Under pressure to do more with less, governments across the country have moved from direct service provision to providing services by contract. Proponents argue that contracting can reduce costs and improve flexibility and customer satisfaction. Critics point to a growing number of failed contracts, arguing there are numerous pitfalls associated with contracting. Missing from these debates is a discussion of how governments’ managerial capacity can improve contract performance. In this article, we identify specific capacities that governments can use to harness the promise of contracting while avoiding its pitfalls. We present analyses of data on municipal and county government contracting activities that show how governments invest in contract– management capacity in response to several internal and external threats to effective contract performance. Because government investment in contract–management capacity is uneven—that is, some governments invest in less capacity even when circumstances would call for more—our analyses may help to explain why some contract arrangements are more successful than others.