SLA service credits: an example with thresholds and caps
A service credit is the amount a vendor owes when it misses a service level, computed from a schedule written in the contract, capped, and deducted from the next invoice. A simple, workable schedule uses two indicators: each tenth of a point of availability below target costs a percentage of the monthly fee, each point of on-time resolution below target costs another, and the total is capped at a share of the monthly fee. In the fictitious example below, a month at 99.62% availability against 99.9%, and 92% on-time against 95%, gives 1,548 of credits before the cap and 1,440 after it.
An SLA that is not measured does not exist
A service level agreement is a set of indicators, each with a definition, a target, a measurement method, a reporting rhythm and a consequence. Remove the measurement and only a promise remains. Three rules keep it real: measure it yourself, or get direct access to the vendor's measurement tool; use a monthly period, so that a bad month is not averaged away in a quarter; and write down the exclusions (maintenance windows, incidents caused by the customer, force majeure), because everything not excluded counts.
If your organisation runs, or asks its vendors to run, a certified service management system, the reference is ISO/IEC 20000-1:2018, Information technology — Service management — Part 1: Service management system requirements, whose abstract addresses customers that require a consistent approach from all their service providers, including those in a supply chain.
The usual indicators
| Indicator | Definition to write in the contract | Measured by |
|---|---|---|
| Monthly availability (%) | (Total time − recorded downtime) / total time, excluding the defined maintenance windows; which services and sites | Customer probe, or the vendor's tool with customer access |
| Response time | From ticket creation to first qualified action, per priority, in business or calendar hours (say which) | Ticketing tool, monthly extract |
| Resolution time | From ticket creation to confirmed resolution, per priority | Ticketing tool |
| On-time rate (%) | Share of tickets resolved within their target time, overall or per priority | Ticketing tool |
Keep the list short for each contract. The on-time rate is a convenient basis for a credit: one percentage, easy to check, and less sensitive to a single long ticket than an average resolution time.
Realistic thresholds
An availability target is a downtime budget. Over a 30-day month (43,200 minutes), simple arithmetic gives:
| Monthly availability target | Maximum downtime in a 30-day month |
|---|---|
| 99% | 432 minutes (7 h 12 min) |
| 99.5% | 216 minutes (3 h 36 min) |
| 99.9% | 43.2 minutes |
| 99.95% | 21.6 minutes |
| 99.99% | 4.3 minutes |
Choose the target from the service's criticality and from what the vendor has actually delivered, not from a round number. Each extra "nine" costs redundancy and on-call time, which the vendor will price. Check the maintenance windows against the target: generous windows make a high target meaningless. At renewal, renegotiate targets on the readings of the past months.
Service credits: mechanism, cap, example
The mechanism, in one line per contract: credit for the month = (tenths of an availability point missed × rate A + points of on-time rate missed × rate B) × monthly fee, capped at P% of the monthly fee. In a spreadsheet, with targets and readings as percentages:
- availability credit
=MAX(0,Target_Avail-Measured_Avail)*1000*Rate_A*Monthly_Fee; - on-time credit
=MAX(0,Target_Rate-Measured_Rate)*100*Rate_B*Monthly_Fee; - credit applied
=MIN(Availability_Credit+OnTime_Credit,Cap*Monthly_Fee).
Multiplying by 1,000 turns a gap of 0.001 (a tenth of a point) into 1; multiplying by 100 turns a gap of 0.01 into one point. The cap makes the clause signable for the vendor; credits that are too heavy tend to be refused, or priced into the fee.
Example SLA (fictitious data)
A managed infrastructure contract with a monthly fee of 18,000 (any currency). Schedule: availability target 99.9%, rate A 2% of the fee per tenth of a point missed; on-time target 95%, rate B 1% per point missed; cap 8% of the monthly fee, that is 1,440.
| Month | Availability | On-time rate | Availability credit | On-time credit | Total | Credit applied |
|---|---|---|---|---|---|---|
| January | 99.62% (2.8 tenths missed) | 92% (3 points missed) | 2.8 × 2% × 18,000 = 1,008 | 3 × 1% × 18,000 = 540 | 1,548 | 1,440 (capped) |
| February | 99.85% (0.5 tenth missed) | 96% (met) | 0.5 × 2% × 18,000 = 180 | 0 | 180 | 180 |
| March | 99.94% (met) | 95% (met) | 0 | 0 | 0 | 0 |
Over the quarter, 1,620 of credits are due, which the contract should turn into credit notes on the following invoices. In the budget, they lower the year-end forecast of the contract line; the way that forecast is kept is described in the IT budget template.
Monthly reporting and drafting traps
Ask for the monthly report a few business days after month end, in a fixed format: readings per indicator, Met or Missed, credits computed with the contractual formula, incidents behind each miss. Record the readings in your own sheet, claim the credit at the monthly review, and track the credit note. Five clauses to check with your lawyer, under the contract's governing law:
- Credits "on request" within a short deadline: prefer automatic application in the report.
- Measurement by the vendor alone, with no access to the raw data.
- Unlimited or vague maintenance windows.
- Credits as the sole and exclusive remedy, including for serious incidents.
- No exit for repeated failure: a right to terminate after a number of missed months over a period is a stronger sanction. Whether a credit clause is enforceable as drafted also depends on the governing law.
Each SLA belongs to a contract whose end and notice dates also need watching: the IT contract register holds them.
FAQ
Should credits be paid or deducted?
Deducted, as a credit note on the next invoice. It is simpler than a separate claim and leaves a trace in the accounts.
How high should the cap be?
High enough that missing the target costs the vendor more than meeting it, low enough that the vendor signs. It is a negotiation per contract; write the value in the schedule and apply it every month.
What if we disagree on a measurement?
The contract should say who measures, how disputes are raised and within how many days they are settled. Without that clause, a disputed month can easily become a lost credit.