Contract has played a major part in the restructuring of the public sector in Britain over the past fourteen years. The radical Conservative assault on the concept of public service provision, and the progressive transformation of the state into a purchasing operation run along private business lines, have involved contract in the introduction of internal markets together with market-based management techniques, the creation of semi-independent agencies with clearly defined goals and responsibilities, and the devolution of financial responsibility to budget-holding business units operating in internal trading relationships. In particular, within local authorities, the introduction of compulsory competitive tendering (CCT) has had a significant impact on the organization of service provision. As first-round contracts under the Local Government Act 1988 come up for renewal in 1994, a major Audit Commission report' has severely criticized the performance of local authorities in managing the contracting process,2 and made a number of concrete recommendations for improvement. Since approximately 85 per cent of the total contract value in the first round was awarded by local authorities to their own direct service organizations (DSOs),3 such criticisms refer principally to perceived failures in internal contracting. This would seem to be a good moment to evaluate the nature, extent, and limits of 'contractual' governance in transactions within local authorities, particularly since such an analysis may be expected to be of relevance in other public sector contexts, such as the National Health Service, the BBC, and the electricity supply industry. After providing a brief overview of the operation of CCT, the paper will argue, first, with reference to on-going research being carried out in a large