The government must identify a repository of information and expertise about the use of payment by results (PbR), according to the National Audit Office (NAO).
In a report the NAO said PbR contracts accounted for at least £15 billion of public sector spend but no department was monitoring how they were operating across government.
The NAO said most PbR schemes “have still to finish” and there was “not yet enough evidence to evaluate the effectiveness of either individual schemes or the mechanism itself”.
“While supporters argue that by its nature PbR offers value for money, PbR contracts are hard to get right, which makes them risky and costly for commissioners,” said the report.
“If PbR can deliver the benefits its supporters claim – such as innovative solutions to intractable problems – then the increased cost and risk may be justified, but this requires credible evidence.
“Without a central repository of knowledge and a strong evidence base to refer to, PbR schemes may be poorly designed and implemented and commissioners are in danger of reinventing the wheel for each new scheme.”
The NAO said PbR was most likely to succeed in situations where results can be measured and attributed to providers’ interventions and commissioners should engage with potential providers at the pre-procurement stage “to ensure they understand the ability and appetite of different providers to take on risks”.
“If the payment offered is too high, the taxpayer could pay too much for the service; if too low, providers may not bid for the contract,” said the report.
It added commissioners should aim to define attainable but stretching performance expectations for providers that justify the implementation of this type of contract.
“A poorly designed scheme may create perverse incentives for providers, such as welfare-to-work providers prioritising people who are easier to help and parking those who are harder to help.”
The report was based on a study of PbR contracts including offender rehabilitation, welfare to work and international development projects such as water and sanitation.
Amyas Morse, head of the NAO, said: “Without credible evidence, commissioners may be using this mechanism in circumstances to which it is ill-suited, to the detriment of value for money.”
A Cabinet Office spokeswoman said: "Payment by results can of course improve our public services because taxpayers ultimately only pay for what is achieved, raising efficiency and providing value for money for the taxpayer. We will learn lessons from the report.”