Contracting Fixed-Route Bus Transit Service (2018)

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20 Introduction This is the first of two chapters presenting the results of a survey of transit agencies regard- ing experiences in contracting fixed-route bus transit service. The survey was designed to elicit information on: • The procurement framework, • Contract/operating agreement structure, • Transition issues, • Labor issues, • Oversight, • Challenges, and • Lessons learned. This chapter presents responses by category listed for the first five categories. Challenges and lessons learned are addressed in Chapter 4. Thirty-seven completed surveys were received from the 45 transit agencies in the sample, a response rate of 82%. Some agencies did not answer all questions. Four partially completed surveys were also received, and responses from the partially completed surveys are included in this analysis. Most responding agencies contract all of their fixed-route bus service. All small agencies and 86% of medium agencies contract all fixed-route bus service. Large agencies are more likely to contract only a portion of their fixed-route service (Figure 3). Contracting is not a new phe- nomenon; over 85% of all respondents have contracted fixed-route bus service for more than 10 years. Cost-related factors are the most common reasons for contracting, followed by acquiring expertise, minimizing the size of agency staff, and responding to mandates from boards or gov- erning bodies (Figure 4). Taking advantage of the greater expertise provided by contractors is an especially important reason for small agencies. Many midsized agencies are mandated to con- tract at least some of their fixed-route service. Other potential reasons were included in the sur- vey question; Figure 4 includes reasons cited by at least one-third of agencies in any size category. Procurement Framework RFP Preparation Responding agencies most often develop an RFP for fixed-route contracting services by adapting the agency’s standard RFP template and/or reviewing similar RFPs developed by other agencies (Figure 5). Respondents emphasized that the RFP and particularly the scope of work C h a p t e r 3 Survey Results Part 1

1 1 12 12 8 1 1 50 10 20 30 40 All 50 to 99% 25 to 49% Less than 25% Small Medium Large Figure 3. Percentage of fixed-route bus service that is contracted. 11 8 11 7 3 1 8 9 7 5 10 5 10 8 3 5 4 4 0 10 20 30 Minimize operating cost Improve cost efficiency Take advantage of contractor expertise Minimize size of agency staff Mandated by governing body Improve labor productivity Small Medium Large Figure 4. Reasons for contracting. Note: Multiple responses allowed. 6 10 3 1 7 7 1 3 10 5 5 4 0 10 20 30 Standard RFP template with specific scope inserted Based on RFPs by similar transit agencies New from-scratch RFP Developed by a consultant Small Medium Large Figure 5. Preparing the RFP. Note: Multiple responses allowed.

22 Contracting Fixed-route Bus transit Service evolve over time, often in response to experience under the then-current contract. Use of a stan- dard template or consultant assistance increased with agency size. Reliance on other agencies’ RFPs decreased with agency size. Standard elements in a contracting RFP include description of the bus service, vehicles, and facilities; detailed description of contractor responsibilities and minimum qualifications; technical proposal requirements; and evaluation criteria. Each element was reported by over 90% of respondents in each size category. Transit agencies frequently include FTA clauses, detailed personnel requirements, and a description of liquidated damages provi- sions and performance incentives. Detailed maintenance specifications and requirements, information of wages and staffing levels for incumbent contractor employees, and expecta- tions regarding transit technologies are less common. Small agencies are less likely to include performance incentives and liquidated damages in their RFPs and contracts for fixed-route service. Transit agencies publicize their RFP in various forums. The agency website is the most com- mon means used. Over half of responding agencies also use national transit publications, local print media, and transit-specific online media to publicize the RFP (Figure 6). Medium-sized agencies were more likely than others to use transit-specific or general online media to publicize their RFPs. Respondents indicated the criteria used to evaluate proposals and also the relative weight assigned to each criterion. Price has the highest median weight at 25%, with a range from 10% to 70%, followed by experience and references and technical capacity of the contractor, each with a median weight of 20%. Median weights are shown in green in Figure 7, which also includes maximum and minimum weights among agencies using a given criterion. The most frequently mentioned criteria in the “Other” category include: • Organization and management team (five agencies); • Staffing plan and qualifications of proposed staff, with focus on local and regional staff (four agencies); • Approach (three agencies); • Quality of proposal/work plans (three agencies); 11 9 7 5 2 12 10 7 8 6 13 9 7 5 3 0 10 20 30 40 Agency or government website National trade publications (e.g., Passenger Transport) Local print media Transit-specific online media General online media Small Medium Large Figure 6. Publicizing the RFP. Note: Multiple responses allowed.

