Let's start with an important point. If Bob was capable of working at an acceptable level, but wasn't doing so, then you and Alice messed up by terminating his contract without giving him a chance to fix things, or at least raising the subject with Bob. Neither you nor I know why Bob was doing unsatisfactory work - he may not have known his work was subpar, or he may have thought that the level he was working at was good enough to keep the company happy. In any case, if you had gone to Bob and said "your work isn't as good as we were expecting and if it continues like this we will have to think about terminating your contract" that would very likely have resulted in the improvement you see now, and you wouldn't be in this situation. (I myself have been in a situation where I was perceived as delivering substandard work entirely due to a misunderstanding. Fortunately my boss talked to me before things got serious, and it was trivially fixable.)

There is absolutely nothing stopping you from issuing a new contract, and you are no worse off than you were before if you have to terminate it. You should of course talk to Bob about the change in performance - don't forget to tell him how pleased you are with his work now - and get his explanation of why there was a change and why he wasn't performing before. This may not be due to anything in his personal life. It's up to him to tell you or not if it is personal. Its fine to ask "is there anything in your out-of-work life that is relevant and you want to tell us about", as long as you accept that the answer "no" is final and the end of the discussion.

It seems Bob is going above and beyond, and that he doesn't hold any bad blood.

How about something like:

For the last few weeks, your work ethic has been on point, and you've become a valued member of the team. You seem to understand that our previous decision to not renew your contract was due to your performance, a problem you've since fixed, to the point it'd be careless of us to let you go without offering you a x month renewal of your contract.

With a few key points:

• Will he care about a less than 6 months contract? If he is such a good employee, what's stopping you (the company, not you personally) from offering him a full time position? Personally, I would find "you're such a good employee, please stay for another month" to be a bit insulting.
• What happens in x months? His new contract expires, and then what?
• He still might refuse, and there is nothing you can do about it.
• It seems Bob has become irreplaceable and he might recognize that. What happens if he agrees to stay, but only with a raise? I would find this improper, but considering his previous option was getting let go, he might still try the gamble.

Can the company willfully terminate a contract due to performance? If so, it seems like your questions are irrelevant - let Bob know how well he's doing, that his recent performance is the reason that you are renewing his contract, and that if he keeps it up he won't have to worry. If he slides again, no big deal - terminate the contract early.

Even if that is not an option, I'm still not sure there's a point in asking these questions. Bob would never have a reason to tell you he thinks he might not perform well if you give him a new contract. My advice is to trust that he will keep performing well and make sure you keep giving him the support needed to make it so.

Also, if his contract is renewed for only a few months than he still needs to perform well for a future recommendation/review, right?

Honestly it sounds like both you and Bob need to work on communicating better. You, on expressing performance expectations more clearly and giving frequent feedback. Bob, on seeking feedback on how well he is meeting those expectations and raising any mitigating factors as soon as they arise.

Was Bob offered any coaching or mentoring, or counseled about performance, before the decision to terminate his contract was made? It's not completely clear from your question.

If not, then I think the decision to cancel was probably a mistake, given that he has demonstrated the capability of improved performance, and he should be offered a contract extension without qualifications. Yes, this represents a risk to you, but Bob has to accept the risk that your commitment to him is uncertain. Offering a contract extension with qualifications is basically stating "yes, your performance has improved, but we are still not sure about you". This might draw the response from Bob that it's probably best to move on anyway.

If Bob WAS offered coaching or mentoring about performance, it failed to improve performance, and Bob did not raise the medical issue until the last minute, I would probably stick with the contract termination IF it is in fact legal (I have no comment on that issue). The risk that the performance improvement is only short-term and not sustainable is real.

Edited in from very helpful comments by Mark Rotteveel

Mark Rotteveel posted some useful comments with some links to specific law for the OP's region, which I'll add here so they don't get eaten by the big automatic comment cleaner, as comments are not guaranteed to be persistent on SE. These links cover the specific law and exceptions to it.

https://www.uwv.nl/nl/ziek/ziek-uit-dienst

https://www.uwv.nl/nl/ontslag/ontslag-tijdens-ziekte

https://www.uwv.nl/nl/ontslag/ontslagvergunning-langdurige-arbeidsongeschiktheid

https://wetten.overheid.nl/BWBR0005290/2025-07-18/0#Boek7Titeldeel10Afdeling9

Thanks to Mark for his effort.

