What is a Contract?

    At their core, contracts represent relationships where two or more parties come together for a specified purpose, under specified conditions. Contracts are legal instruments that set forth obligations, rights, and duties of the partners involved. Contracts for health services—including those for family planning and reproductive health—establish a legal agreement between the SDO and a purchaser for a specified set of services, in a specified location, with clear objectives and measurable indicators of success, of a certain quality, over a defined time period (SHOPS Project, 2012). 

    Typically, purchasers of health care services will seek contracts with SDOs for reasons concerning access, quality, equity, and efficiency of service delivery. By outsourcing service delivery to contractors, purchasers can focus more exclusively on functions such as regulation, planning, and oversight. This emphasis is sometimes described as “steering versus rowing,” or “purchasing versus provision.”

    Objectives of family planning services purchasers

    Government purchasers may seek to: 

    • Improve access to and quality of family planning services, thereby increasing health coverage
    • Improve access for the poor and other underserved groups
    • Relieve pressure on public sector facilities
    • Harness private sector expertise that complements government capabilities
    • Avoid controversy around culturally and politically sensitive family planning issues
    • Align health care providers with national health goals through contract stipulations

    Private purchasers may seek to:

    • Meet service requirements of private insurance clients
    • Comply with legal obligations to provide beneficiaries access to health care
    • Decrease employee sickness leave, absenteeism, and turnover

                                                                                                                                                                                                                                   Adapted from Rosen, 2000

    Are there different types of contracts?

    There are five common types of contractual relationships for health services, as noted below (PSP-One, 2006). The first two, contracting-out and contracting-in, are outsourcing options for purchasers and are the most prevalent. The last two, concerning grants and franchising, are outside the usual scope of contracting-out for health services, but are included here as additional information.

    A contractual agreement by which the SDO is paid to provide goods and/or services to the purchaser’s clients at the SDO’s facilities; this is the most common contracting approach used for family planning services and the focus of this reference. 

    A contractual agreement by which the SDO is paid to provide goods and/or services to the purchaser’s clients at the purchaser’s facilities; when the purchaser is the government, services are provided at government facilities. 

    A contractual arrangement by which the purchaser secures the use, but not ownership, of facilities or equipment by an SDO in exchange for a payment or commitment to provide certain services. 


    A contractual arrangement by which the purchaser awards financial assistance to a private entity (usually an NGO) for a specific purpose; the grantee is required to account for spending funds in the manner specified by the grantor.

    A contractual arrangement by which the government or other franchisor confers the right or privilege to an SDO (franchisee) to provide specified health services to a particular population. It differs from contracting-out in that the franchisor is not the purchaser and is not responsible to pay for the services provided. 

    Why contract?

    SDOs consider contracting opportunities for provision of family planning services for a number of reasons. Ideally, a purchaser’s contract should present a win-win scenario through which the purchaser and SDO are able to achieve shared goals. Delivering high quality family planning services to large numbers of poor and underserved families and individuals is a core component of the mission for many SDOs. Contracts with purchasers, particularly with governments, can enable SDOs to pursue social and business objectives.

    Contracts that cover full costs plus a fair margin for profit or reserves can be a vehicle to sustain and expand service provision by SDOs. In such cases, an SDO has an immediate business case to enter into a contract. 

    Short-term financial viability is an important, but not sole, deciding factor in whether an SDO may choose to enter into a contract. The bulk of family planning services are contracted by SDOs under terms that do not fully cover their costs. Moreover, the proportion of SDOs’ services that are expected to be delivered under contracts with governments is expected to increase as more countries advance from low to middle income status and private donor funding decreases. 

    In all cases, the decision by an SDO to enter into a contract should reflect an accurate assessment of factors, including:

    • The expected financial contribution of the contract: Will projected costs be covered? Is a surplus or a shortfall projected?
    • Potential to access subsidies and other sources of revenue to offset any shortfall in the core contract.
    • Strategic importance and relationship with the purchaser (market size, SDO presence, reliability and stability of the purchaser with contractors, and so on).
    • Opportunity to gain experience with government or other purchaser contracts and with various contracting models.
    • Alignment with the SDO’s goals (for example, to serve vulnerable and underserved populations).



    Sustaining Health Outcomes through the Private Sector (SHOPS) Plus is a five-year cooperative agreement (AID-OAA-A-15-00067) funded by the United States Agency for International Development (USAID). This website is made possible by the generous support of the American people through USAID. The information provided on this website is not official U.S. government information and does not represent the views or positions of USAID or the U.S. government.

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