Survey results part 1 23 • Maintenance plan (two agencies); • Safety program and safety record (two agencies); and • Innovation/creativity (two agencies). Approximately half of all responding agencies developed either an independent government estimate (IGE) or an independent cost estimate (ICE) of the expected cost of the contract. The IGE/ICE helps to identify unrealistically low and high bids. The most common sources for the IGE or ICE were historical information and peer experiences. Bid Process The competitive environment for fixed-route transit service appears strong. Over 70% of responding agencies received at least three bids. Contrary to expectations, the survey showed that small transit agencies are almost as likely to receive more than four bids in response to a contracting RFP as are medium and large agencies. Large agencies are more likely than others to receive only one or two bids (Figure 8). The majority of respondents in all size categories report that the number of bidders either increased or remained the same on the most recent RFP (Figure 9). Only one responding agency 0% 10% 20% 30% 40% 50% 60% 70% 80% Experience and references Thoroughness of implementation plan capacity of contractor Technical Financial capacity of contractor Price DBE participation Other Maximum Maximum Maximum Maximum Maximum Maximum Maximum Minimum Minimum MEDIAN MinimumMinimum Minimum Minimum Minimum MEDIAN MEDIAN MEDIAN MEDIANMEDIAN MEDIAN Figure 7. Evaluation criteria with maximum, minimum, and median weights. DBE = disadvantaged business enterprise.

24 Contracting Fixed-route Bus transit Service issued an RFP for fixed-route services for the first time; most agencies in the survey are replacing or extending contracted services. Over 80% of respondents have not received protests in the most recent fixed-route service procurements. Large transit agencies are much more likely to receive protests than are small or midsize agencies. Underbidding is a concern among transit agencies that contract for fixed-route service. A majority of responding agencies have not received unrealistically low bids in their contracting processes for fixed-route bus service, but 54% of large agencies report an issue with unrealisti- cally low bids (Figure 10). Agencies that have experienced this reported several means to deal with low bids. These include extensive analysis and discussion with individual contractors dur- ing interviews and in the best and final offer (BAFO) phase, a best-value procurement process not based solely on cost, a requirement to break down costs by functional area, and use of an external consultant specializing in price realism in contracts. 4 1 4 2 1 4 4 2 1 5 1 1 3 3 0 5 10 15 More than Four Four Three Two One Small Medium Large Figure 8. Number of bids received. 5 2 3 1 1 5 3 1 2 5 5 3 0 5 10 15 20 Increased No Change Decreased Unsure First Agency RFP Small Medium Large Figure 9. Change in number of bidders.

Survey results part 1 25 Contract/Operating Agreement Structure The next set of survey questions addressed how the contract or operating agreement is struc- tured. The most common length of the initial term of award is either 3 or 5 years (for at least 60% of respondents in all size categories). An option to extend the award was included by 87% of respondents. The potential contract length if all options are exercised is fairly consistent across agency size, with smaller agencies somewhat more likely to have a shorter potential contract length (Figure 11). Several agencies reported the number of option years as “at least three,” so it was not possible to calculate the exact contract length in these cases. The survey asked about the payment basis for the contract. Revenue hours and variable costs (often based on revenue hours) plus a fixed fee are the most common bases for payment. Over three-quarters of all respondents indicate that fare revenues are given directly to the agency. 4 7 1 4 87 5 1 0 10 20 30 Yes No Unsure Small Medium Large Figure 10. Issues with the realism of cost proposals (i.e., unrealistically low bids). 2 2 5 1 3 1 2 5 3 1 3 3 0 5 10 15 At least 8 years At least 7 years At least 6 years At least 5 years 4 years Small Medium Large Figure 11. Potential contract length (initial term plus option years).

26 Contracting Fixed-route Bus transit Service Eighty-one percent of respondents reported that contractor performance provisions were included as part of the current contract. Among agencies that include performance provi- sions, 97% include liquidated damages and/or other performance penalties, whereas only 47% include performance incentives (Figure 12). The likelihood of including performance incentives increases with agency size. Respondents report a large variation in the dollar amounts associated with either incentives or penalties (including liquidated damages). Incentives are typically limited to a certain dollar amount or percentage of the contract; penalties are usually but not always limited. The contract specifies criteria for incentives or penalties. One respondent listed 19 violations and the penalty associated with each violation. Another respondent summarized agency policies as follows: Liquidated damages are assessed daily based on service performed the previous day. The LDs range from $50 per incident to $200 per incident. LDs are also assessed quarterly based on performance measures for the quarter (5 different measures). These LDs range between $10,000 and $15,000 per quarter. Incen- tives are calculated quarterly based on performance measures for the quarter (5 difference measures). The incentives are $5,000 per quarter. Most responding agencies were aware of the possibility that inclusion of liquidated damages or performance penalties could increase the cost of proposals, but only 43% stated that the inclu- sion of these provisions does increase the cost of proposals. All survey respondents provide the buses. The only item provided by the contractor at a majority of responding agencies is nonrevenue/support vehicles (Figure 13). Contractors for small agencies are more likely to provide maintenance equipment and bus storage and maintenance facilities. “Other” responses included a division between agency and contractor in provision of maintenance equip- ment and contractor provision of space, staff, and oversight for customer service representatives. An individual who is currently not affiliated with a transit agency shared insights regarding his experience with the contracting process. As with other direct quotations in this report, these should be viewed as observations and not report recommendations. 1. The transit agency should draft the proposed contract and present it to the potential operators in the Request for Proposals. The contract should be fair and, where it matters, drafted in favor of the agency. Definitions of terms such as “overhead” and “profit” should be precise and specific. 2. The scope of work in the RFP should be precise and specific. A two-step RFP process, where permit- ted by local law, is beneficial. This process involves a Request for Qualifications (RFQ), preparation of a short list, and then a Request for Proposals from short-listed potential operators. 7 2 11 5 11 7 0 10 20 30 Performance penalties, including liquidated damages Performance incentives Small Medium Large Figure 12. Contractor performance provisions.