Original answer

To me this seems like choosing the option with the least legal (and financial) risk to the company.

One of the OP's comments is rather odd:

A comment asked:

Did you talk to the company doctor?

They said:

Yes, but the sick leave/burnout laws in the Netherlands is so strict that any conversation initiated by the employer that's not carefully planned could potentially trigger a lawsuit. An employee whose performance is hindered due to sickness can't be fired (including not getting a renewal).

This is very dubious legal ground to defend termination on. You sound like you're trying to use the letter of the law to defeat the purpose of the law, and that seems a risky strategy.

You seem to know you have an employee who has an illness of some kind that affects/affected their work performance.

You seem to know that termination or not renewing their contract under those conditions is not allowed by the law.

The great mystery to me is why you don't simply offer a full renewed contract?

It's the safest legal option you have.

Any other choice opens up the possibility of legal action once they leave (or even before). This should be something you (and the company) would try and avoid creating a risk of happening. Note that the less solid your legal ground, the more legal costs you open yourselves up to in a potentially long legal dispute, even if you won the legal argument.

I'd suggest the correct approach is to offer a full contract renewal without strings attached and ensure the employee has all the medical supports they are entitled to by law.

You opened up a legal risk when you terminated in the manner you did. Fix that quickly before it becomes a certainty, not a risk.

If the contract has not expired yet, you can extend it any time.

That is uncommon, but not unheard.

After that conversation, his performance completely turned around. He went from being someone others felt uncomfortable sitting with to a delight to work with. The quiet person suddenly became a major contributor to many discussions, and his energy increased significantly. The team and I are now saddened by his imminent departure. During this time, I also replaced Alice as the manager, which gave me the chance to mentor him more directly. I am now almost confident that he would be an excellent addition to the team.

One lesson in all this is that obviously Bob never was inherently unable to do what you wanted him to do. We are so used to sorting people in buckets like ”good performer” or “bad performer” and to the idea that one of the manager's most important job is to find the right people and get rid of the others that we lose track of the fact that performance at an individual or collective level is just as much a function of context and circumstances than it is the result of individual qualities.

That's not a particularly novel insight, there is a whole literature on this and related ideas in anthropology, in sociology, and in psychology (e.g. on attribution biases like the “fundamental attribution error” or on cultural norms around the “locus of control”). Yet, the high-low performer framework is so strong that we still pay a lot more attention to individual evaluation than contextual factors.

However, since the law forbids me from probing into his personal situation, I would like to ask him how he sees himself performing if he were to get a new contract. In other words, is he performing this way now because he has a reason (getting a reference for a new job), or because his personal situation is resolved?

That's not en either-or situation or something about which Bob will have any particularly useful insight to share. We are not very good at predicting our own behavior and we obviously have no idea what personal problems we might face in the future. Furthermore, to the extent that Bob was deliberately “slacking”, that would still be a response to the context he was in and something he has no reason to share with you even if you could ask.

In a way, it feels as if you are still wondering whether Bob really is a low performer or a high performer but we have seen that Bob, like most people, could be either at different times. Even outside major life events, we all respond to incentives and the circumstances in which we find ourselves. That's true for Bob but that's also true for all the other members of your team, even those who have never given you any reason to worry in the few years you have known them. And that distinction has proven to be especially useless in Bob's case!

Instead, it might be more fruitful to think about the reasons you might provide for Bob to continue to contribute to the team in the way you wish. For example, since it seems you are concerned Bob might be too sensitive to external rewards (like a reference) then is there something like a career path with significant evolution that you could offer in the future? If not, the risk his behavior might change again will be there and a conversation is not going to alleviate it.

Neither you or the contractor are reliable.

You have to stand to your decisions and communicate expectations in the performance of others before execution. Changing your mind like the wind changes directions is not well perceived by the team and your peers. Predictability creates stability and trust.

This is what you get when mission-critical work is done by contractors.

Employers love the idea of employing salaried employees on a contract basis. Screwing them out of benefits seems so wonderful. Employers can also circumvent all labour laws protecting employees against termination of work. You are not firing, you are just not renewing a contract. Wonderful.

The only real problem with this setup is when the tech that has all the passwords for the server and database disappears, and the business does not legal basis to compel him to return or the senior dev says he is going to reknew his contract but then on the day of signing vanishes as leaving a half programmed app with nobody knows how to complete.

Except for those risks, there is no real problem with employing people to do mission-critical work on a contract basis.