In this paper, a performance-based contract model is developed to analyze the effect of the PB contract in procuring public projects on the contractors' incentives for technological innovation and for moral hazard. Considering the variety of technical needs of construction works, we have pointed out that the PB contract fosters the matching the technical needs of each work and the contractor endowproven that such a mathichg mechanism motivates the contractor to develop new technologies. Moreover, we have pointed out that the role of performance tests in preventing the contractors' moral hazard for excess cost saving by introducing unreliable new technology.