What is Bonus-Malus Arrangement?

A bonus-malus arrangement goes further than an SLA with a penalty clause: it also rewards positive performance and creates a two-sided incentive. The supplier earns more when they exceed the agreed standard, but pays back when they fall short. That changes the dynamic of the relationship.

A practical example for a cleaning contract: the standard is a quality score of 7.5 on a monthly inspection. If the supplier averages above 8.5, they receive a three percent bonus on the quarterly invoice. If they score below 6.5, a five percent discount applies. The supplier is now actively motivated to drive quality, not merely to clear the minimum threshold.

Three elements are essential for a bonus-malus arrangement. Measurable performance indicators: without objective measurement there is no basis for a bonus or malus. Clear threshold values: what is the baseline, what is the upper boundary for a bonus, and what triggers a malus? A clear calculation mechanism: how and when is the bonus or malus calculated and applied?

Bonus-malus arrangements are most effective for services where quality is measurable: cleaning, catering, security, and facilities management.

An SLA defines what is expected. A bonus-malus arrangement makes compliance financially attractive and non-compliance financially felt. That is a fundamentally different dynamic in the supplier relationship.

For SMBs, a bonus-malus arrangement is a powerful instrument for services that directly affect customer satisfaction day to day. A cleaning company that knows the quality score has a direct impact on the invoice manages its staff differently from one that only needs to clear minimum requirements.

Weshare (2025) reports that 95 percent of organisations lack full visibility into their contractual obligations, including the clauses they contain.