Using contractual levers to manage supplier performance: Tips and pitfalls

Effective contractual levers are an essential tool for managing supplier performance. Whether you're procuring or supplying in the public or private sectors, there are some key issues to consider when codifying contractual levers for dealing with poor performance.

Early stages: The Service Description

The design of appropriate contractual levers begins early in the tender process with a clear understanding of the Service Description that underpins the contract and the level of performance and quality sought. Many contractual disputes arise out of specifications that lack clarity and detail. Seeking early engagement in codifying requirements in Service specifications is key.

Where codification of the requirement is not possible from the outset, the focus should shift to identifying genuine output based minimum requirements, distinguishing needs from wants, and using supplier dialogue to fill remaining gaps before a contract is finalised. Two design principles that are especially important at this stage are understanding the difference between leading indicators (that signal future trends) and lagging indicators (that measure past performance) and workshopping unintended consequences before the tender is issued.

There is a danger of a technical team drafting the Service Description in a vacuum, as interactions with the wider contractual terms, schedules and tender requirements also need to be considered. Among others, these include any implementation/acceptance process, remedies for delay, title and risk, liability and service levels/credits. Drafting the Service Description requires input from all relevant stakeholders: commercial, technical and financial, but ideally should be sufficiently detailed to be understood by someone unconnected to the project.

A full Service Description enables a break-down of the services into logical modules or towers. A clear link can then be created between the different service elements and corresponding charges and service level requirements. Detailed customer responsibilities which are true dependencies for supplier delivery should also be carefully considered as this affects remedies which a supplier may claim for failure to deliver. Clarity minimises the likelihood of conflict between customer and supplier interests at these service interfaces.

Contract preparation and negotiation: Contractual levers

There are a range of contractual levers that can be incorporated to manage supplier performance throughout the contract lifecycle.  These can provide a structure for the remediation of performance, provide immediate relief in the form of credits and provide weight for any performance discussions in contract, which can be a useful tool in getting performance back on track and avoiding disputes.

Incorporating Service level agreements (SLAs) requires particular consideration. As contractual commitments that define baseline standards in relation to service elements, SLAs are legally binding upon the supplier. Typically including specific thresholds for acceptable performance, remedies for failure and consequences for service level failure, SLAs are often coupled with key performance indictors (KPIs), setting out the measurement tools to evaluate how well a supplier is performing against the agreed objectives. Service credits are a common remedy, but should be applied strategically. The supplier's profit model should be considered as poorly designed credit regimes may simply be priced back into the contract through risk premiums and price inflation. Where persistent underperformance occurs, ratchet mechanisms, escalating the consequences of repeated KPI failure over time, are a stronger and possibly more proportionate lever.

The first question in service level design is: what part of the services should be measured and what is the aim of the SLA? Not every element of a service warrants a KPI. The framework should focus on key service measures only, benchmarked, where appropriate, against pre-existing SLAs from a previous provider, internal standards, or recognised industry benchmarks. Practicality is a further consideration: the resource and cost involved in measuring performance elements, or the ability to measure automatically and without total reliance on the supplier, may be determinative in whether it is worth including. A metric that cannot be objectively reported will not survive a performance dispute.

When designing service levels, care should be taken to avoid gold-plating - setting unnecessarily demanding standards that add cost without adding value. For instance, on a 24/7 service 99.99% availability equates to approximately 53 minutes of downtime, whilst 99.5% equates to approximately 43.7 hours of downtime . Rigour is required in understanding the operational reality of percentage targets and the pricing consequences.

When performance failure is serious or persistent, broader contractual remedies can come into play, subject to the underlying contractual terms, such as step-in rights and termination. However, as we have considered in this previous article, the decision to terminate a contract is rarely straightforward and can have far-reaching legal, commercial and operational consequences, so termination may be a lever of last resort rather than a default response. Before escalating to that level, the contract should include a clear process for a rectification, with the expense of implementing that plan allocated between the parties, and a "fix first, argue later" approach to restore service (particularly across multiple suppliers) before disputes about liability are resolved.

A well-balanced performance regime does not rely solely on punitive mechanisms. Service level achievement and continuous improvement can be rewarded through retained sums, bonuses or gainshare arrangements, and alliancing structures involving multi-party SLAs. These positive commercial levers align supplier incentives with customer outcomes and may be more effective at driving sustained performance than a regime based entirely on deductions.

Ultimately it is important to ensure that an SLA drives the right supplier behaviour that results in effective service performance and maintaining a co-operative relationship.

Post-contract: Governance, active management, and continuous review

The governance process is key to ensuring effective management and collegiate working between the parties, while avoiding a blame culture. Governance must be established early and should address:

• what will be measured and by whom,
• data ownership,
• contract management resources,
• and how the performance regime aligns with other key contracts, including flow-down obligations.

Post-award, performance management must be proactive. Parties should make active use of the service level regime and monitor its effectiveness, varying it if required.

Where issues arise, a structured approach should include:

• conducting root cause analysis,
• adopting a collaborative approach,
• giving the supplier a genuine opportunity to improve,
• and reviewing whether the customer's own supplier management processes need to change.

Finally, all those involved in the day-to-day management of the contract must understand the contract and how it is intended to be used, with clear ownership defined for KPI measurement, reporting, review meetings, and the decision to invoke contractual levers. Ideally a contract manual will detail this and facilitate a smooth handover. Only if a contract team is prepared to use a contractual performance regime as intended, will it be an effective means of contract management.

To learn more about addressing supplier underperformance visit our Navigating supplier performance hub. Here, we share insights into managing the contract lifecycle more effectively: protecting your position, mitigating risk, and unlocking future opportunity.

Contributor: Claire Welch

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2026.  For more information see our terms & conditions.