A. Preparation

Public authorities should consult with private transportation providers before designing and issuing requests for proposals. This consultation may be through informal meetings, hearings, or through formal committees of private providers under the sponsorship of public authorities. Advance consultation permits the public authority to consider alternatives for service and contract design that take full advantage of private-sector capabilities, consistent with public requirements.

B. Request for Proposal Information

Requests for proposals should contain a complete description of the service to be purchased, including schedules, service miles, service hours and any applicable service or safety standards. Further, requests for proposals should contain a clear description of the required proposal format. In New Orleans and Denver, public-transit authorities have provided detailed questionnaires and cost forms, which, once completed, are the private company's proposal. This approach reduces uncertainty about what is required in the private company's proposal and greatly simplifies the preparation of proposals. Simplification increases the number of companies likely to respond, especially smaller companies, which tend toward lean management. Requests for proposals should, at a minimum, contain detailed cost proposal forms to be completed and submitted as a part of the proposal.

C. Length Of Procurement Process

The time span between issuance of the request for proposals and submission of proposals may be the single greatest deterrent to the number of competitors. There should be sufficient time for all potential proposers to solicit and receive copies of the request for proposals, to attend any pre-proposal conferences, and to prepare their proposal. In general, the amount of time allotted should increase with the size of the service to be proposed and to the extent that the contractor would have to provide facilities, capital equipment, and vehicles. Normally, except for very small and emergency contracts, two months is sufficient time for private companies to respond to requests for proposals. For large contracts of 100 vehicles or more, agencies should allow three or more months for response.

The amount of time allowed between the award of the contract and service provision is usually specified in the request for proposals and the ensuing contract. Insufficient lead time will deter competent service providers from proposing. For small contracts and when the authorities supply the vehicles, two to three months is sufficient lead time. When contracts are large or require a company to supply vehicles or specialized equipment or facilities, six to nine months of lead time may be needed. Public authorities also should allow themselves adequate time for a thorough evaluation of the proposals received.

D. Proposal Evaluation Most public authorities divide the evaluation process into two parts:

  1. Evaluation of service qualifications and specifications; and

  2. Determination of the most cost-effective proposal.

A company's price proposal is not considered if it does not meet the service qualifications and specifications. Some public authorities require separate sealed envelopes—one with the service proposal and qualifications and the other with the price. The price envelope is opened only for companies that have qualified in the first step. This approach is useful in building the confidence of private providers in the procurement process and minimizes the potential for challenges by unqualified companies.

E. Fair Cost Comparison

Public transit authorities often compare in-house operating costs with proposed competitive costs before determining whether to award a contract to a private proposer. Private providers have alleged that public-transit authorities have not fairly evaluated private proposals relative to in-house costs. Some public transit authorities have determined their in-house costs only after reviewing the competitive proposals. In other cases, public authorities have understated in-house costs.[26] As a result, a general mistrust has arisen in cases where public authorities administer competitive contracting processes in which they are also competitors.

Two adverse effects result when a publicly funded agency wins a contract as a result of understating its costs:

  1. Overall competition for public contracts tends to decline resulting in long-term cost increases. The private sector is not inclined to respond to requests for proposals where the process is perceived as unfair.

  2. Total public costs increase or services decrease because the winning proposer must subsidize the transit service it won with public monies that were earmarked for another purpose. The publicly funded agency must cut a service for which it was funded or must request additional funding or increased fares or user fees to cover the costs of the transit service. Public-transit authority contract administrators have required detailed accounting from publicly funded proposers to eliminate this cross subsidization. The Federal Transit Administration requires that public transit authorities must propose no less than fully allocated capital and operating costs when responding to requests for proposals.[27]

Three public transit authorities that have taken special steps to assure objectivity offer potential models. In Cincinnati, the Southwest Ohio Regional Transit Authority (SORTA) hired an accounting firm to prepare its internal proposal and submitted its sealed proposal by the deadline required of the private providers. Personnel assisting in the development of the internal proposal were not permitted to participate in the evaluation of proposals. The Bi-State Development Authority of St. Louis separated the internal preparation of a proposal from the evaluation process. Bi-State did not permit personnel who prepared the internal proposal to participate in the evaluation of proposals. The Suburban Mobility Authority for Regional Transportation (SMART) in suburban Detroit followed procedures similar to SORTA and Bi-State, but SMART also publicly announced the agency bid price prior to opening private bids at the proposal deadline to alleviate any doubt about agency price manipulation.

