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In-house vs. Contracted Management and/or Operations

Introduction

It is a common practice for Federal Transit Administration (FTA) grantees to contract out part or all of the functions of transit systems.  There are many factors that might come into play when deciding whether or not to use a third-party contractor for transit management and/or operations:  the cost associated with a particular program, available staff hours, level of expertise, convenience, state or local laws, larger planning strategies, control over operations customer service, and training standards.   All of these factors should be evaluated in order to determine the best course of action for the agency.  The organization’s mission, vision, and long-range plans should guide the decision-making process.  Keep in mind that using a third party operator does not relieve the grantee from compliance with federal requirements.

This section of the toolkit is organized in the following subsections:

Contracting Approaches

If the transit manager (or governing board) decides that contracting out a program is the best action for the agency, factors to be taken into consideration how the contractor will be obtained (in accordance with the agency’s procurement policies), who will take part in that process, and the length of the contract.  Once a contractor is secured, the transit manager should work with the contractor to determine the type of relationship the agency will have with the contractor and clearly define which party is responsible for what tasks.

It is also important to be aware of the different contracting models to decide which model is best for the agency depending on its needs and resources.  

  • The turnkey model of contracting involves a company that takes care of everything from providing the management team and staff members to owning all necessary capital (vehicles, equipment, and operating/administrative facilities).  The responsibilities of an agency as an FTA grantee include planning, applying for and administering the grant, establishing policies, and overseeing the contract. 
  • Another option is to contract for the key transit management officials while all other employees and capital would be in-house responsibility. 
  • The next contracting option provides staff employed by a contractor while the agency owns all capital. 
  • The last option breaks out contracts by service type.  For example, the agency could work with different contractors to provide the fixed route service, demand response service, and human service transportation.  The agency could also contract out for vehicle maintenance or other support functions.    

Regardless of which model chosen, advertise the contract solicitation and requirements to a large audience get as many responses to the proposal as possible.  This will ensure that there is a competitive bidding process and will help to find the best fit for the agency. 

It is important to remember that whether the program is administered in-house or using a contractor, the agency must be in compliance with all applicable federal regulations.  

This includes:

  • Conducting a competitive procurement to select a contractor and
  • Requiring the contractor to comply with the requirements that would apply to the organization if the services were operated services in-house, such as Americans with Disabilities Act (ADA), Civil Rights, Drug and Alcohol testing, and other federal requirements introduced in this toolkit. 

According to FTA Third Party Contracting Guidance, "each third party contractor and subcontractor is required to comply with the terms of its third party contract or subcontract, including requirements to extend those federally required clauses and provisions to its subcontractors at the lowest tier required." The person responsible for procurement within your agency must be aware that compliance with federal requirements is a condition of being a subrecipient of federal funds, and must include federally-required clauses in the solicitation and executed contract.  Importantly, the grantee is responsible for oversight of the contractor throughout the life of the contract.

The FTA procurement requirements are detailed in FTA circular C 4220.1F, "Third Party Contracting Guidance."  (Noted that this circular has not yet be updated to reflect most recent federal regulations, and transit managers should also consult the “Super Circular,” 2 CFR Part 200, §200.318 through §200.326.) Federal procurement requirements are introduced in the Procurement 101 page of this toolkit, and expanded upon in the Procurement - Beyond 101 page.

This section presents two case studies: one rural transit agency that contracts out its operations, and another that handles everything in-house. The case studies describe the services provided by each system, discuss the reasons for contracting or operating in-house, and raise issues to consider when deciding whether contracting or in-house operating is right for a transit system.

As illustrated by these case studies, the structure, capacity, environment, needs and resources of systems can be different. Consequently, contracts with a third party will differ case by case.  However, some of the advice provided under these case studies might be helpful to make a well-informed decision as to whether or not to contact out and how to structure that relationship. 

Case Study – Managing Your Operations In-house:  Crawford Area Transit Authority, Meadville, PA

The Crawford Area Transit Authority (CATA) provides service to Crawford and Venango Counties in the northwest corner of Pennsylvania.  Services include fixed bus routes and door-to-door transportation.  In the past, CATA had contracted out its services, but decided to bring it back in-house to regain direct control over all aspects of operations.  In 2016 CATA entered into a management contract with the Venango County Commissioners to operate the Venango County Transportation program, which in 2018 became a member municipality of CATA. This resulted in CATA expanding services and almost doubling in size.  The case study is taken from an interview with the General Manager of CATA, Timothy Geibel, who discussed some of the factors considered when deciding whether to bring operations back in-house or outsource them with a contractor.

