Service Credits Clause template clause

    Updated: 26 March 2026

    Please note: these example clauses are intended as a starting point, not as legal advice. Always adapt the text to your specific situation and have important contracts reviewed by a legal professional.

    Clause text

    Article [X] - Service Credits

    1. If, in any measurement period, the Supplier fails to meet the performance standards set out in Schedule [X] ("Service Level Agreement"), the Client shall be entitled to deduct service credits from the next invoice, in accordance with the tiers set out in this Article.

    2. Service credits shall be calculated as follows:
    (a) Availability below [percentage, e.g. 99.5]% but at or above [e.g. 99.0]%: [percentage, e.g. 5]% of the monthly fee;
    (b) Availability below [e.g. 99.0]% but at or above [e.g. 97.0]%: [e.g. 10]% of the monthly fee;
    (c) Availability below [e.g. 97.0]%: [e.g. 20]% of the monthly fee.
    The above tiers apply per calendar month based on the measurement methodology defined in Schedule [X].

    3. The total service credits per calendar month shall not exceed [percentage, e.g. 30]% of the monthly fee. Service credits that cannot be set off in a given month shall carry forward to the following month.

    4. Service credits shall not prejudice the Client's right to claim damages. Service credits shall not be deducted from any damages awarded.

    5. If the Supplier owes service credits in [number, e.g. 3] consecutive calendar months or in [number, e.g. 5] of the last [number, e.g. 12] calendar months, this shall constitute a material breach entitling the Client to terminate the Agreement in accordance with the termination provisions of this Agreement.

    What does this clause mean?

    Service credits are an automated correction mechanism when agreed service levels are not met. Instead of a lengthy damages claim process, you automatically receive a discount on the next invoice. This makes the financial consequences of underperformance immediately visible and tangible for the supplier.

    The distinction from a penalty clause matters: a penalty is a lump-sum amount that is disconnected from the actual loss, whereas service credits are a reduction in fees for services not delivered to standard. Service credits are therefore less susceptible to judicial moderation. Research by CIPS shows that 80% of invoices do not match the contractual terms. Service credits force a periodic measurement moment at which you compare actual performance against the contractual standard.

    Paragraph 5 adds an escalation mechanism: structural underperformance leads not only to credits but also provides grounds for termination. This prevents you from receiving service credits for years from a supplier that consistently underperforms, without being able to exit the contract.

    When should you use this clause?

    Include a service credits clause in any agreement with measurable performance standards, particularly in IT outsourcing, managed services, hosting, cloud platforms, helpdesks, and facilities management.

    Service credits are most effective in combination with an SLA that sets concrete, measurable targets (uptime, response time, resolution time). According to World Commerce & Contracting, 9.2% of annual revenue is lost due to poor contract management. A significant portion of that loss is attributable to underperformance that is not detected or compensated in time. Automate the measurement period and credit calculation in your contract management system to avoid manual errors.

    Customize these elements

    • 1Align the tiers with your actual dependency: the more critical the service, the more aggressive the tier. For business-critical systems, availability below 97% may justify a credit of 30% or more
    • 2Consider service credits for KPIs beyond availability: incident response time, change request turnaround time, customer satisfaction score
    • 3Set the monthly cap deliberately: too low (e.g. 10%) makes the incentive toothless, too high (e.g. 100%) makes the relationship unworkable
    • 4Add a bonus arrangement for above-average performance if you want to keep the relationship balanced (bonus-malus model)

    Sources

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