Exploring critical supplier selection criteria for performance-based contracting: insights from the defense industry

Purpose This study explores critical supplier selection criteria in performance-based contracting (PBC), emphasizing the pre-contractual phase where supplier evaluation mitigates adverse selection risks. Design/methodology/approach This study reveals the important supplier selection criteria in PBC by investigating the logical links in data collected from literature reviews, previous studies, secondary data and four awarded PBCs within the defense industry. Content analysis methodology is employed as an inductive exploratory research tool that allows in-depth research when there is little knowledge to understand the phenomena in question. Findings Six supplier selection criteria emerged for successful PBC arrangements: (1) capability to deliver outcomes; (2) reliability, maintainability, and supportability improvements; (3) buyer–supplier (public–private) partnering; (4) systems approach capability; (5) footprint reduction and obsolescence management; (6) cost ownership. Research limitations/implications This study advances supplier selection research in PBC by applying agency theory to pre-contractual risk and connecting selection criteria with performance management and measurable outcomes. In future studies, interviews with PBC managers can be conducted to validate these selection criteria across both public and private domains. Practical implications The findings of this study provide guidance on how to use critical selection criteria to reduce the risk of high dependence on suppliers in PBCs by avoiding the selection of the wrong supplier. Thus, buyers can avoid the “adverse selection” agency problem by usage of those appropriate selection criteria. This study equips buyers with a roadmap to appropriately select suppliers through PBC governance. Originality/value By linking supplier selection with performance management, this study offers practical guidance for high dependency contracting environments.