4
Transit Service Contracting in the United States: Extent and Practice

As discussed in Chapter 1, the conduct and analysis of a nationwide survey of transit systems formed a major part of this study. This chapter describes the survey and its coverage, and reviews those results that indicate the extent and practice of transit service contracting in the United States.

Survey Design and Method

FTA collects information on purchased transportation as part of the National Transit Database (NTD). Recipients of federal transit grants must report how much transportation they purchase from outside entities for each mode by dollar amount and quantity of services supplied (such as peak vehicles, vehicle-hours, and vehicle-miles). The NTD shows general trends and overall patterns in purchased transportation, as noted in Chapter 1. Yet it does not reveal program- or contract-level details, nor does it offer insight on the reasons for contracting and its results. The committee designed its survey to obtain both quantitative and qualitative information.

FTA furnished a list of 502 public transportation systems from 50 states and the District of Columbia that report to the NTD. These systems provide a mix of transit services. Most offer fixed-route bus or demand-responsive services or both. Many of the larger systems provide other services as well, such as rail



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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience 4 Transit Service Contracting in the United States: Extent and Practice As discussed in Chapter 1, the conduct and analysis of a nationwide survey of transit systems formed a major part of this study. This chapter describes the survey and its coverage, and reviews those results that indicate the extent and practice of transit service contracting in the United States. Survey Design and Method FTA collects information on purchased transportation as part of the National Transit Database (NTD). Recipients of federal transit grants must report how much transportation they purchase from outside entities for each mode by dollar amount and quantity of services supplied (such as peak vehicles, vehicle-hours, and vehicle-miles). The NTD shows general trends and overall patterns in purchased transportation, as noted in Chapter 1. Yet it does not reveal program- or contract-level details, nor does it offer insight on the reasons for contracting and its results. The committee designed its survey to obtain both quantitative and qualitative information. FTA furnished a list of 502 public transportation systems from 50 states and the District of Columbia that report to the NTD. These systems provide a mix of transit services. Most offer fixed-route bus or demand-responsive services or both. Many of the larger systems provide other services as well, such as rail

