BACKGROUND: Pay for performance schemes are increasingly being implemented in low income countries to improve health service coverage and quality. This paper describes the context within which a pay for performance programme was introduced in Tanzania and discusses the potential for pay for performance to address health system constraints to meeting targets. METHOD: 40 in-depth interviews and four focus group discussions were undertaken with health workers, and regional, district and facility managers. Data was collected on work environment characteristics and staff attitudes towards work in the first phase of the implementation of the pilot. A survey of 75 facilities and 101 health workers were carried out to examine facility resourcing, and health worker employment conditions and job satisfaction. RESULTS: Five contextual factors which affect the implementation of P4P were identified by health workers: salary and employment benefits; resource availability, including staff, medicines and functioning equipment; supervision; facility access to utilities; and community preferences. The results suggest that it is important to consider contextual issues when implementing pay for performance schemes in low income settings. It highlights the importance of basic infrastructures being in place, a minimum number of staff with appropriate education and skills as well as sufficient resources before implementing pay for performance. CONCLUSION: Health professionals working within a pay for performance scheme in Tanzania were concerned about challenges related to shortages of resources, limited supplies and unfavourable community preferences. The P4P scheme may provide the incentive and means to address certain constraints, in so far as they are within the control of providers and managers, however, other constraints will be harder to address.