Output-Based Contract

An output-based contract specifies the results the contracting authority requires, not the methods the supplier must use to achieve them. Instead of prescribing staff levels, working hours, and processes, the contract defines measurable outputs: the number of services delivered, the quality standards achieved, the availability of a system or facility. The supplier then organises its resources and methods to hit those outputs as efficiently as it can.

What is an Output-Based Contract?

Output-based contracting is a deliberate policy choice by European contracting authorities to move away from input specification, which tends to lock in existing delivery models and prevent innovation. When you specify inputs (10 staff, Monday to Friday, 9am to 5pm), you get exactly what you specified. When you specify outputs (99% of enquiries resolved within 24 hours), the supplier can decide whether to deploy more staff, automate, reorganise workflows, or use specialist subcontractors to achieve the target.

Output-based contracts are most effective where:

• The desired result can be measured objectively (response times, availability rates, defect counts, quantity processed)
• The supplier has genuine flexibility in how it organises delivery
• The authority is willing to step back from micromanaging the delivery model
• There is a clear service level agreement framework for measuring and reporting performance

They are common in facilities management (availability of meeting rooms, lifts, heating systems), IT services (system uptime, incident resolution times), transport operations (punctuality, capacity), and social care commissioning (outcomes for service users).

Output specification is encouraged by the European Commission as a means of promoting innovation. Directive 2014/24/EU Article 42 allows contracting authorities to specify technical requirements in terms of performance and functional requirements rather than detailed technical descriptions, which is the design basis of output-based contracting.

Output-based contracts should be distinguished from performance-based contracts, which add an incentive payment or risk-sharing mechanism on top of the output structure. An output-based contract may pay a fixed fee for achieving the defined outputs; a performance-based contract adjusts the fee based on performance above or below targets.

Why it matters for bidders

Output-based tendering rewards operational creativity. If you can develop a delivery model that achieves the specified outputs more efficiently than your competitors, you can price more competitively while maintaining your margin. Your bid should demonstrate not just that you can meet the outputs, but how your specific delivery model gives the authority confidence you will do so consistently.

The risk in output contracting is that the outputs are poorly defined or that measurement methodology creates disputes. Before submitting your bid, scrutinise how each output will be measured and by whom. Ambiguous measurement rules are a source of payment disputes throughout the contract period.

Example

A Norwegian municipality procures school cleaning services on an output basis. Rather than specifying staff hours and cleaning frequencies, the contract defines cleanliness standards measured through monthly inspections using a defined scoring system. The supplier chooses its own cleaning schedule, staffing levels, and methods. Payment deductions apply when inspection scores fall below the threshold. The supplier invests in robotics to meet the standard with fewer staff hours, delivering higher margin.

Frequently Asked Questions

What happens if the authority's output specification turns out to be unachievable?

If output targets are set unrealistically high, they create an impossible commercial position for suppliers and lead to either poor competition (bidders price the unachievable risk heavily) or contract failure. Authorities should test output targets against industry benchmarks and, for complex services, use market engagement before publishing the specification to calibrate achievable targets.

Can outputs be adjusted during the contract?

Yes, subject to the modification rules in Article 72 of Directive 2014/24/EU. If the required outputs change materially (for example, the volume of a service grows substantially), the contract should be varied to reflect the new performance baseline. Authorities should build a formal output review mechanism into the contract to manage this.

Is output-based contracting suitable for construction works?

For construction, the equivalent concept is employer's requirements specification (specifying functional outcomes rather than prescribing a design), as used in design-build and turnkey contracts. Pure output-based contracting is more naturally suited to services where the delivery process is ongoing and measurable over time.