Survey results part 1 27 3. The process for oversight of the contractor should be set forth in the RFQ/RFP scope of work and in the contract. Board members normally do not have the time nor the expertise to provide direct over- sight on all matters. This means that the agency will be required to hire qualified staff or contractors to provide oversight. 4. The contract should require a performance bond in case the contractor terminates its operations and the Agency is left with the expenses of continuing operations absent the contractor as well as another procurement process. 5. The contractor should be required to follow law governing public agencies in its operations espe- cially regarding procurements, political contributions, entertainment and travel, and all of its records related to the contract should be labeled as open public records; it is spending the public’s money and should be as accountable as the public entity for which it is working. 6. An audited overhead rate in accordance with 48 CFR Part 31 should be established for the contrac- tor’s Field Office at the agency and for its corporate operations. This is not the same as the agency’s overhead rate. 7. The contract should provide for an independent audit of the contractor’s expenditures, and its over- head/profit, with provisions for clawback of excess overhead/profit. 8. The agency might want the contractor staff to be identified as such in all public and private matters, and the contractor entity to be identified on the transit vehicles as operator. (Note: this is not univer- sal; some agencies prefer that all employees be identified as employees of the transit agency.) 9. The division of expenses for which the agency pays directly and those for which it pays through the contractor should be analyzed for cost efficiency. 10. Of course performance standards, rewards and penalties should be included in the contract. 11. The agency should establish a single point of contact individual to whom the contractor must respond. This could be a board member or, better, a staff Executive Director of the agency. 12. A 3rd party operation involves a profit for the contractor. The economies of 3rd party contracting must outweigh the additional cost of the contractor’s profit, all other things being equal. Transition Issues Most agencies (29 of 37, or 78%) have not changed contractors within the past 3 years and thus have not experienced transition issues recently. Five of the eight agencies that have gone through a recent transition rated the transition as acceptable, with two transitions rated as difficult and one as smooth. Difficulties with the transition centered on labor and equipment issues and a general lack of cooperation between the incumbent and new contractors. The most common 8 7 6 7 3 1 2 7 4 4 3 5 4 2 11 5 6 5 2 2 0 10 20 30 Nonrevenue support vehicles Bus maintenance facility Bus maintenance equipment Bus storage facility Scheduling software None—all provided by the transit agency Other Small Medium Large Figure 13. Equipment and facilities provided by the contractor. Note: Multiple responses allowed.

28 Contracting Fixed-route Bus transit Service problem was disagreement between the incoming and incumbent contractor regarding the con- dition of the vehicles and who had the responsibility for correcting vehicle issues. Resolution of the disagreement typically requires agency intervention. One agency hired an outside inspector, whereas another became directly involved in negotiation by attorneys for the contractors. Two agencies also mentioned difficulty with the transfer of insurance and personnel documents from the incumbent to the incoming contractor. Labor Issues Most respondents reported no labor issues related to contracting. Small transit agencies are least likely to report labor issues (Figure 14). Specific labor issues revolved around collective bargaining agreements, wage and benefit levels, and continuity of employment. Four of the 14 agencies that experienced labor issues reported an actual or threatened strike as the most serious issue. Low wages, poor benefits, frozen pension plans, and difficulty in attracting and retaining quality staff were also reported. Most agencies noted that the most serious issue has not yet been resolved (in several cases nego- tiations are continuing) or was resolved through difficult negotiations. One agency is inserting a minimum wage requirement into the next RFP, both to level the playing field and to avert labor issues. Another agency stated that it would mandate a level of benefits equivalent to the public sector if it could find the funding to do so. A large majority of agencies (29 of 34, or 85%) have not had to respond to a Section 13c complaint. Oversight The importance of oversight is reflected in the near unanimity (36 of 37 responding agencies) of monitoring contracted fixed-route services. Specific areas monitored by at least half of the respondents include maintenance, safety, data, cash counting, and day-to-day operations. Most respondents indicated that specific staff members had the responsibility for monitoring performance. Large agencies are more likely to have a specific unit within the agency responsible for monitoring. 3 9 6 65 6 20 10 20 30 Yes No Unsure Small Medium Large Figure 14. Labor issues related to contracting.

