When a supplier relationship comes under pressure, the KPI provisions are usually where clients look first. And with good reason. In contractual terms, a KPI does a lot of work: it is how performance gets measured, how underperformance is evidenced, and how the contractual consequences are engaged. The difficulty, in our experience, is that these provisions do not always hold up when things actually start to go wrong.
The targets looked sensible when the contract was signed, the paperwork was in order, and the deal went ahead. What often went unresolved were the harder questions sitting underneath - how performance would be measured in practice, who controlled the data, and what a failure would actually cost the supplier in commercial terms. Those questions have a habit of surfacing only once performance has already slipped, at which point they are considerably harder to deal with.
Most of the time, when we are asked to look at a KPI framework that has failed, the drafting itself is rarely the real culprit. The problem usually goes back to the negotiation.
KPI provisions typically do several related legal jobs. They may help define the contractual performance standard, they provide evidence when a failure is being assessed, and they trigger the remedies, service credits or escalation procedures the parties agreed. Whether missing a KPI amounts to a contractual breach depends on how the relevant provisions are drafted and how they sit within the wider contract - in many arrangements, KPIs operate alongside service levels and reporting obligations rather than as freestanding commitments in their own right.
KPI design is a commercial exercise before it is a legal one. Legal input matters, but no amount of careful drafting will rescue a set of targets that the parties never properly thought through. This is why early legal involvement can be so valuable -often the adviser's contribution at that stage is simply making sure the right questions get asked before positions harden. In our experience, that can be the difference between provisions that work in practice and provisions that unravel at exactly the moment they are needed.
What needs to be resolved before drafting begins
The issues that generate disputes are rarely technically complex. They are, almost always, the questions that were parked at the outset.
What level of performance genuinely matters? Targets should reflect the point at which the buyer suffers real commercial impact - not convenient benchmarks, and not figures carried over from a previous deal because they were to hand.
Who is responsible for measurement? Self-reporting, independent verification and joint assessment all have different implications for cost and reliability, and for how disagreements get handled when the numbers are challenged.
What happens when performance falls short? Different failures may deserve different consequences, and a well-structured contract recognises that rather than applying a uniform response across the board.
How will the framework evolve? In long-term arrangements, fixed KPIs drift out of alignment with the underlying business. A workable review mechanism is worth building in from day one.
Where these points have been properly addressed, the drafting tends to follow fairly naturally: clearer metrics, defined data sources, objective methodologies, proportionate escalation.
Sustainability provisions
Sustainability provisions are where the gap between aspiration and enforceability shows up most clearly. A requirement to use "reasonable endeavours" to reduce emissions may carry some weight, but unless it is measurable, capable of verification and tied to defined consequences, it is hard to see it functioning as a KPI in any meaningful sense.
Certain questions tend to get left on the table. What is the baseline? Who bears the cost of improvement? And what has actually been agreed if the target is missed? Without workable answers, provisions of this kind, risk creating the appearance of contractual control without reliably delivering it.
The regulatory backdrop is adding pressure here. The UK Sustainability Reporting Standards (UK SRS), published by the FRC in early 2026 and based on the ISSB framework, are expected to inform future sustainability reporting obligations for a number of UK companies, although the precise scope and implementation timetable remain subject to ongoing regulatory developments. Under UK SRS S1, in-scope companies will need to disclose information about sustainability-related risks and opportunities across their value chains. A buyer anticipating those obligations may well need supplier data in a compatible format - and KPI provisions designed without that in mind may need revisiting before they have even been tested.
The CMA's Green Claims Code adds a further layer. A buyer relying on unverified supplier representations when making public environmental claims may face contractual and regulatory risk, and potentially consumer protection exposure too, particularly where those claims are communicated externally to customers, investors or other stakeholders.
The specific obligations will vary by entity and sector, but the general direction of travel is hard to miss: sustainability KPIs need to be concrete, they need to be measurable, and they need to rest on reliable data.
AI in the supply chain
Contractual frameworks have not kept pace with the technology. AI-driven monitoring and performance systems are increasingly common in supply chain arrangements, and they raise questions that traditional drafting was never designed to answer.
Who owns the data these systems generate? Can a party challenge an automated determination that carries financial consequences? And - a point that is often overlooked - what happens where one party provides the platform on which the other depends? In that scenario, the performance of the platform itself may need to be measured and managed like anything else in the contract.
The EU AI Act, which entered into force in August 2024 and applies progressively through 2026 and 2027, introduces transparency and human-oversight obligations for AI systems used in certain high-risk contexts. Depending on their functionality and how they are deployed, some AI-enabled supply chain management systems may fall within its scope - in some circumstances, within the provisions applicable to high-risk AI systems. UK businesses with EU operations or EU counterparties should be thinking now about where their arrangements sit as the Act's provisions take effect.
Even where the regulatory obligations do not bite, the contractual risk remains. Automating a decision does not remove the potential for a dispute about it; it simply changes the evidential and governance issues that arise when performance is challenged.
Public sector contracts: KPIs beyond the contract
In public procurement, KPIs have taken on a life beyond the four corners of the contract.
The Procurement Act 2023, in force since February 2025, requires contracting authorities to set and publish at least three KPIs for contracts with an estimated value exceeding £5 million, and performance against those KPIs must be reported and made publicly available. Under the Act's exclusion regime, poor performance may be taken into account in future procurement decisions, and serious or persistent performance failures may - depending on the circumstances of the particular case - contribute to exclusion or debarment decisions under the statutory framework.
For suppliers, the practical consequence is that KPI provisions in public sector contracts now carry a reputational dimension that outlasts the immediate relationship. Managing the contract effectively means understanding not just what the KPIs require, but what consistent underperformance means within that statutory framework.
Practical implications
Involve legal advisers early, so the key commercial questions are identified and framed before drafting begins.
Never agree a target without agreeing how it will be measured.
Align remedies with the actual commercial impact of failure, keeping the penalty doctrine in mind.
Build review mechanisms into longer-term arrangements.
Where automated or AI-driven systems are involved, deal with data ownership and challenge rights expressly.
For contracts subject to the Procurement Act 2023, understand the publication and reporting obligations from the outset.
Where UK SRS obligations are anticipated, consider whether the sustainability KPIs will actually produce data in a compatible format.
The legal machinery for drafting and enforcing KPI frameworks is well established, and disputes rarely arise because that machinery is missing. They arise because the parties never reached sufficient agreement on the commercial assumptions underneath it. Effective KPI provisions have less to do with drafting sophistication than with identifying, documenting and allocating risk in a way that reflects the commercial realities of the deal.
As supply chains grow more complex, more data-driven and more heavily scrutinised, the ability to evidence performance, allocate responsibility and enforce clear remedies may matter as much in practice as the targets themselves.
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Disclaimer: This publication is provided by Laytons LLP for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to your regular contact at Laytons LLP or Laytons’ Commercial team.
