Key performance indicator (KPI): Overview, definition and example
What is a key performance indicator (KPI) clause?
A key performance indicator (KPI) clause in a contract sets measurable goals or benchmarks that the parties must meet during the course of the agreement. It is used to track the performance of a party based on specific metrics, such as sales targets, production levels, or customer satisfaction scores. If the agreed-upon KPIs are not met, the clause may allow for penalties, adjustments to the contract, or even termination.
Why is a KPI clause important?
A KPI clause is important because it provides clear expectations for both parties and ensures that performance can be objectively measured. It helps drive accountability, aligns the parties on common goals, and can incentivize the parties to meet specific targets. For businesses, it’s an effective way to monitor progress and identify potential issues before they become problems.
Understanding KPI clause through an example
Imagine a marketing agency is hired to increase website traffic for a client. The contract includes a KPI clause stating that the agency must increase traffic by 20% within six months. If the agency fails to meet this target, the clause might allow for a reduction in fees or a renegotiation of the terms. On the other hand, if the target is met, the agency might earn a bonus.
In another case, a supplier agrees to deliver a certain quantity of goods on time each month, with the KPI clause stating that the supplier must deliver 95% of the orders within the agreed timeframe. If the supplier consistently misses this target, the client might have the right to terminate the contract or seek compensation.
Example of a KPI clause
Here’s how a KPI clause might look in a contract:
“The Supplier shall meet the following performance benchmarks as defined in this Agreement: (i) deliver 95% of orders within the agreed time frame, (ii) maintain customer satisfaction ratings above 85%, and (iii) provide monthly reporting of all relevant data. Failure to meet any of these benchmarks will result in a review of the Agreement and may result in penalties, adjustments, or termination.”
Conclusion
A KPI clause helps ensure that both parties in a contract are working towards clear, measurable objectives. It provides a framework for evaluating performance and can protect businesses by outlining the consequences if performance expectations are not met. Including a KPI clause in your contracts can help maintain accountability and drive success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.