Executive Summary

Each year more than 500 state, regional, and local government agencies receive aid from the Federal Transit Administration (FTA) for the provision of public transit. They include the country’s largest urban transit agencies, each covering thousands of square kilometers, operating thousands of vehicles, and serving hundreds of thousands of riders per week. They also include some of the country’s smallest transit systems covering mostly rural areas and operating only a handful of vehicles, typically serving a few hundred passengers per day. Most of these agencies provide fixed-route bus and demand-responsive transit services, and some also provide other services, such as commuter and rapid rail. Given this assortment of system types and services, it is not surprising that one finds great variety in the way transit agencies deliver their services to the public—from the use of their own vehicles and personnel to the use of outside contractors for some or all services.

In the interest of learning more about contracting as a method of transit service delivery, the 1998 Transportation Equity Act for the 21st Century (TEA-21) called on the Transportation Research Board (TRB) to conduct a study of contracting by recipients of federal transit grants. The act called for an examination of the extent and practice of transit service contracting and its effects on operating costs, customer service, safety, and other aspects of service quality and quantity.



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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Executive Summary Each year more than 500 state, regional, and local government agencies receive aid from the Federal Transit Administration (FTA) for the provision of public transit. They include the country’s largest urban transit agencies, each covering thousands of square kilometers, operating thousands of vehicles, and serving hundreds of thousands of riders per week. They also include some of the country’s smallest transit systems covering mostly rural areas and operating only a handful of vehicles, typically serving a few hundred passengers per day. Most of these agencies provide fixed-route bus and demand-responsive transit services, and some also provide other services, such as commuter and rapid rail. Given this assortment of system types and services, it is not surprising that one finds great variety in the way transit agencies deliver their services to the public—from the use of their own vehicles and personnel to the use of outside contractors for some or all services. In the interest of learning more about contracting as a method of transit service delivery, the 1998 Transportation Equity Act for the 21st Century (TEA-21) called on the Transportation Research Board (TRB) to conduct a study of contracting by recipients of federal transit grants. The act called for an examination of the extent and practice of transit service contracting and its effects on operating costs, customer service, safety, and other aspects of service quality and quantity.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience To conduct the study, TRB convened a 12-member committee of experts in public transportation management, labor, economics, and public policy. In carrying out the study, the committee reviewed previous reports on transit service contracting; conducted its own nationwide survey of public transit systems and their general managers; and interviewed transit managers, labor union leaders, contractors, and members of transit policy boards. The study focused on fixed-route bus and demand-responsive transit services, which account for the vast majority of transit service contracts. Most of the findings and conclusions presented in this report emerged from the committee’s survey of transit systems and their general managers. In the first part of the survey, transit systems from around the country were asked to provide information on the extent to which they contract for bus and demand-responsive services and to describe their individual contracts and contracting programs. In the second part of the survey, general managers were asked to explain why they contract or do not, to relate their experiences with contracting, and to offer advice on how to make contracting work better. Part 1 yielded much detail on the amount of contracting that goes on and how contracts are obtained and structured; the results from Part 2 offer important insights about the effects of transit contracting on cost, quality, and other aspects of service. Though highly informative, the national transit survey was a challenging undertaking, its design, administration, and analysis consuming much of the time available to the committee for deliberation and analysis. While it would have been desirable to evaluate and critique the results of other studies and databases in similar depth, doing so would have been a time-consuming and contentious process that would have impeded the committee’s ability to collaborate in conducting the survey. The committee believes, moreover, that the survey results in and of themselves are an important contribution to the field and anticipates their use by others to better understand and quantify the practice and effects of transit contracting. The committee drew on its own varied expertise and experience to interpret the large amount of empirical information obtained from the survey. Resulting findings and conclusions are summarized in the following pages, along with additional insights and ideas for follow-on study. Extent of Transit Service Contracting in the United States As part of the National Transit Database (NTD), FTA maintains a database of “purchased transportation” by transit systems that have received federal aid.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience The committee supplemented this information with the results of Part 1 of its survey of transit contracts and contracting programs. More than 250 systems, accounting for more than half of all federal aid recipients, responded to the survey. These responses, augmented by NTD data, are highly informative about the extent and methods of transit service contracting in the United States. The survey findings reveal that transit contracting is neither rare nor monolithic in practice. Hundreds of transit systems—of all sizes and types—now contract for some transit services, and many have done so for a number of years. About one-third of all federal aid recipients contract for more than 25 percent of their services, and about one-quarter contract for a smaller share. The remaining 40 percent do not currently contract at all, yet about one in three of these systems has done so in the recent past (see Figure ES-1). Altogether, about 15 percent of all bus and demand-responsive vehicle-hours is provided by contractors, a percentage that has changed very little during the past 5 or 6 years (see Figure ES-2). Contracting by System Size and Service Type In general, larger systems (those with more than 50 total vehicles) are more likely than smaller ones to contract for some transit services (see Figure ES-3). Yet when small systems do contract, they are much more likely to contract for all services. Many small transit systems are run by city and county agencies that do not specialize in transit. These general governmental agencies are twice as likely as regional transit agencies to contract for all their transit services. A corollary is that while regional transit agencies are more likely than city and county agencies to have some contracted services, they seldom contract for most of their services. A majority of both small and larger transit systems contract for demand-responsive services; however, they differ significantly in their propensity to contract for fixed-route bus services. About half of small and two-thirds of larger systems contract for all their demand-responsive services. By comparison, one-third of smaller systems contracts for all fixed-route bus services, whereas only one-sixth of larger systems do. Overall, contracting is much more common for demand-responsive than for fixed-route bus services. About 60 percent of transit systems that provide demand-responsive service contract for 25 percent or more of this service, and more than half contract for all of it (see Figure ES-3). By comparison, only about 30 percent of systems that provide fixed-route bus service contract for 25 percent of more of this service, and about 25 percent contract for all of it.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE ES-1 Estimated share of transit systems receiving federal aid and currently contracting for fixed-route bus and demand-responsive services (based on survey results augmented with data from the National Transit Database). Altogether, about two-thirds of demand-responsive service is provided through contractors, compared with only 6 percent of bus service (see Chapter 1, Figure 1–3, p. 5). Possible Reasons for Contracting The survey findings, coupled with NTD data, suggest some plausible reasons why transit agencies choose to contract. That a large number of systems contract for a relatively small proportion of services suggests that many are using the practice to fill service niches or to add or expand services quickly. Likewise, the findings indicate that many small systems, run by city and county agencies that do not specialize in transit, may be contracting for highly pragmatic reasons, such as the need to obtain certain specialized expertise. Yet statistical data on the magnitude and incidence of contracting are not sufficient for assessing the validity of these possible reasons for contracting. Part 2 of the survey was therefore designed to elicit from general managers of transit systems the factors influencing their decisions about contracting. Their answers are summarized next.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE ES-2 Recent trends in vehicle-hours directly operated and purchased for demand-responsive and fixed-route bus services, 1994 to 1998. (NOTE: Percentages refer to share of total vehicle-hours purchased. SOURCE: National Transit Database.)