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience transit. A small number do not offer bus or demand-responsive services, but specialize in commuter rail, vanpool, or ferryboat operations. The survey was mailed in November 2000 to the top executives of each of the 502 systems, accompanied by a letter from the committee chair explaining the purpose of the survey and urging participation; stamped return envelopes were also provided.1 The chair mailed a follow-on letter to recipients in January 2001. Appendix B contains facsimiles of the original cover letter and survey, along with a listing of the recipients and respondents (as of March 15, 2001). As noted in Chapter 1, the survey consisted of two parts. General managers were asked to forward Part 1 to the members of their staffs most familiar with service contracts. This part asked general questions about the kinds of services provided by the agency and its overall use of contracting. It also included detailed questions about the terms and structure of individual contracts and the history of contractor changes and bid activity. Because the four-digit FTA designator for each grant recipient surveyed was available, it was possible to cross-reference the most recent NTD reports (1998) as needed. Since some of the smallest systems (those operating fewer than 10 vehicles) do not report annually to the NTD, however, these systems were asked to provide NTD data in their response, including current fleet size (maximum vehicles in service) and most recent annual ridership and operating expenditures. Each agency was asked to report whether it now contracts for any public transit services. All systems surveyed, whether they answered “yes” or “no” to this question, were requested to return the survey. Those answering “yes” were asked more detailed questions on up to four specific contracts: their two largest for fixed-route bus service and their two largest for demand-responsive paratransit services. For each contracted service, information was requested about the length of the contract; basis of payment; treatment of fare revenues; use of performance incentives and penalties; and parties responsible for the provision of vehicles, facilities, and equipment. Respondents were also asked to describe each contractor—whether publicly owned, private, or not-for-profit—and to indicate whether the services provided in the contract had replaced a directly operated service, created a new service, or succeeded a previously contracted service. Additional information was sought on experience in obtaining the contracted services, particularly for bidding contracts. For each reported contract, respondents were asked to identify the year the current contract was awarded, the number of bidders for the current award, the number of bidders the last time the contract was awarded, the number of times the contract had been rebid, and the number of times the service contractor had changed.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience The general managers were asked to complete the perceptual questions in Part 2 of the survey, which addressed the rationale for contracting and the outcomes of contracting programs. This part also solicited from the general mangers advice on how to make contracting work better. The results from this part of the survey are discussed in more detail in Chapter 5. Survey Coverage and Representation Of the 502 transit systems surveyed, more than half—259—returned Part 1 (the contract staff survey), while 237 returned Part 2 (the general manager survey). Most of the systems that returned one part of the survey also returned the other: 233 returned both parts; 26 returned Part 1 only; and 4 returned Part 2 only. Figure 4–1 shows the response rates (respondents as a percentage of recipients) for Parts 1 and 2 by system size. The survey respondents are comparable in composition to federal grant recipients as a whole. The 259 Part 1 respondents—the focus of this chapter—form a large and diverse group. Systems of all sizes responded in close proportion to their overall numbers (see Figure 4–2). About 60 percent are relatively small systems, operating fleets of 50 or fewer vehicles (in maximum service); this percentage is similar to the share of small systems that reported to the 1998 NTD. The large systems (those operating fleets of more than 250 vehicles) had the highest response rate; hence these systems represent a slightly higher share of the survey respondents than of reporters to the NTD. Eight of the country’s 10 largest bus systems (by fleet size) and 17 of the top 25 returned the survey. The respondents consist of regional and local authorities that specialize in transit, municipal and county departments of public works, and state agencies that receive federal transit aid. The pattern of respondents by agency type is quite close to that of all federal grant recipients (see Figure 4–3). The respondents are well distributed geographically, with their geographic distribution being comparable to that of all federal grant recipients (see Figure 4–4), although a slightly disproportionate number are from the Pacific Southwest—the FTA region consisting of Arizona, California, Hawaii, and Nevada. Information on the number of respondents by region and the states that make up each region is provided in Appendix B. As a group, the 259 Part 1 respondents represent about half of all of federal grant recipients reporting in the 1998 NTD. Moreover, they account for about 55 percent of all bus and demand-responsive vehicles in service and for similar shares of total vehicle-miles and vehicle-hours in revenue service (see Table 4–1).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–1 Response rates by transit system size for Parts 1 and 2 of the survey.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–2 Distribution of Part 1 survey respondents by transit system size, compared with distribution of all federal grant recipients surveyed.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–3 Distribution of Part 1 survey respondents by agency type, compared with distribution of all federal grant recipients surveyed.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–4 Distribution of Part 1 survey respondents by region of the country, compared with distribution of all federal grant recipients surveyed. (NOTE: The ten regions correspond to FTA definitions—see Appendix B.)

