# Service credits

Source: https://contracko.com/glossary/service-credits

# Service credits

Pre-agreed financial credits a supplier owes the client when service levels are missed.

## Definition

Service credits are fixed deductions from a supplier's fees that apply automatically when agreed service levels in an SLA are not met. They give the client a quick, predictable remedy without the need to prove actual loss and incentivise consistent performance. Contracts typically cap total credits, state whether they are the sole remedy for minor breaches, and clarify their relationship to penalty-clause rules under Dutch law.

## Example

> If monthly uptime falls below 99.9%, the customer receives a service credit of 5% of that month's fee for each percentage point missed.

## Why this is a business risk

Service credits only protect you if you actively track SLA performance and claim them. Many clients never see the credits they are owed because they lack visibility into uptime data or miss the claim window. Conversely, suppliers face unexpected cash-flow impacts if credits accumulate and the cap is hit, potentially triggering a right to terminate for persistent underperformance.

## How to manage it

- Define uptime and performance metrics with precise formulas -- exclude scheduled maintenance windows from the calculation or disputes will follow.
- Require the supplier to deliver a monthly performance report so you do not have to chase the data to calculate credits.
- Track the credit cap as a contract milestone -- when it is reached you may have a termination right for persistent underperformance.
- Clarify in the contract whether service credits are the exclusive remedy for the relevant SLA miss or whether damages can also be claimed on top.

### How Contracko helps

Contracko tracks SLA thresholds, credit calculation rules and monthly reporting deadlines extracted from contracts, and sends reminders when reports are due or caps are approaching. Storing SLA data alongside the contract means the performance history is available the moment you need to assert or dispute a credit.

## Relevant for

[IT Services](https://contracko.com/industries/it-services)[Software & SaaS](https://contracko.com/industries/software-saas)[Managed Service Providers](https://contracko.com/industries/managed-service-providers)

## Related clauses

- [Service Level Agreement (SLA)](https://contracko.com/clause-library/service-level-agreement)
- [Service Credits Clause](https://contracko.com/clause-library/service-credits)
- [Liquidated Damages Clause](https://contracko.com/clause-library/liquidated-damages)

## Related terms

- [Service level agreement (SLA)](https://contracko.com/glossary/sla)
- [Bonus-malus arrangement](https://contracko.com/glossary/bonus-malus-arrangement)
- [Liquidated damages](https://contracko.com/glossary/liquidated-damages)
- [Liability limitation](https://contracko.com/glossary/liability-limitation)

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## Frequently asked questions

Common questions about this term.

- **Q:** Are service credits the same as a penalty clause?
  **A:** Functionally they resemble a liquidated damages mechanism, and a Dutch court may treat them under the penalty-clause rules, so contracts should state whether credits are the exclusive remedy or sit alongside damages.

- **Q:** Can the customer also claim damages on top of service credits?
  **A:** Only if the contract allows it; many SLAs make credits the sole remedy for the service-level miss, so the wording of the clause is decisive.

- **Q:** What happens when the credit cap is reached?
  **A:** Reaching the cap typically triggers an additional remedy such as a right to terminate for persistent underperformance, or a step-in right. The contract should specify this expressly, otherwise the client is left without recourse once the cap is hit.

- **Q:** Do service credits apply automatically or must the client claim them?
  **A:** Most SLAs make credits automatic once a threshold is missed, but the supplier may require a formal claim or include a reconciliation cycle. Check whether credits carry over to the next period or are forfeited if not claimed in time.

- **Q:** Can a supplier exclude certain outages from the SLA calculation?
  **A:** Yes. Standard exclusions include scheduled maintenance, force majeure, third-party infrastructure failures and client-caused outages. The scope of exclusions is negotiated and should be listed exhaustively to avoid disputes.

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