Service Level Agreement Overview

Service level agreement penalty examples are the typical penalties that could be incurred if a service provider violates the terms of a service level agreement that they have agreed to. A service level agreement is a contract that defines what level of service is to be expected from a supplier, lays out the metrics for measuring that service, and states what penalties will result from failure to meet that level of service. The service level agreement penalties are disciplinary measures, sometimes monetary, sometimes service-related, that exist not to save money or damage the service provider, but to make sure the terms of the contract are maintained.

Service Level Agreement Penalty Parameters

Service level agreement penalties will vary from contract to contract. When they are being drafted, several parameters for these penalties should be considered. These are:

  • Service availability. This involves factors like network uptime, database availability, and data center resources. Penalties should be included as a deterrent against service downtime, as such downtime could negatively affect business productivity.
  • Service quality. This involves the guarantee of performance, the number of defects or errors allowed in a product or service, process gaps, and other quality issues. One approach to consider is to levy a penalty for every failure that was made to meet these objectives.

Service Level Agreement Penalties

There are a variety of penalties that may be incurred from service level violations. The three most common are:

  • Financial penalties. With these, the vendor will be required to pay back to the customer the amount of damages that was agreed upon in the contract. This may not amount to a full reimbursement of the service fee paid by the customer for the job.
  • Service credits. With these, the vendor will reimburse the customer for the cost of the work that was done or offer credit for future work to be done. In either event, actually funds are not being transferred.
  • License extension or support. With this, the vendor will be required to extend the license’s term or offer further support to the customer without charge, which may include development and maintenance.

Such penalties must be set out in the language of the service contract; otherwise, they will not be enforceable. Furthermore, of these penalties, the service credit and license extension penalty may not be considered adequate compensation by some, as some might question the value of receiving the continued services of a provider that fails to meet its quality levels. Rather, employing a combination of penalties may be a better approach, while at the same time including an incentive like a monetary bonus for satisfactory or beyond satisfactory work.

Service Level Agreement Indemnification Clause

Having an indemnification clause in a service level agreement is highly recommended. In a service level agreement, an indemnification clause will require the service provider to indemnify, or hold harmless, the customer for costs incurred due to a breach of the warranty. It will also require the service provider to pay the customer any litigation costs from third parties due to a breach of the warranty. A standard service level agreement offered by the service provider will likely not include this provision. If so, it should be added, although further negotiation on its finer points will probably be desired by the service vendor.

Service Level Agreement Verification

In order to enforce a service level agreement, verification of the service levels in question is necessary. Many service providers will make service level statistics available, often online. Through the web site, the customer may then check on whether the appropriate service level is being maintained and, if not, whether they are entitled to service level credits or other compensation as set out in the contract.

Often, such systems and processes are handled by a third-party company that specializes in such work, and it is recommended that the customer and this company are in contact during the contract negotiation so as to eliminate any confusion about the service levels to be tracked and how they will be tracked. Third-party tools that automatically capture service level performance data may also be employed.

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