Source: Living Cities
The Pay for Success (PFS) model is a funding approach that ties payment for services with the achievement of measurable outcomes. The movement towards PFS is a means of ensuring that high-quality, effective social services are working for individuals and communities. PFS has been used to scale up effective programs and interventions, as well as test innovative models of service delivery. Since the payer is not committed to paying for services if they do not achieve the desired outcomes, PFS can be particularly attractive to governments as a way to realize greater accountability and efficiency by allocating resources to programs with demonstrable outcomes.
Traditionally, contracts or grants to support social service delivery are based on the volume of services delivered (e.g., number of affordable housing units produced) or short-term outputs (e.g., number of families at 80% AMI who are housed on a mixed-income development). In the PFS model, instead of government paying nonprofit organizations to deliver services like housing counseling, private investors provide the funding and are repaid later by the government (along with a potential profit) if the service meets agreed-on performance benchmarks. This idea of using private “return-seeking” capital to provide affordable housing has wide appeal, with PFS proponents asserting that attracting private capital in the service of society may be the perfect innovation to plug the funding gaps in the government and nonprofit sectors.
But, how exactly does this model work? Upon launch, a Pay for Success project follows the mechanics below, as detailed in the contract:
Stanford Social Innovation Review | The Payoff of Pay-for-Success
Nonprofit Finance Funds | What is Pay for Success?
Urban Institute | Pay for Success: A New Way to Fund What Works
United States Department of Labor | What is Pay for Success? Frequently Asked Questions about the PFS Financing Model
Living Cities | Pay for Success: Living Cities' Initial Screening Criteria