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience TABLE 4–1 Part 1 Survey Respondents’ Share of Total Fixed-Route Bus and Demand-Responsive Vehicles, Revenue-Miles, Revenue-Hours, and Operating Expenses Reported in 1998 National Transit Database Service Respondents’ Percentage of Total Fixed-Route Bus   Total Vehicles (Maximum in Service) 59.4 Vehicle Revenue-Miles 59.3 Vehicle Revenue-Hours 59.5 Total Operating Expenses 62.4 Demand-Responsive   Total Vehicles (Maximum in Service) 45.2 Vehicle Revenue-Miles 45.7 Vehicle Revenue-Hours 44.4 Total Operating Expenses 49.0 Total   Total Vehicles (Maximum in Service) 55.8 Vehicle Revenue-Miles 56.7 Vehicle Revenue-Hours 56.9 Total Operating Expenses 61.1 NOTE: The 1998 National Transit Database was the most recent available at the time of the analysis. SOURCE: 1998 National Transit Database, Federal Transit Administration. According to the 1998 NTD, the 259 survey respondents as a group contract for a smaller proportion of their transit services than those systems not responding to the survey (see Table 4–2). This may be attributable to the fact that the survey respondents include most of the country’s largest transit systems. While many of these systems do contract for transit services, the total amount of service for which they contract is typically small relative to their overall operations. Altogether, the 259 respondents are responsible for half the purchased transportation reported in the 1998 NTD. Overall, the survey respondents are broadly representative of systems receiving federal aid. Their responses are therefore highly informative about the extent of contracting by federal aid recipients today, how that contracting is practiced, and what the competitive landscape for contracts looks like. The results of Part 1 of the survey are examined next, often with reference to cross-tabulations of the responses to more than one question. Tabulations of responses to individual Part 1 survey questions are provided Appendix C.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience TABLE 4–2 Part 1 Survey Respondents’ Use of Purchased (Contracted) Services for Fixed-Route Bus and Demand-Responsive Services, 1998 National Transit Database Survey Respondents Total Vehicles in Maximum Service Vehicle Revenue-Miles Vehicle Revenue-Hours Total Operating Expenses Percentage of Bus Service Purchased 6.7 6.7 5.3 4.4 Percentage of Demand-Responsive Service Purchased 74.7 70.5 70.6 69.2 Percentage of All Transit Service Purchased 20.4 16.5 14.0 9.4 Systems Not Participating in Survey   Percentage of Bus Service Purchased 8.3 7.9 6.5 7.4 Percentage of Demand-Responsive Service Purchased 67.2 63.8 63.8 62.2 Percentage of All Transit Service Purchased 26.5 21.3 21.3 14.4   SOURCE: 1998 National Transit Database, Federal Transit Administration. Extent of Transit Contracting Of the 259 Part 1 respondents, 156, or about 60 percent, reported having contracts for transit service, and the remaining 103 reported not contracting at all. About one-third of those that contract—57 of 156—do so for all their services (see Figure 4–5); the other 99 have contracts for only some of their services. Because information was requested on each agency’s largest contracts only, the survey results do not reveal how much contracting takes place in individual systems relative to their total operations. Hence the amount of service contracted by each of the 99 systems that reported “some” (but not all) contracted services may vary widely—from as little as 1 percent of total service to as much 99 percent. To gain a better understanding of the amount of contracting that occurs, the survey results were cross-referenced with data on purchased transportation from the 1998 NTD, which included information for 89 of the 99 systems reporting “some” contracting in the survey. According to these data, about 30 percent of these 89 systems contract for more than 25 percent (but less than 100 percent) of their revenue vehicle-miles, 45 percent contract for 11 to 25 percent, and the remaining 25 percent contract for 10 percent or less.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–5 Percentage of Part 1 survey respondents that contract for all, some, and no transit services (total respondents=259). Taken together, the survey results and NTD data suggest that of the systems that contract for some service, most do so for more than 10 percent of total service, but relatively few do so for more than 25 percent (see Figure 4–6). The survey results and NTD data suggest further differences in the incidence of contracting by system size, type of service, agency type, and region. These differences are discussed next. System Size About half (75) of the 156 respondents that reported use of contracting are from small systems with fewer than 50 fixed-route bus and demand-responsive vehicles in maximum service. About 30 percent (45) are from medium-sized systems with 50 to 249 vehicles. Large systems with 250 or more vehicles account for about 20 percent (34) of respondents (see Figure 4–7). (System size could not be determined for 2 respondents.) Small systems make up a large share of those that contract, primarily because they account for about 60 percent of all transit systems. Yet small systems reported contracting less often than large systems in relation to their overall numbers.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–6 Share of transit systems that contract all, some, and no services (as estimated using Part 1 survey results augmented by NTD data). FIGURE 4–7 Distribution of Part 1 survey respondents that reported contracting by system size.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience TABLE 4–9 Number of Contracting Agencies Using Competitive and Negotiated Methods of Contract Procurement, by Service Type Method Bus Services Percentage of Agencies Contracting Bus Services Demand-Responsive Services Percentage of Agencies Contracting Demand-Responsive Services All Services Percentage of All Contracting Agencies Competitive bidding 36 46.8 57 47.5 93 47.5 Negotiated Procurement 10 13.0 22 18.3 32 16.2 Combination 27 35.1 32 26.7 59 29.8 Other 4 5.2 9 7.5 13 6.6 Total responding 77 100.0 120 100.0 198 100.0

