Procurement, for all its operational backbone and strategic ambition, has often struggled with one recurring obstacle: the gap between what’s contracted and what’s actually delivered. The contract is signed, the targets are set, and yet the value that materialises rarely looks like the value on paper.
This obstacle is what led to the rise of performance-based contracting (PBC) in the 1990’s, according to the ICMA. While the general practice has been around much longer, the term was coined and incentivised by governments in an effort to optimise the buyer-supplier relationship. The push was not brought in as a silver bullet, but as a realignment of incentives, expectations, and accountability. It’s not new by any means. The model has been a staple in the defence and aerospace industries since it was first coined, and more recently in public-private infrastructure partnerships (Gordon, 2001). But in a market now driven by outcomes, flexibility, and resilience, performance-based models are gaining traction across broader areas of procurement – from facilities management to IT services and logistics. And rightly so.
From Service Promises to Measurable Outcomes
Traditional procurement contracts tend to be input-based: deliver X number of goods, provide Y number of service hours, conduct Z number of deliverables. The issue, of course, is that inputs don’t equal outcomes. A supplier might tick every box on the deliverables list and still miss the mark entirely when it comes to quality or business value added.
Performance-based contracts flip the model. They define success not by the activity itself, but by the impact it has. You pay for performance, not just presence. For example, a facilities provider might be rewarded for maintaining a 95% equipment uptime rate, rather than simply completing scheduled checks. An IT service partner could be incentivised by first-time resolution rates, not just the number of tickets closed.
Done right, the model promotes accountability, fosters innovation, and aligns both parties around shared goals. This can be particularly important when those goals are complex or shifting (Larsen, 2023).
Why It’s Gaining Momentum Now
There are a few reasons performance-based models are drawing more attention this year:
- Shift from cost to value: Procurement is no longer just about price savings (although I’m sure we can all agree, the pressure to save costs is still very much there). It’s about business impact, risk mitigation, resilience, and increasingly as laws get more stringent, ESG outcomes. Performance-based models offer a natural framework to contract against these and increase longevity of buyer-supplier relationships when outcomes are successful.
- Complex supply ecosystems: As organisations work with more partners and services become more integrated, simply managing scope and SLAs isn’t enough. There’s a growing need for shared accountability across outcomes, not just timelines.
- Space for supplier expertise: Performance-based models give suppliers the freedom to determine how best to meet the desired outcomes, rather than being restricted by overly rigid specifications. This autonomy not only encourages innovation but often results in more effective solutions that the buying organisation may not have envisioned on its own. When suppliers are trusted to apply their expertise, the quality of outcomes and overall relationship improves.
- Technology-enabled transparency: Perhaps most crucially, we now have the tools to make this model work. Real-time data, supplier performance dashboards, and structured reporting make it easier to define, track, and enforce performance metrics without adding unreasonable overhead. This added transparency is also beneficial to suppliers, as it allows them to see data-backed feedback on their performance.
Of Course, There Are Trade-Offs
Many procurement teams are hesitant to apply this model, and performance-based contracting is still far from the norm. Done poorly, PBCs can breed ambiguity, strained relationships, or gaming of the system (most commonly seen through manipulated performance data). Misaligned KPIs, vague language for specifications, or poor baseline data can tank even the best-intentioned agreement. And it’s not a fit for everything, standardised or highly transactional goods and services are usually better off keeping with traditional contracting methodologies.
But for categories with measurable outcomes, fast-shifting requirements, and real business impact? The benefits can be substantial.
How Procurement Teams Can Move Forward
For procurement leaders, embracing performance-based contracting isn’t just about changing your specs. It’s about changing how you think. It requires:
- Clarity of purpose: You must be able to define what success looks like in clear metrics that reflect business impact.
- Agility: Relationships need to be monitored, iterated on, and recalibrated when needed – without waiting for the renewal cycle.
- Visibility: You need reliable, accessible data to track what’s happening in real-time.
That last point is where many teams still struggle. Even when the right commercial terms are in place, the lack of usable, category-specific insight can make real accountability feel elusive. This is where analytics on supplier performance and increased contract visibility start to really matter (Performance-based contracting in 2025: Benefits and challenges 2025).
Takeaway
Performance-based contracting isn’t about turning every supplier relationship into an intense monitoring exercise. It’s about knowing what matters and making sure the incentives are aligned to get you there.
Procurement teams that can track performance not just after the fact, but during delivery, are the ones that move from compliance to top-performers.
Future Processing. (2025, February 25). Performance-based contracting in 2025: Benefits and challenges. When IT challenges overwhelm your company I Start Nearshoring. https://startnearshoring.com/knowledge/mastering-performance-based-contracting/
Gordon, S. B. (2001). (rep.). PERFORMANCE-BASED CONTRACTING (6th ed., Vol. 33, pp. 1–3). DC , Washington: ICMA.
Larsen, R. (2023, November 14). Demystifying the performance-based contracting business model. Untaylored. https://www.untaylored.com/post/demystifying-the-performance-based-contracting-business-model