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE ES-3 Contracting for fixed-route bus and demand-responsive transit services by (a) system size and (b) service type.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Transit General Managers’ Rationale for Contracting One could ask any number of individuals about factors influencing the decision to contract for transit service and obtain a broad range of answers. The committee chose to survey transit general managers because they are highly identifiable participants in the decision to contract and because they can provide specific information on contracting procedures and effects. At the same time, it must be recognized that the choice of contracting is often a policy-level decision influenced by political, legal, and institutional factors beyond the control of transit managers. Comparable surveys of others involved in the decision to contract, such as local elected officials and transit board members, would undoubtedly have yielded much additional information, and possibly different answers, about the factors influencing contracting decisions and about contracting outcomes. Yet while recognizing that the survey results represent the particular vantage point of transit management, the committee believes they offer much insight into why some transit agencies contract and others do not. Chief Reasons for Contracting Survey respondents included general managers of systems that currently contract and those that do not, among them some that have contracted in the recent past but have since stopped doing so. The general managers of systems that presently contract gave several reasons for the practice. The most prevalent were to start new services, reduce operating costs, and improve service cost-efficiency. Relatively few cited state and federal laws and policies as a main or important reason for contracting. Chief Reasons for Not Contracting In explaining why they do not contract, general managers cited a desire to maintain control over their operations, low anticipated cost savings, and little reason for changing current practice. Like the general managers of agencies that do contract, few general managers of agencies that do not contract cited state and federal laws and policies, including the labor protection provisions in Section 13c of the Federal Transit Act, as influencing their decision.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Interest in Change Nearly 80 percent of the general managers of transit systems that currently contract reported that they would do so again given their experience; about 15 percent said they would not, and 5 percent were uncertain. Likewise, more than 70 percent of the general managers of systems that do not contract reported that they are not interested in adopting the practice to replace or supplement current methods of in-house service delivery; 25 percent said they are interested in doing so, and 5 percent were uncertain. To be sure, some general managers indicating no desire to change may be defending or rationalizing their current approach. Yet the findings also suggest a fair amount of satisfaction with existing practice. It is certainly plausible that those systems whose circumstances make them best suited to contracting are now doing it, while those with less favorable circumstances are not. Taking a somewhat different perspective, however, the results also reveal that a sizable minority of general managers—one in seven who are now contracting and one in four who are not—have an interest in changing their current approach to service delivery. Methods of Structuring and Obtaining Contracts The surveyed transit systems were asked to provide details about their two largest fixed-route bus and two largest demand-responsive contracts. The survey asked about the length of each contract, the basis of payment, the use of performance incentives and penalties, and other details of contract terms and provisions. In addition, respondents were asked about the methods used to obtain the contract and the degree of competition experienced, including the number of bidders and contractor changes that occurred during each bid cycle. The answers to these questions, gleaned for nearly 300 contracts reported by more than 150 systems, reveal much about the way service contracts are structured and the degree of competition for contracts today. Contract Specificity Most transit service contracts are highly prescriptive and detailed agreements. They not only define the kinds of services to be offered, but also prescribe how those services are to be provided; how service quantity and quality are to be measured and monitored; and who will provide the vehicles, facilities, main-