To obtain the maximum level of competition and, therefore, the lowest price, public authorities must encourage the confidence of the private sector in the fairness of the procurement process. This is best accomplished by requiring that public authorities be subject to the same rules as private companies and that public authorities propose their true costs when competing for contracts.

F. Pre-proposal Conference

Many public authorities hold one or more pre-proposal conferences with potential proposers after issuance of the request for proposals. Pre-proposal conferences often result in changes in the proposal package as the public authority makes corrections in the original specifications or, as a result of questions from the potential contractors, becomes aware of alternative ways to deliver the service. Pre-proposal conferences can assist both the public authority and the private providers by improving the understanding of the service required, and this results in lower costs and more responsive private proposals.

G. Fixed-price Contracts

Most public transit authorities in the United States require that proposers submit a final price that is largely unalterable throughout the term of the contract. This is called a fixed-price contract. Most contracts contain a provision that allows for minor changes in the amount of service. Typically, service levels may be increased or decreased by a certain percentage (usually plus or minus 5 percent), and many contracts allow for modifications to the route structure if both parties agree.

The extensive use of fixed-price contracts has been instrumental in maintaining the cost effectiveness of competitive contracting. The most important characteristic of fixed-price contracts is that contract rates (prices) cannot be non-competitively manipulated. Fixed-price contracts involve the proposal of a certain price for a given amount of service over a specific contract length, usually expressed in cost per unit of service, such as service miles or service hours.

From the public perspective, the optimum level of competition and, thus, the lowest costs are likely to be achieved through "pure" fixed-price contracts. Proposers are required to quote fixed prices for basic contract terms, for all option periods, and for downward or upward adjustments in service level. There is no price negotiation after execution of the contract and, therefore, no provision for adjustment of unit prices.

Fixed-price contracts may, however, include forms of indexation that permit contract price adjustments based upon the change in generally accepted indices such as measures of inflation, fuel costs, or transportation industry costs. Indexing can reduce the risk for private contractors as they attempt to predict future costs. Potential contractors propose basic unit prices, but the unit prices are increased or decreased periodically according to specified indices. The price variation may be a percentage of the index's change or may be invoked only when a certain level is reached such as a 10 percent increase or decline from a base level. As in pure fixed-price contracts, indexed fixed-price contracts do not provide for price negotiation after execution of the contract—remuneration can be altered only in response to changes in the appropriate indices.

Contract-price indexing can increase public costs, since U.S. private-sector costs historically have increased at rates slower than inflation and substantially slower than transportation industry indices. But indexing can provide a simple tool for dealing with major variations in cost that are outside the control of the contractors, especially fuel costs.

There is a simpler, more cost-effective way to deal with extraordinary and universal escalation of some costs like fuel. Some contracts have reduced private risk by negotiation or "pass through" of these costs. In "pass-through" arrangements, bidders do not include the price of fuel in their cost estimations or they are given a constant price (one dollar per gallon) for estimation purposes. Reimbursement for the winning bidder is based on the current market price of the cost component. Negotiation is less formal; the winning bidder may request that the authority adjust the contract price to reflect the increase in the designated cost component, usually fuel. These methods avoid contract-price indexing, which can unduly increase public costs. Limited negotiation and "pass-through" options reduce the risk of the private operator, thus potentially reducing contract prices.

H. Renewal Options Contract duration can be defined in two ways by public authorities.

Some public authorities offer contracts that have a specified ten-n, such as three years, while other public authorities may award contracts for a basic term plus renewal "options." For example, a public authority may award a three-year contract with a two-year renewal option for a total contract term of five years. At the end of three years, the public authority may decide to exercise the two-year option and have the incumbent company continue to provide the service. On the other hand, the public authority may decide to competitively procure the service again at the end of three years. The use of options can increase the incentives to the contractor to provide quality service and can give the public authority a way to change contractors without invoking termination.

