This paper analyses how capabilities can reconcile conflicting objectives in policy driven public contracting. Results obtained from a quasi‐experiment involving a policy intervention to favour small firms (SMEs) in Brazil show that public manager's contract‐management capabilities can promote cost savings, increased responsiveness (government‐level outcomes), and enhanced buyer‐supplier coordination when favoured firms are successful in public contracting. Execution capabilities of private suppliers positively influence firm‐level outcomes by attenuating the severity of sanctions against favoured firms due to deficient provision. The paper highlights the mechanisms for leveraging performance in public‐private interactions when conflicting goals are present despite inherent contract incompleteness and bureaucratic rigidity, thus adding to the current knowledge of strategic management in the context of public organizations.