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience tenance, and support services. Such specificity is often necessary to convey the multifaceted and sometimes intangible attributes of transit service, such as customer care. The survey findings suggest that detailed contracts are especially important as a means of ensuring that all parties understand each other’s responsibilities and expected performance. Legal constraints that preclude the development of ongoing and informal relations between public agencies and particular suppliers—as are often found among private organizations that regularly buy and sell services from one another—can make such clarity and specificity even more important for transit service contracting. Contract Provisions Most transit service contracts include provisions that prompt the contractor to control costs and pay attention to service quality. Contractors are usually compensated on the basis of the amount of service they provide according to a specified rate, such as a charge per revenue-hour; relatively few are compensated on the basis of the costs they claim to have incurred in supplying the service. This approach shifts cost-containment responsibilities to the contractor. Furthermore, contract terms are often designed to foster competition. The most common contract duration is 3 years with two 1-year options. This interval is apparently long enough to avoid repeated transaction costs associated with frequent rebidding, but short enough to ensure that incumbent contractors do not become complacent and that competitor interest is sustained. Most contracting agencies provide the vehicles and facilities for the service, especially in bus contracts. This practice, too, may foster competition by reducing contractors’ capital risks and by allowing the agency to retake and rebid the service if the winning contractor fails to perform as required. Competition for Contracts The survey results indicate that the majority of transit systems obtain service contracts through procedures intended to attract competing bidders. Most reported contracts, especially the largest ones and those for bus services, have attracted multiple bidders. As might be expected, larger contracts, more prevalent among the bigger transit systems, tend to attract greater numbers of bidders and involve changes in contractors more often than do smaller contracts. In general, however, the numbers of bidders on contracts have been stable in recent years, and many contracts continue to change hands even after

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience having been rebid numerous times, suggesting that incumbent contractors are frequently subject to competition. Effects of Contracting on Service Cost and Quality During the past two decades, numerous studies have focused on the effects of contracting on the cost and quality of transit services. These studies have addressed many pertinent questions, such as the extent to which contracting saves or contributes to transit agency overhead and budgetary costs, and how contracting’s effects on labor productivity, labor-management relations, and worker retention relate to the quality of service experienced by customers. As noted, contracting is used in many different ways for multiple purposes. Because of variations in circumstances and analytical methods, it has often proven difficult to use the results of individual studies to draw general conclusions about the nature and magnitude of contracting’s effects on cost, quality, and other aspects of transit service. A comprehensive analysis and synthesis of previous research could not be undertaken within the time frame and resources available for this project. Instead of attempting to formulate such judgments about the effects of contracting by reviewing past studies, the committee chose to ask the transit general managers surveyed for their own assessments of those effects. Respondents received no guidance on what constitutes a cost saving or a high quality of service; instead, they were simply asked to use their judgment in identifying and rating various effects of transit service contracting. Most of the general managers of systems that are now contracting reported that their contracting programs are meeting expectations. More than half stated that their expectations for contracting have been fully met overall, and another 38 percent reported that their expectations have been partially met. Almost all of the general managers of systems that are now contracting reported cost savings from the practice. Most of these general managers, from small and large agencies alike, cited reductions in operating costs. Small agencies reported benefits from contractors’ assumption of supervisory and administrative burdens. The negative effects of contracting mentioned most frequently by general managers from systems that have contracted, including those that do so now and those that have done so in the past, were the loss of operational control, shortcomings in service quality, and problems with customer service. More than half the general managers that reported having their expectations for con-

