Under competitive contracting, the public authority retains the service franchise (ownership) and controls the service. The public authority specifies route alignments, service frequencies, fares, schedules, and any other requirements deemed to be in the public interest. Private transportation companies respond to requests for proposals from public authorities to provide specific services for a limited period of time (usually no more than five years). The public authority awards a contract to the lowest responsive and responsible proposer. Winning cost proposals, final contracts, and requests for proposals are available to the public. In some cases, the public authority leases the vehicles (buses, etc.) to the successful contractor; in other cases the contractors supply their own vehicles.

Under a properly designed contract, the private contractor has incentives to perform effectively. The profit motive provides firms with an incentive to reduce costs within the constraints of the contract. Additionally, the contract may be canceled for unsatisfactory performance; indeed, many contracts provide for penalties for unsatisfactory performance. Finally, the private company will be interested in being favorably considered when the contract is re-contracted at expiration or when another service package is to be contracted.

Administered properly, competitive contracting results in the lowest costs. Where private costs are less than public costs, the service is operated privately. Where public costs are less than private costs, the service is operated by a public authority under the same terms and conditions as would have been imposed upon a private company. In either case, the service is operated the least expensively. Competitive contracting in the public sector is analogous to "make or buy" analysis in the private sector.