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience TABLE 4–10 Number of Reported Contracts, by Number of Bidders and Service Type Number of Bidders Bus Contracts Percentage of Bus Contracts Demand-Responsive Services Percentage of Demand-Responsive Contracts Other Contracts Total Contracts Percentage of Total Contracts 1 16 18.4 41 28.5 2 59 24.7 2 13 14.9 36 25.0 3 52 21.8 3 25 28.7 23 16.0 2 50 20.9 4 14 16.1 16 11.1 1 31 13.0 5 or more 19 21.8 28 19.4 0 47 19.7 Total responding 87 100.0 144 100.0 8 239 100.0

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience TABLE 4–11 Number of Reported Contracts, by Number of Bidders and System Size Number of Bidders Contracts by Small Systems Percentage of All Contracts by Small Systems Contracts by Medium-Sized Systems Percentage of All Contracts by Medium-Sized Systems Contracts by Large Systems Percentage of All Contracts by Large Systems 1 39 38.6 11 14.5 9 14.5 2 30 29.7 19 25.0 3 4.8 3 14 13.9 22 28.9 14 22.6 4 7 6.9 11 14.5 13 21.0 5 or more 11 10.9 13 17.1 23 37.1 Total responding 101 100.0 76 100.0 62 100.0

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Change in Bidders from Previous Bid Cycle Those systems that currently contract were asked to report the number of bidders from the previous bid cycle to the most recent rebid. Of the 189 reported contracts that have been rebid (that is, those that have been through more than one full bid cycle), 150 had more than 1 bidder during the previous bid cycle. The remaining 39 had only 1 bidder during the previous bid cycle and were not included in this analysis. Of the 150 contracts that had at least two bidders in their previous bid cycle, 36 percent experienced a decline in bidders during the most recent rebid, 23 percent experienced an increase, and about 41 percent had no change (see Figure 4–13). The results differ for bus and demand-responsive services: about as many bus contracts experienced an increase as a decline in bidders; by comparison, 40 percent of demand-responsive contracts experienced a decline in bidders, while fewer than 20 percent experienced a gain. Change in Bid Activity by Contract Age One would expect the number of bidders on a contract to vary somewhat with each successive bid cycle. Whether a pattern emerges and contracts tend to generate more or fewer bids as they go through additional bid cycles might provide some indication of the dynamics of competition over time. Figure 4–14 shows the percentage of contracts that have experienced various levels of bid activity according to the number of times each was rebid. Among those contracts that have been rebid once or twice, about 60 percent attracted more than two bidders during their most recent bid period. There appears to have been only a slight decline in bidder interest over time. About half of those contracts that had been rebid three or more times attracted three or more bidders during their most recent rebid period. Change in Contractors For contracts that have been through many rebids, periodic changes in contractor may be indicative of a competitive environment. Presumably, if incumbent contractors are subjected to competitive discipline, some turnover should be expected, although the minimum amount of contractor turnover that is indicative of a competitive situation is not presupposed. Change in Contractors by Contract Age In general, one would expect to see more contractor changes for those contracts that have been rebid several times, simply because there have been sev-

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–13 Percentage of contracts reported by Part 1 survey respondents with increasing or decreasing number of bids from previous to most recent bid cycle (excluding contracts that had only one bid in previous cycle).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–14 Percentage of contracts with one, two, three, and four or more bidders by number of bid cycles (contracts reported in survey Part 1). eral opportunities for change. Figure 4–15 presents the number of contractor changes for 200 reported contracts, grouped according to the number of times the contracts have been rebid. As expected, those contracts that have been rebid only once or twice are most likely to have had a single contractor: 57 percent of these contracts have had only one contractor, and therefore have not experienced a change. By the third and fourth rebid cycles, however, most contracts have been through more than one contractor; 40 percent have had one or two contractor changes, and 26 percent have had at least three contractor changes. Two-thirds of the contracts that have had five or more rebids have experienced a contractor change. Change in Contractors by System Size Small and medium-sized systems appear somewhat less likely than the largest systems to change contractors. Among those contracts that have been rebid at least once, more than 55 percent reported by small and medium-sized systems