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience tracting partially met identified service quality as an important problem. General managers from systems that no longer contract also cited problems with service quality. General Managers’ Advice on Contracting By and large, the general managers from transit agencies that are now contracting are satisfied with the cost savings achieved and less satisfied with the quality of service provided. Yet often through practical experience, the transit systems that are contracting today have found ways of achieving acceptable levels of both cost savings and service quality. Many have advice to offer other agencies that are considering contracting, including the following: Anticipate the advantages and disadvantages of contracting, and set realistic expectations. Establish a competitive procurement process that invites high-quality proposals and screens out unrealistic proposals and unqualified contractors. Prepare an internal analysis of the cost of service contracting as a baseline for examining bids. Spell out all contractor responsibilities clearly, monitor performance closely, and communicate with the contractor frequently and openly. Additional Insights and Ideas for Follow-On Study In designing the survey, the committee sought to balance a desire for additional data against practical considerations involved in obtaining a sufficiently large number of responses that could be analyzed in a timely manner. Some relevant data were therefore sacrificed, such as the overall magnitude of the benefits and costs associated with contracting and general managers’ satisfaction with their in-house services. Such information would undoubtedly have been helpful in providing an appropriate context for assessing the survey findings on contracting’s results and cost-effectiveness. Nevertheless, the committee believes researchers and practitioners will benefit from the perceptual information on contracting outcomes obtained from the hundreds of general managers responding to the survey. Likewise, more information on the extent to which policy and political environments have influenced the decision to contract would have been desirable. While the general managers surveyed offer one perspective on such

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience influences, the experiences of individual committee members suggest that political considerations, especially at the local level, can be important in decisions about whether to contract. In subsequent research, the information from the committee’s survey of general managers must be supplemented with other information, obtained in part from other participants in transit policy making, if the overall effect of political considerations on contracting decisions is to be understood. The survey results nevertheless provide much new information for assessing transit service contracting. Collectively they demonstrate that contracting is a dynamic undertaking. At any given time, some agencies are contracting for some or all their services, some are not contracting at all, and others are about to begin or forego contracting. Certainly, transit agency needs and circumstances can change over time in ways that affect the comparative advantages of contracting and direct service provision. Reports from general managers suggest that contracting can entail a trade-off between cost savings and service quality. An agency’s original desire to contain costs through contracting may be tempered by concerns about ensuring service quality. Over time, as transit agencies exert more control over service quality by imposing more stringent performance requirements in contracts, it is reasonable to expect contractor costs to rise. At the same time, labor unions may agree to changes in collective bargaining agreements that make direct service provision more cost-competitive with contracted service. Although decisions to contract are sometimes portrayed as being politically or ideologically motivated, the committee believes that practical considerations and experiences such as these are important factors in the decision to start, stop, or continue contracting. A final and related insight concerns the nature of service contracting relationships. The committee found much evidence of the need to define thoroughly and formally in contract documents the quality of transit service to be delivered. Yet not all the qualitative aspects of transit service can be articulated well in a written set of specifications. On the basis of past experience with individual contractors, transit managers can come to value certain contractor qualities that may not be adequately described in a request for proposals or a contract document. The emergence of such positive relationships is perhaps most evident in contracting for demand-responsive services; transit managers are reluctant to change contractors once they have found one that performs well by, for example, pleasing regular customers and generating few service

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience complaints. The continuation of these types of relationships may be as advantageous to riders as to the agency and contractors involved. The extent to which such service contracting relationships exist today in the transit industry and can be fostered and maintained to the benefit of riders deserves further consideration in follow-on studies that assess the appropriate role of public transit agencies in contract monitoring, oversight, and management.

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