Drafting service level agreements in commercial contracts

An SLA is a contractual document that sets out clear expectations; performance metrics; responsibilities of each party; and a framework for managing performance between service providers and customers.

From a customer perspective, an SLA provides assurance that quality service is delivered. For example, it is common for retailers to rely on SLAs to ensure their e-commerce platforms remain available during peak shopping periods. A failure in uptime means lost sales and reputational damage.

Different business needs result in various types of SLAs, including:

• continuous service levels – these are always measured and are common in areas like IT support, where businesses require uninterrupted service availability;
•  event-based service levels – these define performance based on specific events, such as response times during system outages or high-traffic periods; and
• sample-based service levels – these measure whether a selected sample meets the required standard. They are used when monitoring every instance would be impractical, perhaps because it is too costly or too time-consuming. Sampling provides a cost-effective way to validate performance while maintaining accuracy. A common example is periodic quality checks in a call centre.

The service level set out in an SLA is a binding obligation. As a result, service levels defined in the agreement should be objective and measurable. Businesses should focus on services that directly impact the client's experience and avoid overwhelming the SLAs with unnecessary measures. A few high-quality service levels are better than dozens of low-impact ones, which can distract suppliers from delivering high-impact core services.

Managing service level failures will require a clear and structured approach to be outlined in the SLA. Typically, this approach will include an escalation procedure where the supplier must provide the customer with a root cause analysis and a remediation plan, along with timely updates. Consequences for non-compliance should be explicitly documented and may include service credits, termination rights, step-in rights or service augmentation.

The focus is usually on encouraging performance rather than punishing the other party. As a result, the approach adopted by both sides is normally outcome-driven, aiming to ensure smooth operations and consistent service.

Suppliers often seek a broad scope of relief events, such as force majeure, and these provisions should be negotiated and documented upfront. Ambiguity in these areas can lead to costly disputes, highlighting the importance of being clear and precise when drafting the SLA.

Flexibility should also be built into an SLA, particularly in the delivery of long-term services. Clear mechanisms for monitoring and managing change should be included, to ensure the SLA remains relevant as external environments and the needs of the business evolve. This can involve monthly reporting to track performance, a formal process for updating service levels when technology or customer expectations shift, and defined steps for adding or removing service levels without disrupting operations. For example, parties might agree on a review cycle where new metrics can be introduced or outdated ones retired.

SLAs are critical because they set clear performance expectations, assign accountability, and define consequences when standards are not met. Negotiating SLAs often requires significant time and effort from multiple stakeholders, making it a complex process that businesses should prioritise, rather than overlook.