Scheduling and Personnel Responsibilities

When operations are contracted out, it is the contractor’s responsibility to ensure that service is operating on the schedules defined by the transportation provider.  The contractor also handles all personnel issues such as absent employees, vacation requests, disciplinary actions, and other issues.

CATA assessed the additional work load that would be created by taking on the scheduling and personnel management, and determined that it was more important to have the internal control over the daily operations than to work with a third party contractor and simply play the role of overseer.  Internal control of operations necessitated the hiring of qualified individuals that know and understand transportation.  Recruiting such persons in smaller, non-urban areas can prove to be difficult.  Taking advantage of training resources in the region, through PennDOT and various national organizations such as National RTAP, greatly aided in CATA’s ability to get new staff up to speed on public transportation.

Managing Bus Drivers

When operations are contracted out, the transportation provider does not have direct contact with or authority over the bus drivers.  Any issues that arise, such as complaints from riders, typically go through the contractor, not through the transit agency manager.  While the agency can establish policies for the bus drivers, it is the contractor who will address the issue with the bus driver. This poses challenges, delays and additional layers of communication when trying to resolve issues and at times may come down to contractual language that is in place with the contractors on how to handle drivers.

By bringing service in-house, CATA is able to quickly address issues with bus drivers by both setting the policies and having direct interaction with the drivers when enforcing those policies.

Training Standards

In contracted operations, the transportation provider can establish guidelines for standard and refresher training, but it is the responsibility of the contractor to ensure that all drivers meet those guidelines. 

CATA determined that it was in their best interest to have the ability to directly train, re-train and educate their drivers.   Managing operations internally does place a greater administrative burden on the transportation provider; however, from a risk management perspective, the agency will be better positioned to implement stronger training programs, refresher training and ongoing evaluations of bus drivers than would be possible if service was contracted out.    

Customer Service

In most cases, under contracted operations, while the transportation provider cannot address issues directly with a bus driver, staff do field all calls, complaints and concerns from the public.  If a complaint comes in, the agency must work through the contractor to address the issue.  With internal operations, however, the transportation provider can speak directly to the bus driver to remedy the situation.

Cost-Benefit Analysis

CATA has found that properly done internal operations can be a more cost efficient option than contracting out operations.  A public transportation provider may be able to secure better liability and workers compensation insurance than a private provider if the transportation provider can document sound training and hiring practices.  Internal operations also alleviate the need for paying contractor wages, contractor profit and overhead expenses at the contractor’s facility.  

Technology Assessment

Transit managers should assess various technologies that can aid in the direct operation of service and complete a cost-benefit analysis of each technology.Some technologies to consider are:

  • Payroll/Accounting Software – reduces the need for financial staff along with saving time in preparing payroll and processing monthly financial activities.  Web-based models exist that provide low cost service, do not need additional computers, and provide a wealth of data reports to help with tracking state and federal reporting criteria.
  • Scheduling/Dispatch Software – many models exist for computer aided dispatch (CAD) / automatic vehicle location (AVL) programs that can provide easy, paperless scheduling through mobile data terminals in vehicles.  These products also produce a wealth of data reports to help determine efficiency, productivity and more. 
  • Maintenance Software - aids in tracking preventive maintenance and due dates for inspections, and provides a wealth of data on vehicle history and trends. 

Technologies are continuing to evolve and must be considered when determining in-house operations.  As with any technology, costs need to be considered for the maintenance, upgrade and continual use of the technology. 

