Procurement procedure
Service Credit
A contractual deduction from supplier payment triggered when an agreed service level is missed, used across UK public sector contracts.
Definition
A service credit is a pre-agreed financial deduction applied to a supplier's invoice when performance falls below a level committed in the contract. It is the standard remedy attached to a Service Level Agreement (SLA) in UK public sector contracts: rather than requiring the buyer to prove loss, the contract fixes in advance what a missed target costs the supplier. Service credits are compensatory rather than punitive, which matters legally, because a deduction set far above any genuine estimate of loss risks being unenforceable as a penalty.
How it works in practice
The contract sets out a service credit regime, usually as a schedule alongside the SLA table. Each measured service level carries a credit value, often expressed as a percentage of the monthly service charge, and the schedule states the measurement period, how performance is evidenced, and when the deduction is applied. A typical structure applies a small percentage for a single missed target in a month, rising for repeated or severe breaches, with an overall cap on credits in any period.
Buyers generally pair the regime with escalation. Sustained breach triggers a performance improvement plan, then formal remedies, and ultimately termination for persistent failure. Most regimes also include an earn-back or relief mechanism: relief events, such as buyer-caused delay or a documented force majeure, suspend the clock, and some contracts let a supplier recover credits after a defined run of compliant months.
For suppliers, the practical work happens at bid stage. Service credits should be modelled into the price. A regime with an uncapped or very high exposure changes the risk profile of the contract, and clarification questions during the tender are the right moment to test whether measurement methods are objective, whether relief events are properly defined, and whether the cap is realistic. Under the Procurement Act 2023, sustained performance failure can also surface publicly through a Contract Performance Notice, so the reputational stake now extends beyond the individual contract.
Common questions
Are service credits the same as damages?
No. Service credits are a contractual mechanism agreed in advance and applied automatically against invoices. Damages are a legal remedy claimed for breach and require proof of loss. Most public sector contracts state that service credits are the exclusive financial remedy for the performance failures they cover, so the two do not usually stack for the same failure.
Can a supplier challenge a service credit?
Yes, through the contract's dispute process. The most common grounds are that the measurement was wrong, that a relief event applied, or that the failure was caused by the buyer or a third party outside the supplier's control. Good contracts define the evidence and reporting process precisely enough that these arguments can be settled on the data.
Is there a cap on service credits?
Almost always, and the cap is one of the most important commercial terms to check. Caps are commonly expressed as a percentage of the monthly or annual charge. An uncapped regime transfers open-ended risk to the supplier and should be raised as a clarification during the tender rather than accepted silently.
Do service credits apply during mobilisation?
Usually not in full. Many contracts suspend or reduce service credits during an agreed mobilisation period while the service transfers and stabilises. The length of that grace period and what it covers should be confirmed before submission.
