The performance of performance-based contracting in public outsourcing

Performance-based contracting has become a cornerstone of modern outsourcing, promising better outcomes, stronger accountability, and greater value. But does it really deliver? In this episode, Pedro Espaillat explores the findings of a new meta-regression analysis, revealing why successful performance-based contracts depend on more than incentives alone. Discover the critical role of governance, collaboration, meaningful performance measures, and organisational capability in achieving lasting commercial success.

A Leading Edge podcast hosted by Nikki Mackay, featuring Pedro Espaillat, who shares insights from his latest research exploring the performance of performance-based contracting in public outsourcing.

Performance-Based Contracting (PBC) is promoted as a model that improves results, enhances quality, reduces costs, and increases accountability. It has become a standard element of government contracting worldwide and a key component of newer pay-for-success models. However, scholarly evaluations remain scattered and often lack a solid theoretical foundation. This study conducts a meta-analysis of 740 observations from 38 studies across 10 service areas to evaluate genuine performance. Utilizing principal–agent, incomplete-contract, and goal-setting theories, we examine what influences the performance of PBC. By combining these perspectives within a single empirical framework, the paper offers a systematic test of core assumptions about incentive alignment, contract incompleteness, and goal design in public contracting. Results indicate that outcome-focused contracts are more successful than those targeting process- or output-based results. This finding provides quantitative evidence supporting incomplete-contract theory’s claim that performance depends on the contractibility of outcomes and extends principal–agent logic by demonstrating when and why incentives fail in multidimensional public settings. Although context matters, factors such as residual control, collaboration, and shared goals are central to PBC success. The study thus makes a theoretical contribution by bridging economic and behavioral contracting theories and empirically grounding their predictions in public-sector evidence.