Performance based contracting (PBC) emerged as a new service model which is reshaping the acquisition, operation and maintenance of capital equipment. PBC is often referred to as performance based logistics in defense industry, or is called as power-by-the-hour in the airline industry. The focus of PBC is on the outcome of the system reliability performance, not materials and labors involved in the maintenance. This presentation introduces a novel quantitative approach to planning performance-based contracts in the presence of system usage uncertainty. We develop an analytical model to characterize the system availability by comprehending five key performance drivers: failure rate, usage variability, spare parts inventory, repair turn-around time, and system fleet population. This analytical insight into the system performance allows us to estimate the lifecycle cost by taking into account the design, manufacturing, maintenance and repair across the system lifetime. Two types of contracting schemes are examined under the cost minimization and the profit maximization. This presentation aims to provide theoretical guidance to facilitate the paradigm change as it shits from material based services to performance based contracting.