Chelsea have provided further evidence of their determination to become self-sufficient by entering into negotiations over a performance-related contract extension for Michael Ballack. The Germany midfield player’s deal expires at the end of the season, but it includes an option to extend for another year that both sides would like to take up.

Ballack’s contract is worth £121,000 a week irrespective of his contribution on the pitch, but such is the determination to control costs at Stamford Bridge that any extension is likely to include a significant performance-based component. It is understood that initial talks between the club and Ballack’s advisers have focused on a much lower basic salary, but with large bonuses based on the 32-year-old’s number of appearances, goals and the performance of the team.

Ballack is believed to be happy with such a deal, because he received a significant signing-on fee when he arrived on a free transfer from Bayern Munich 2½ years ago and is confident of continuing to deliver match-winning displays. In addition to sorting out the fine detail, the main sticking point is the length of the proposed contract, with Ballack keen to sign a two-year extension that would keep him at the club until 2011. Negotiations began in earnest before Christmas and should be concluded by the start of next month.

Chelsea’s tentative move towards incorporating performance-related pay into their wage structure forms a part of their drive to become self-funding, but it also represents a targeted response to the problem of maintaining an ageing squad.

The five-year deal signed by Frank Lampard last summer was a significant move away from a system of fixed contracts, because the wages of the England midfield player, 30, are understood to rise until the third year of the deal before falling in the final two. The contract outlined for Ballack would be the first of its kind at the club. Such deals could become more common for older squad members at Chelsea because they offer the club protection from incurring huge liabilities when players are injured or lose form. It will not have gone unnoticed that Didier Drogba, the 30-year-old striker who has had several knee operations and has frequently spoken of his desire to leave, is due to hold talks on a new deal in the summer.

Chelsea’s new stance appears good business practice, although it is a considerable departure from recent policy — Andriy Shevchenko joined on a five-year deal worth £130,000 a week just before his 30th birthday — and it reflects the desire to move away from reliance on the largesse of Roman Abramovich. The club insist that it is unconnected to the owner’s huge losses on the Russian stock market and the general economic downturn.

Chelsea view the recession as an opportunity to adopt a more rigid cost structure in the hope of emerging as a more efficient business in a couple of years, with transfer spending and players’ wages obvious areas in which to make savings. All other contract talks have therefore been put on hold, with Drogba, Joe Cole and John Obi Mikel being told to wait until the end of the season to discuss new terms despite having only 18 months remaining on their deals.

Luiz Felipe Scolari, the manager, has also been told that he will have no money to spend during this transfer window unless Chelsea suffer an injury crisis or receive an offer that is too good to refuse for a fringe player, leading to the need for a replacement. The club hope to refresh the squad in the summer without asking Abramovich for money, using the £12 million received from Manchester City for Wayne Bridge and any other transfer income from the sale of unwanted players such as Florent Malouda and Salomon Kalou.