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–15 Percentage of reported contracts rebid at least once that have had contractor changes, (a) by number of changes; (b) by number of times rebid.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience have not changed hands, compared with about 40 percent for the largest systems (see Figure 4–16). History of Contractor Changes and Bid Activity One might suspect that those contracts with a history of contractor changes would elicit more bidder interest and activity because of the higher potential to challenge the incumbent successfully. Figure 4–17 shows the most recent number of bidders for those contracts that have been rebid at least twice (and therefore have a record of change or no change) by the number of times the contract has changed hands during its life.3 The results suggest that contracts without a record of changing hands are most likely to have only one bidder—the incumbent. It is important to note, however, that even among those contracts that do not have a history of contractor changes, most still attract multiple—though so far unsuccessful—bidders when they are rebid. Summary of Results The results from the survey, augmented by NTD data, yield several findings about the extent of contracting, contract terms and provisions, and competition in contracting: Extent of Contracting About half of all transit systems contract for 10 percent or more of their services. About 60 percent have at least some contracted service. Yet in the aggregate, only about 15 percent of combined bus and demand-responsive services (measured in vehicle revenue-hours) are contracted in the United States, and this percentage has changed very little in recent years (see Chapter 1). Transit systems are much more likely to contract out demand-responsive than fixed-route bus services: more than two-thirds of surveyed systems have contracts for their demand-responsive services, whereas fewer than 40 percent have contracts for bus services. More than half the systems with demand-responsive services contract out all of these services. Larger systems are more likely than small ones (operating fewer than 50 vehicles) to contract for at least some transit services, although usually for less than 25 percent of their total services. Small systems contract less often than larger ones, but when they do contract are much more likely to do so for all their services. City and county agencies are more likely than state and regional transit agencies to contract for all their transit services.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–16 Percentage of rebid contracts that have experienced contractor changes: (a) by number of changes; (b) by system size (contracts reported in survey Part 1).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience FIGURE 4–17 Percentage of all reported contracts (among those that have been rebid at least twice) by numbers of bidders during the most recent rebid and by number of contractor changes over the contract life.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Contract Terms and Provisions Most contracts are for multiyear periods, usually 3 years. Bus contracts tend to be longer than contracts for demand-responsive services. Transit agencies usually provide the vehicles and other major assets for bus service contracts. For demand-responsive contracts, there is a much greater likelihood that the contractor will either provide the vehicles or share this responsibility with the contracting agency. Most contracts are structured to pay contractors on a predetermined fee per unit of output produced—usually revenue- or vehicle-hours of service. The contractor is therefore responsible for controlling costs; only one-quarter of reported contracts pay contractors on the basis of cost plus a fixed fee. Monetary penalties to discourage poor performance are common in contracts. Fewer contracts contain monetary incentives for good performance. Contracting Methods and Competition Most transit service contracts are awarded through a competitive process. Most contracts attract more than two bidders, although smaller contracts are more likely to attract only a single bidder. Demand-responsive contracts tend to attract fewer bidders than bus contracts. Small systems are least successful in attracting multiple bidders; most receive fewer than three bids. Transit systems report that the number of bidders on contracts has been relatively stable, but demand-responsive contracts are more likely than bus contracts to have experienced a decline in bidders from the previous bid cycle. The contracts of larger systems are more likely than those of small systems to have changed contractors at least once. As contracts go through successive bid cycles, they continue to attract interest among bidders, suggesting continued competition. Moreover, most contracts that have been rebid at least three times have experienced a change in contractors. Even those contracts that have had only one contractor have continued to attract bidder interest. Notes 1.   Electronic versions of the survey were also made available to recipients on request. 2.   Penalty disputes are typically resolved in court, while disputes over liquidated damages are more likely to be subject to arbitration. 3.   The fact that these contracts tend to attract only one bidder may be the reason for the lack of contractor changes; however, it may also be the consequence. The direction of causality cannot be established.