Jurisdiction(s):
United Kingdom

Structuring supplier incentives and oversight in outsourcing: service credits (levels, remedies, penalties), earnback and bonuses, milestone liquidated damages, gainsharing, results-based contracting, step-in, benchmarking and audit

Published by a LexisNexis Commercial expert

Practice notes

Practice Note

This Practice Note explores prevalent approaches to motivating suppliers within outsourcing engagements. It examines service credits, earn back, service bonuses, gain sharing and results-based contracting. It also looks at general oversight tools such as step-in, benchmarking and audit rights. Most outsourcing agreements include measures intended to drive suppliers by either penalising substandard performance or rewarding outcomes that surpass the specified benchmark.

This Practice Note focuses on the following common methods of supplier incentivisation:

Service credits, earnback and service bonuses
Late delivery payments and early delivery bonuses
Gainsharing
Results-based contracting
Oversight arrangements

These levers form only part of a wider context for encouraging supplier performance. Outsourcing deals are typically long-term and rely on a continuing relationship between the parties. Accordingly, the customer will often recognise that:

a measured, balanced stance is prudent, avoiding efforts to shift all risks onto the supplier
it retains an ongoing role in achieving success for the services and the supplier relationship as a whole
formal legal remedies are not invariably the most effective way to resolve difficulties, and
the supplier should and

...

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Ian Edwards

Bird & Bird

Ian is a Partner in Bird & Bird's Commercial Group in London. He provides commercial advice on a wide range of outsourcing, technology and other projects, acting for both customers and suppliers. He has worked with clients in a diverse range of sectors, including financial services, energy, IT and telecommunications. Ian's outsourcing experience includes advising on all aspects of the outsourcing life cycle, from RFP development and supplier selection, through the contract negotiation phase, to ongoing contract management and renegotiation. Ian regularly advises on large-scale technology projects, including procurement, development and integration projects, and ongoing service arrangements. He has also advised on various supply, distribution, ageny and franchising arrangements. ...

Web page updated on 22/05/2026

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