Contracting for Bus and Demand-Responsive Transit Services A Survey of U.S. Practice and Experience: Special Report 258 (2001) / Chapter Skim
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3. Conceptual Framework and Previous Studies on Contracting
3. Conceptual Framework and Previous Studies on Contracting
Pages 46-60
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From page 46... ...
The Contracting Decision: Conceptual Framework A public transit agency can deliver transit services through one of two methods: it can provide the service directly using its own vehicles and personnel, or it can contract with another entity. The choice between these two methods is described in the economic literature as the "make or buy" decision.
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From page 47... ...
To avoid an unwieldy and expensive contract, they instead stipulate a means of settling unanticipated disputes arising from contingencies, such as a method of arbitration. Public transit agencies are parties to both complete and incomplete contracts.
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From page 48... ...
Because of the practical difficulties associated with specifying, monitoring, and enforcing all aspects of service, public transit managers may place a high value on being able to trust the service provider. The Decision To Contract in Light of Transaction Costs A major reason transit agencies contract for transit services is to derive the benefits of market competition.
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From page 49... ...
Nevertheless, even many IFBs contain language that limits the award to the lowest "responsive" bidder; that is, the agency may refuse to award the contract to a low bidder that does not meet minimum levels of licensing, bonding, and financial wherewithal. A two-step procurement process is sometimes used to limit the pool of respondents to those that meet certain qualifications.
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. At the same time, a public transit agency must take into account various transaction costs associated with contracting.
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Furthermore, the contracting agency may bear recurrent costs associated with contracting, such as the expense of monitoring contractor performance, handling and resolving contract disputes, and coordinating contractor and inhouse services. Many transaction costs can be anticipated and estimated; however, not all transaction costs are quantifiable.
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From page 52... ...
little attention in the literature. Some previous studies that have examined other reasons for and outcomes of contracting, such as effects on administrative expenses, service quality, and safety performance, have been largely audit-like examinations of contractor records on vehicle accidents and breakdowns, on-time performance, vehicle inspections, and the like.2 Given the sometimes conflicting findings of competing studies on the effects of transit service contracting on operating costs, the committee chose not to conduct a comprehensive, adjudicative review of the results of this research.
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From page 53... ...
How best to treat transit agency overhead costs when projecting savings from contracting has been the subject of much controversy and disagreement. Some of the early UMTA studies estimated that Tonger-run, "fully allocated" cost savings from contracting could be twice as high as initial savings in variable costs because of gradual reductions in transit agency administrative expenses and other overhead items passed along to the contractor.
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Foothill Transit reported considerable success in reducing operating subsidies for the former SCRTD routes and increasing ridership by about 30 percent (Richmond 1992~. To further assess these reported effects, the Los Angeles County Transportation Commission commissioned a series of evaluations by the accounting firm Ernst and Young (1991, 1992, and 19931.
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1992~. The auditors found that in the second full year of the program, the contractor prices were 12.5 percent lower than the costs incurred by RTD in providing similar service directly, not including projected savings in overhead.
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The methods of procurement used most often by public agencies to contract for services are not always amenable to the development of close working relationships between transit agencies and contractors. Therefore, most contract agreements contain detailed specifications regarding service expectations and quality, as well as provisions for monitoring and measuring performance.
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Given the focus of most previous transit contracting research on changes in operating costs, the relative dearth of cross-sectional studies on the nature and extent of contracting, and the fact that most of the research on transit contracting was completect a decade or more ago, the committee chose to conduct a comprehensive survey of the state of transit service contracting in the United States today. It is to the results of this survey that the discussion turns in the next two chapters.
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Report prepared for the Los Angeles County Transportation Commission, Sept. Goldstein, H
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UMTA-CA-06-0220-1, Urban Mass Transportation Administration, Washington, D.C. Selected Bibliography Contracting and Transaction Cost Theory Deakin, S
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1993. Comparing Public and Private Bus Transit Services: A Study of the Los Angeles Foothill Transit Zone.
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