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Background In medical residency, performance observations are considered an important strategy to monitor competence development, provide feedback and warrant patient safety. The aim of this study was to gain insight into whether and how supervisor-resident dyads build a working repertoire regarding the use of observations, and how they discuss and align goals and approaches to observation in particular. Methods We used a qualitative, social constructivist approach to explore if and how supervisory dyads work towards alignment of goals and preferred approaches to performance observations. We conducted semi-structured interviews with supervisor-resident dyads, performing a template analysis of the data thus obtained. Results The supervisory dyads did not frequently communicate about the use of observations, except at the start of training and unless they were triggered by internal or external factors. Their working repertoire regarding the use of observations seemed to be primarily driven by patient safety goals and institutional assessment requirements rather than by providing developmental feedback. Although intended as formative, the institutional test was perceived as summative by supervisors and residents, and led to teaching to the test rather than educating for purposes of competence development. Conclusions To unlock the full educational potential of performance observations, and to foster the development of an educational alliance, it is essential that supervisory dyads and the training institute communicate clearly about these observations and the role of assessment practices of- and for learning, in order to align their goals and respective approaches.