The Ethiopian Roads Authority is responsible for the construction and maintenance of the road networkrnsystem in the country. ERA is dedicated to reduce cost and time of maintenance activities and to controlrnquality of work as well as keeping the road infrastructure in an efficient state using the traditional methodsrnof contracting. Since 2016, ERA has been contracting out road projects (construction and maintenance) onrnperformance measures as an alternative methods of contracts. This method is named performance basedrncontract (PBC). Starting from 2016, ERA is implementing PBC on three projects at a pilot level thosernfinanced by local financer (government and road fund) and one project financed by the World Bank. rnTherefore, the aim of this thesis is to examine the potential of this method for improving the roadrnconstruction and maintenance practice of ERA. In addition, the advantages and disadvantages of the PBCrnwere investigated by analyzing the challenges faced by ERA during the implementation of PBC at the pilotrnprojects. Accordingly this thesis presents reviews of literatures recently produced. It also briefly discussesrnthe problems of traditional methods of contracting in ERA which is supported by a case study. Thernimplementation of PBC in ERA has been reviewed and analyzed. rnThe thesis examined those implemented PBC projects to identify the benefits achieved and respectivelyrndifferentiated the negative impacts of PBC and Traditional Contracts on ERA projects. To effect this, arnseries of questionnaire surveys and interviews were conducted out, which helped to achieved researchrnobjectives. rnThe main contributions of this thesis are: (i) defining PBC and explaining its advantages and disadvantagesrnduring implementation in ERA projects; (ii) examining the potential of PBC in ERA; and (iii) analyzingrnthe challenges faced during implementing PBC in ERA. Therefore, the significant achievement of this studyrnwas identification of hindrances in establishing PBC in ERA and examining its potentiality andrneffectiveness. The research recommended that PBC is a better alternative that should be adopted by ERArntogether with the traditional contract method. The potential of reducing maintenance costs, increasing thernquality of works and reducing the chance of corruption are some of the benefits of PBC.