Survey results part 1 29 The median number of agency employees (in full-time equivalents) involved in contractor oversight is three. The range of responses was from zero to 41 full-time equivalents (FTEs). The median number of agency employees involved in oversight increases with agency size, as expected (Table 1). Several respondents stress the importance of ongoing communication between the transit agency and the contractor. Over three-quarters of all respondents state that they are in daily communication with their contractor. Locating the agency and the contractor in the same build- ing encourages daily communication. All respondents from large agencies and 92% of respondents from midsized agencies rate the quality of communication with their contractors as good or very good. In contrast, only 63% of respondents from small agencies rate the communication as good or very good (Figure 15). Conflicts will arise in the course of the agency–contractor relationship. Communication is the most common means of resolving conflicts, although some agencies do use performance penal- ties or liquidated damages. Slightly more than half of all respondents have assessed liquidated damages or performance penalties under the current contract. The tendency to assess liquidated damages or penalties increases with system size (Figure 16). Good data are vital for effective oversight. Survey results indicate that responsibility for data collection is almost evenly split between the agency and the contractor. Almost two-thirds of respondents noted that operating data are reported monthly, whereas 20% generate reports of operating data daily. Over 80% of respondents make at least some of the operating data available to the public. The percentage of responding agencies that release at least some operating data to the public Measure Small Agencies Medium Agencies Large Agencies All Agencies Median 1.5 3.6 8.4 3.0 Minimum 0 1 0.3 0 Maximum 5 14 41 41 Source: Survey results Table 1. Agency employees (full-time equivalents) involved in oversight. 5 2 3 1 4 7 1 6 7 0 10 20 Very good Good Fair Poor Multiple contractors; depends on the contractor Small Medium Large Figure 15. Quality of communication with contractor.

30 Contracting Fixed-route Bus transit Service increases with increasing size (Figure 17). Most agencies that release some data typically make ridership data available. The most common means for a member of the public to obtain oper- ating data is to make a request under local public records law. Other means noted are through the agency’s website, the NTD website, printed reports, or monthly reports to the agency’s governing body. Service integration did not emerge as a critical issue to respondents. The likelihood of having occasional or ongoing issues with service integration increases with agency size. The final topic in the oversight section of the survey addressed evaluation criteria for the con- tractor’s performance. Agencies evaluate service performance in a variety of ways. Performance standards, either agencywide or contractor-specific, and customer feedback as expressed in sur- veys are objective means to evaluate performance, but informal feedback is also used in perfor- mance evaluation (Figure 18). “Other” means of evaluation tend to be objective, such as use of automatic passenger counter (APC)/automatic vehicle location (AVL) data, a formal customer complaint process, verified customer complaints, video review from on-board cameras, a secret rider program, review of records, site visits, vehicle inspections, pullout checks, and dispatch and maintenance reports. 3 4 6 6 7 4 0 10 20 Yes No Small Medium Large Figure 16. Assessment of liquidated damages or performance penalties. 4 4 3 7 3 2 8 4 1 0 10 20 Yes Some are, some are not No Small Medium Large Figure 17. Public availability of operating data, including NTD data.

Survey results part 1 31 The final question regarding oversight asked agencies to identify the most important issue in oversight and how the agency addressed this issue. This open-ended question elicited a variety of responses. Ensuring quality of service and safety through consistent oversight and ongoing communication despite limited staff availability is a common thread through the responses (Figure 19). Small and midsized agencies emphasized communication with the contractor and additional staff with better training as the means to resolve oversight-related issues, whereas large agencies stressed consistent monitoring and increased use of new tech- nologies to monitor performance. 6 7 7 8 3 8 7 5 7 4 2 10 7 7 10 3 5 0 10 20 30 Agency-wide performance standards Performance standards for contractor service Customer feedback via surveys Informal customer feedback Qualitatively Other Small Medium Large Figure 18. Evaluating contractor performance. 3 2 1 2 2 1 1 1 3 1 4 1 2 0 5 Quality of service Safety Limited staff/knowledge re oversight Regular communication Consistent contractor compliance Federal reporting Timely receipt of information Small Medium Large Figure 19. Most important issue in agency oversight. Note: Multiple responses allowed.