PPP contracts are based on an output specification approach: the public-sector party defines the basic standards of service whilst the private-sector party chooses how to meet and possibly improve upon these basic standards. This approach incentivizes innovative solutions, allowing for private sector's skills and knowledge to feed into public service provision, but comes at the cost of greater risk of contract misspecifications for the public sector. In particular, problems may arise because the output characteristics specified in the contract, which form the basis of the contractual obligations, may be ill or not clearly described. Problems may also arise to the extent that the output specifications are inconsistent with the infrastructure needs that the PPP intends to satisfy, and that should be identified by conducting a careful assessment previous to the contract drafting. Mistakes at the contract drafting stage can then be very costly for the public-sector party because of the long-term nature of most PPP contracts.
A number of factors can lead to contract misspecifications. For example, they can be due to mistakes resulting from an incompetent public-sector party (or whoever acts on its behalf) in charge of contract drafting. Lack of appropriate incentives for the public-sector party and thus inadequate effort in information acquisition and processing can also result in contract misspecifications. Corruption and favouritism explain contract misspecifications that lead to the private-sector party receiving very favourable contract terms.
Making the public-sector party accountable for its actions so as to provide adequate incentives is not an easy task. Labour market regulations often constrain the use of incentive mechanisms for the public sector and lack of financial stakes make it difficult to provide incentives in the first place. Also, PPP contracts are generally long-term contracts, so when mistakes are discovered, the public sector employee may have moved job already. In the early stages of PPPs, mistakes at the contract drafting stage have often arisen simply because of lack of experience of public administrations on the writing of PPP contracts. In Europe, a challenge for the public sector has been to rapidly build up the capacity and knowledge to devise and implement PPPs, and to manage the PPP contractual relationships over the long-run. The public sector's progress on this front has not kept pace with that of private sector partners. In the UK, recognition of this problem by the National Audit Office has led to a series of programs aimed at training public officials and to an extensive use of external consultants.