOR often serves as the basis for contract development.

5. Who is responsible for preparing TOR?

TOR is typically prepared by the project owner or management, with involvement from key stakeholders to ensure it reflects business needs and mutual agreement.

6. What are the risks of running a project without TOR?

Without TOR, projects risk scope creep, role conflicts, delays, cost overruns, and outcomes that do not meet management expectations.

7. Does TOR always need to be detailed and lengthy?

No. TOR should be proportional to project complexity—concise for simple projects and more detailed for strategic initiatives.

8. Can TOR be changed after a project starts?

Yes, as long as changes follow an agreed change-management mechanism and are clearly documented to avoid new conflicts.

9. What are the indicators of a good TOR?

A good TOR has clear objectives, defined scope, explicit roles and responsibilities, and serves as a reliable reference when disagreements arise.