Following a decade of piloting different models of contracting, in mid-2009 the Cambodian Ministry of Health began to test a form of 'internal contracting' for health care delivery in selected health districts (including hospitals and health centers) contracted by the provincial health department as Special Operating Agencies (SOAs) and provided with greater management autonomy. This study assesses the internal contracting approach as a means for improving the management of district health services and strengthening service delivery. While the study may contribute to the emerging field now known as performance-based financing, the lessons deal more broadly with the impact of management reform and increased autonomy in contrast to traditional public sector line-management and budgeting. Carried out during 2011, the study was based on: (i) a review of the literature and of operational documents; (ii) primary data from semi-structured key informant interviews with 20 health officials in two provinces involved in four SOA pilot districts; and (iii) routine data from the 2011 SOA performance monitoring report. Five prerequisites were identified for effective contract management and improved service delivery: a clear understanding of roles and responsibilities by the contracting parties; implementation of clear rules and procedures; effective management of performance; effective monitoring of the contract; and adequate and timely provision of resources. Both the level and allocation of incentives and management bottlenecks at various levels continue to impede implementation. We conclude that, in contracted arrangements like these, the clear separation of contracting functions (purchasing, commissioning, monitoring and regulating), management autonomy where responsibilities are genuinely devolved and accepted, and the provision of resources adequate to meet contract demands are necessary conditions for success.