diff --git a/.changes/unreleased/Fixes-20230629-221615.yaml b/.changes/unreleased/Fixes-20230629-221615.yaml
new file mode 100644
index 00000000000..43a32ee5e95
--- /dev/null
+++ b/.changes/unreleased/Fixes-20230629-221615.yaml
@@ -0,0 +1,6 @@
+kind: Fixes
+body: Allow on_schema_change = fail for contracted incremental models
+time: 2023-06-29T22:16:15.34895-04:00
+custom:
+  Author: michelleark
+  Issue: "7975"
diff --git a/core/dbt/contracts/graph/model_config.py b/core/dbt/contracts/graph/model_config.py
index 89471df8d5b..fbcfb6d3c56 100644
--- a/core/dbt/contracts/graph/model_config.py
+++ b/core/dbt/contracts/graph/model_config.py
@@ -495,12 +495,12 @@ def __post_init__(self):
         if (
             self.contract.enforced
             and self.materialized == "incremental"
-            and self.on_schema_change != "append_new_columns"
+            and self.on_schema_change not in ("append_new_columns", "fail")
         ):
             raise ValidationError(
                 f"Invalid value for on_schema_change: {self.on_schema_change}. Models "
                 "materialized as incremental with contracts enabled must set "
-                "on_schema_change to 'append_new_columns'"
+                "on_schema_change to 'append_new_columns' or 'fail'"
             )
 
     @classmethod
diff --git a/tests/functional/configs/test_contract_configs.py b/tests/functional/configs/test_contract_configs.py
index ae909e6e4bb..a2a2ba8016b 100644
--- a/tests/functional/configs/test_contract_configs.py
+++ b/tests/functional/configs/test_contract_configs.py
@@ -388,7 +388,7 @@ def test__config_errors(self, project):
             run_dbt(["run"], expect_pass=False)
 
         exc_str = " ".join(str(err_info.value).split())
-        expected_materialization_error = "Invalid value for on_schema_change: ignore. Models materialized as incremental with contracts enabled must set on_schema_change to 'append_new_columns'"
+        expected_materialization_error = "Invalid value for on_schema_change: ignore. Models materialized as incremental with contracts enabled must set on_schema_change to 'append_new_columns' or 'fail'"
         assert expected_materialization_error in str(exc_str)