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The article focuses on the economic importance of performance-based contracts or industrial product-service systems (IPS) in the aerospace and defence sectors in Great Britain. It highlights several types of service needed for the contracts and the research being conducted to support and reduce the risk attached to such contracts. Several categories of the contracts are provided including maintenance, repair, and support.

Traditional outsourcing literature has claimed gains for the customer in terms of quality and costs. However, such gains are illusory in outsourcing of high-risk, complex tasks. The use of contracts and governance mechanisms for handling complex procurements is essential in obtaining rewards from outsourcing. Powerful incentives and risks are normally used in industrial service contracts to transfer risks to measure compliance with performance measures. The availability contracts for complex engineering services provision are forms of outsourcing contracts thattransfer resourcesfrom government to external service providers on a substantial scale. The change moves the contractor role from creating resources to managing resources. Such role change mandates collaboration with customers and suppliers in supply/value chains. The management task is then perceived in terms of linking and optimising alignments rather than increasing service levels. Incentive design is one mechanism for linking the coordination of resources required in availability contracting to the business model. This article studies the impacts of agreed contract type and incentive mechanism on the customer and service provider profits using agent-based discrete event simulation model under multiple risk sharing scenarios. [ABSTRACT FROM AUTHOR]