Contracts and Service Level Agreements

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Statutory bodies are increasingly turning to voluntary and community organisations to deliver services under contract, and both the UK and Scottish Governments are currently keen to increase the sector’s role in delivering public services.  For some organisations, this is an opportunity to improve financial sustainability, and to increase and improve the services they can deliver.

Taking on the role of public service provider can be a great opportunity for an organisation.  However there are dangers.  Contracted work can undermine independence and pull an organisation away from its primary purpose.

There is also a danger that some contracts do not deliver Full Cost Recovery and leave organisations with inadequate resources to cover the real costs of services.

A Definition

Contracts and Service Level Agreements (SLAs) are formal agreements, providing funding in return for the delivery of a service or services.  They are often multi-year agreements, and are a more formal arrangement than a grant – carrying more specific details about the services to be provided and conditions to be met.

Most contracts are awarded through a competitive tendering process, and larger contracts can entail extremely bureaucratic processes, involving compliance with a raft of EU and UK regulations.  The process of purchasing services through competitive tendering for contracts is known as Procurement.

Contracts are legally enforceable agreements.  If either side breaches the agreement eg. if a social enterprise fails to deliver services on time or to the agreed standards, or if a public body terminates a contract outside the agreed terms, legal redress can be sought from the defaulting party.

Service Level Agreements (SLAs) tend to be less bureaucratic and less well defined, and can vary in scope anywhere from actual contracts to a list of targets which both parties hope will be met.  The latter can make it difficult to define whether income from an SLA is earned income or actually a grant.  This raises the added problem of how to account for such income, as charity law states that grant and earned income should be presented separately in annual accounts.  Historically SLAs have been used for smaller scale service delivery.


Things to consider

  • You should always check the small print in any financial arrangement.  Legal liabilities (on both sides) will be attached to any contract and should be thoroughly understood by all parties to the contract
  • Income that is earned through a Contract or SLA will be treated differently for tax purposes from income that has been awarded as a grant
  • Income from grant sources and from contractual agreements should be shown separately in annual accounts.  As well as being compliant with charity law, this split can also provide useful information on the organisation’s financial health which is useful for the purposes of attracting investment

Find out about contracts through

  • local voluntary and community sector networks and publications.
  • direct contact with the purchaser such as the government department, local authority, Primary Care Trust, other voluntary and community organisations and businesses.  Many of these now make their contract opportunities available on line and you can often sign up to be alerted to those of possible interest to you.  Unless there is a good reason not to do so, most public sector and statutory bodies will now publish tenders through the Public Contracts Scotland website

or on

  • specialist magazines or local newspaper adverts, including daily supplements to the Official Journal of the European Union (OJEU), where some contracts have to be published
  • inspection reports from organisations', such as the Audit Commission, Commission of Social Care Inspection and Ofsted.  These can not only alert you to established contracts, but also help you in drawing up a tender by providing information on how they are performing and the criteria used to measure their performance.
  • the official contracts website of the Office of Government Commerce, where tender opportunities are listed

Trading and providing services under contract accounts for nearly half of the total income of the sector.  According to the Institute of Public Finance in 2006, the National Health Service and central government spend around £15 billion a year on service delivery.