Federal Manager's Daily Report

Federal agencies could benefit from exploring “pay for success” contracting arrangements being tested at lower levels of government, in which the government pays an investor, usually with a rate of return, based on savings from decreased use of more costly services, GAO has said.

GAO examined 10 such projects and found that they offer potential benefits to all parties involved. “For example, governments can implement prevention programs that potentially lead to reduced spending on social services and transfer the risk of failing to achieve outcomes to investors.”


It said that federal government involvement in such projects “has been limited” even though OMB has encouraged agencies to explore them.

“Potential roles federal agencies could play in PFS projects include making outcome payments or helping build capacity. We have previously reported that collaborative mechanisms, such as interagency groups, can be used to implement programs and share information. However, a formal mechanism for federal agencies to collaborate on PFS does not exist. Given the evolving nature of PFS, a mechanism for federal agencies to collaborate on PFS would increase access to leading practices,” GAO said.

It added, though, that there is a challenge in managing potential risks in such projects. “For example, without safeguards, there is a risk that paying for outcomes could create perverse incentives, such as focusing on individuals who are easiest to serve rather than those most in need. To address this risk, PFS contracts included various provisions, such as only including those with the greatest need in the evaluation that determines if the government makes payments,” it said.