I. Contract Duration

Costs are likely to be higher for shorter contract durations because the risks will be greater, since proposers must recover fixed costs over a shorter period of time. Further, "start-up" costs are incurred when a new private provider assumes a service. Costs will also tend to be higher because the number of proposers will decline as the risk increases. Contract duration can be shorter in cases where the public authority provides vehicles for the private contractor. Some contracts have been for only one year, while most have been at least two years. Where the contractor supplies the vehicles, contracts should be at least three years.

Alternatively, contract periods can be too long. Longer contracts require greater risks for both parties, since it is extremely difficult to project costs. Generally, contracts, including options, do not extend to beyond five years. The primary reason is that, as contract lengths extend beyond five years, it is necessary to rely more on negotiated price increases and adjustments, which, in the absence of competition, are likely to result in higher public costs.

Finally, it is important to observe the same contract duration whether the contract is awarded to a public authority or a private company. Failure to competitively re-procure a contract represents an abandonment of competitive incentives and likely will result in higher public costs.

J. Contract Size

Many transit authorities believe it more convenient to deal with a few large contracts. The transit industry is characterized by diseconomies of scale,[28] so a preference for large contracts merely limits competition and raises public, costs. There are a large number of small private providers in the United States, and they increase industry competition and help keep private transit prices low. The smaller the proposal package, the more likely that smaller companies will be among the proposers.[29]

K. Market-Share Limitation

Many public transit authorities and two pieces of competitive contracting Legislation[30] limit the total percentage of transit service that can be awarded to any one contractor. These market-share limitations restrict the ability of a single company to gain market power and limit competition. Colorado Senate Bill 164 limits individual contractors to no more than 50 percent of competitively procured service, while model state legislation by the American Legislative Exchange Council imposes a 25 percent limitation where more than 60 vehicles of service are operated competitively under the sponsorship of the public authority.

L. Rotation of Procurements

When public authorities have more than one contract, they should rotate the procurement and expiration dates. Rotating the procurement dates reduce the incentive for an incumbent company to seek undue political advantage in the award process. It allows for winning proposers to acquire equipment and losing contractors to dispose of equipment in small parcels, thus reducing the overall risks associated with entry and exit. Finally, rotation of contracts increases the likelihood of consistently good performance by current contractors who also wish to propose on the new service package. (A contractor who is performing poorly on a current contract would not be likely to win a new package.)

M. Service Specifications

Public authorities clearly describe route alignments, public timetables, estimated annual service miles and service hours, and vehicle descriptions and appearance (color and exterior markings) in their contracts and requests for proposals. The public authorities also specify what ancillary services are to be provided, such as marketing, telephone information, etc.

N. Provision of Vehicles, Equipment, and Facilities

Vehicles for competitively contracted transit services may be provided by public authorities or by the private companies. Specialized transit equipment, such as vaulted fare boxes, usually are provided by the transit agency even when the agency does not supply vehicles. Facilities are rarely provided, but this practice may become more common as contracting expands and in high-cost cities where it is difficult for a private company to find or afford garage and maintenance space. An increasing number of public transit authorities, like the San Mateo County Transit District near San Francisco and the Dallas Area Rapid Transit Authority, have made or plan to make public vehicles available for use by private contractors to reduce costs and to increase competition. Fairfax County, Virginia, provides facilities and San Diego is planning to provide maintenance facilities for contractors.

There are several advantages to public vehicle (and facility) provision:

  1. The federal government provides 80 percent of the cost of transit-agency vehicles. These monies may be used to pay depreciation for privately owned vehicles in use for contracting, but paperwork and procedures make direct provision easier;

  2. Public authorities do not pay interest charges and taxes on vehicles; and

  3. Public provision of vehicles ameliorates the private operator's risk associated with vehicle acquisition and disposal. A disadvantage of public vehicle provision is that the public authority incurs additional costs of monitoring the maintenance records of the private company operating the vehicles.

O. Insurance Coverage

Most public authorities require contractors to maintain accident and liability insurance limits at least as high as the public authorities carry themselves and similar to those required by the U.S. Interstate Commerce Commission. Any requirement above this common industry practice, even where it may be justified, adds to the costs of the contract.

