Abstract Contracting out of health services increasingly involves a new role for governments as purchasers of services. To date, emphasis has been on contractual outcomes and the contracting process, which may benefit from improvements in developing countries, has been understudied. This article uses evidence from wide scale NGO contracting in Pakistan and examines the performance of government purchasers in managing the contracting process; draws comparisons with NGO managed contracting; and identifies purchaser skills needed for contracting NGOs. We found that the contracting process is complex and government purchasers struggled to manage the contracting process despite the provision of well‐designed contracts and guidelines. Weaknesses were seen in three areas: (i) poor capacity for managing tendering; (ii) weak public sector governance resulting in slow processes, low interest and rent seeking pressures; and (iii) mistrust between government and the NGO sector. In comparison parallel contracting ventures managed by large NGOs generally resulted in faster implementation, closer contractual relationships, drew wider participation of NGOs and often provided technical support. Our findings do not dilute the importance of government in contracting but front the case for an independent purchasing agency, for example an experienced NGO, to manage public sector contracts for community based services with the government role instead being one of larger oversight. Copyright © 2011 John Wiley & Sons, Ltd.