This paper aims to understand the transaction costs implications of two different governance modes for large scale contracting of HIV prevention services to non-governmental organisations (NGOs) in 2 states in India as part of the National AIDS Control Programme between 2001 and 2003. Interviews at purposively selected case study NGOs, contracting agencies and key informants as well as document review were used to compile qualitative data and make comparisons between the states on five themes theoretically proposed to shape transaction costs: institutional environment, informational problems, opportunism, scale of activity and asset specificity (the degree to which investments made specifically for the contract have value elsewhere). The State AIDS Control Society (SACS) in state Y used a management agency to manage the NGO contracts whereas the SACS in state X contracted directly with the NGOs. A high level of uncertainty, endemic corruption and weak information systems served to weaken the contractual relationships in both states. The management agency in state Y enabled the development of a strong NGO network, greater transparency and control over corrupt practises than the contract model in state X. State X's contractual process was further weakened by inadequate human resources. The application of the transaction cost framework to contracting out public services to NGOs identified the key costs associated with the governance of HIV prevention services through NGO contracts in India. A more successful form of relational contract evolved within the network of the contract management agency and the NGOs. This led to improved flows of information and perceived quality, and limited corrupt practises. It is unlikely that the SACS on its own, with broader responsibilities and limited autonomy can achieve the same ends. The management agency approach therefore appears to be both transaction cost reducing and better able to cope with the large scale of these contracting programmes.