P. Performance and Bid Bonds

Most public transit authorities require contractors to post bid (proposal) bonds and performance (service) bonds or their equivalents such as irrevocable letters of credit. (Bonds and letters of credit are financial instruments that guarantee payment to the transit agency if the contractor or bidder defaults.) Bid bonds or their equivalents are submitted by all bidders with their proposals and cover the agency's costs of re-awarding the contract plus the incremental costs of service during the extra time needed to award and start contracted service should the current bidder fail to begin service. Bid bonds or similar instruments are returned to losing bidders and to winning bidders upon commencement of service.

Performance bonds or similar instruments serve two primary functions:

  1. To demonstrate the contractors' business soundness; and

  2. To compensate the public authority for any losses resulting from contractor default.

Performance bonds and their equivalents represent the most simple and reliable indicator of the contractor's financial ability to perform. Public authorities are not skilled in judging the fiscal condition of private businesses, and it can be unwise for a public authority to perform such a task. Performance bonds and their equivalents can be an easy, cost-effective way for public authorities to minimize risks.

Performance bonds should be limited to the maximum potential loss to the public authority in the event of a default by a private transportation provider, and a consensus is arising that the maximum performance bond amount should be no more than three months' of the contract value. Even this may be excessive-there have been just five days of service lost as a result of contractor default in the United States during the past decade. Since public-transit service is readily available from the competitive market, the maximum foreseeable loss from a contractor default is the incremental cost of purchasing substitute service while a new procurement process is undertaken. The public cost of an unscheduled procurement process also is added to this incremental cost. San Diego County has developed its performance-bond requirement by making such a calculation and Miami allows contractors an option to performance bonds: the transit agency deducts a portion of the early contract payments and establishes an escrow account equal to the amount of a performance bond.

The necessity of ensuring the performance of private contractors must be balanced against the higher costs that are likely to occur from the requirement of performance bonds and their equivalents—their value should be no greater than the foreseeable loss.

Q. Performance Standards

Most contracts provide for some standards of performance. These may include indices for service quality (cleanliness, color, lettering, and decor of the vehicle; driver attire; and driver courtesy), on-time performance, trip completion, record keeping, and safety. Interestingly, the standards set for contracted services routinely exceed those standards previously—and often concurrently—set for service provided by the public authority. In many cases, there were no preceding standards for performance, although limited performance records are required by the federal government.

Safety: Most public transit contracts require that contractors include safety standards and vehicle maintenance standards.

Service Quality: Various service quality standards are customarily included in contracts, such as on-time performance, trip completion, vehicle cleanliness, driver courtesy, and passenger complaint rates.

R. Penalties and Incentives

Many public authorities specify financial penalties for unsatisfactory performance (in addition to the ultimate penalty, cancellation of the contract). Judiciously administered, financial penalties can enhance the likelihood that contracted service maintains high standards of quality and performance. Excessively high penalties or penalties based upon unreasonable standards impose additional costs on both the public authority and the contractor. Potential contractors will calculate the costs of excessive penalties and increase their proposal prices to compensate. Public authorities must evaluate the total costs and benefits of each penalty. Incentives generally have not been used in competitively contracted bus services because public authorities have assumed that the profit motive will be incentive enough for a responsible private provider.

S. Public Supervision

Public-transit services require extensive supervision, whether they are provided by the public authority itself or by private contract. The additional costs of supervising competitively contracted services are small. London Regional Transport has reported that its incremental contract monitoring cost was 2.5 percent of contract value for a program that involves more than 20 contracts and 800 competitively contracted buses. Ann Arbor, Michigan, reported incremental supervision costs of less than 2 percent. Common sense would indicate that the costs of supervision would be directly correlated to the extent of the monitoring effort. This is usually, but not always, the case. Public transit authorities have been innovative with regard to supervision. Miami uses temporary help to do random monitoring of on-time performance and service quality, permitting a higher degree of monitoring than would otherwise be possible. Carson, California performs random monitoring but supplements this with routine calls to frequent riders for comments on performance issues.