Mr. Geibel also gave the following advice to systems that are deciding whether or not to contract out their operations:

  1. Start planning early.  Transitioning operation of service should begin in the planning stages 9-12 months prior to the anticipated transition date. 
  2. Look at the expense per passenger for the agency’s system versus peer transportation providers’ expense per passenger.  If your costs are significantly higher, consider assessing the feasibility of internal operations. 
  3. Receive input from the agency’s governing board.  Transitioning from contracted to in-house operations is a major project that needs buy-in from the Board of Directors, County Commissioners, or whoever is responsible for the oversight of the agency.
  4. Keep communication active.  Keep the key players informed of what is taking place.  Once a decision to operate internally is made, let employees know.
  5. When transitioning to internal operations, give contractor employees an opportunity to apply for a position with your agency, and make it known that the agency will hire the best candidates for the positions.
  6. When a decision is made that service will be operated internally rather than by a contractor, control the process for public information.  Be proactive in discussing any changes with the public.  There will most likely be opposition to any change, but if the public can understand that transitioning to internal operations will not adversely affect service on the street, buy-in from the public will be easier to obtain.
  7. Expect opposition from the contractor and be prepared to defend the agency’s decision to operate service internally.  Focus on responsible use of taxpayer funds and providing the most efficient service to the public.  In most cases, the contractor will not want to lose the contract as it will result in lost revenue to their organization.  After services are brought in-house, there is still potential for the agency to work with the previous contractor on a new, reduced level which may involve maintenance services, towing of vehicles, etc.  Try and keep a positive relationship in place.
  8. Assess current staffing levels.  Does the agency need to create additional positions to properly operate service internally, such as additional dispatchers, supervisors, etc.?  These costs should be included in the assessment of making a transition.   Technology can aid in this process by streamlining processes for managing staffing levels to ensure regulatory compliance with employment laws.  Examples include human resource technologies for tracking employment requirements (driver’s license updates, medical certifications for drivers, safety sensitive training requirements, etc.).  Payroll technologies further streamline the administrative burden of managing staffing levels.
  9. Once the transition is made, track the results.  How is the transit agency doing?  Are costs where the manager thought they would be?  If not, what factors changed?  What was missed in the assessment?

Read more about the Crawford Area Transit Authority.

Case Study – Contracting Out Your Services:  Franklin Regional Transit Authority, Greenfield, MA

The Franklin Regional Transit Authority (FRTA) provides service to 41 communities throughout four counties in western Massachusetts, covering the largest and most rural geographic area in the state.  The FRTA develops, finances and contracts for the operation of transportation facilities and services within its transit area, and daily activities are managed by the Administrator, appointed by the Advisory Board.  The following is taken from an interview with the Tina Cote, Administrator of FRTA. 

According to Chapter 161B Section 25 of the Massachusetts General Laws, regional transit authorities cannot operate service directly.  Instead, they must contract with private operators for the provision of service.  For a long time, the FRTA contracted with a local agency, but in 2007, they released an RFP to find a new contractor to oversee the operations of their fixed route, ADA paratransit, and some of their demand response service.  During this period of time, FRTA was consolidating services with another agency and a great deal was in transition, making it a complicated situation for a contractor to take on.   A professional management company won the bid and, at the time of the interview (2012), was in the fifth year of its contract with FRTA.  FRTA has continued to contract with the same vendor, primarily because there is not a lot of competition to bid on work for rural agencies in the area, and they submitted the only proposal.  FRTA’s most recent contract began in July of 2018 and has the option to renew for an additional 9 years.

The contractor employs the general manager, assistant general manager, and training manager.  The contractor manages the day-to-day operations:  maintenance, drivers, dispatchers, schedulers, etc.  FRTA pays the contractor a management fee, which covers the cost of manager salaries.  FRTA, however, oversees the rest of the budget.   FRTA works with the managers employed through the contract on a regular basis to oversee the budget.

Ms. Cote explained that her team has daily contact with the general manager but this does not take much of their time. The contact might be as simple as reporting a request that a passenger’s payment card got stuck in a machine and he/she needs change, to verifying a late departure/early arrival or looking into a scheduling issue.  Ms. Cote also meets with the operations team (general manager, assistant general manager, and safety and training manager) once a week to go over everything that is taking place.  This system works well, and she attributes the success of the partnership to having a good operations team.  She also remarked that even if FRTA did operate services in-house, they would still hire a general manager to oversee the daily tasks—a structure not unlike what is currently found with the contractor. 

Ms. Cote advises agencies that are considering putting their operations out to bid to be as specific as possible in the RFP and incorporate lessons learned from previous contracting experiences or issues you have run into with your in-house operations.  Outlining a payment structure within the contract and other performance measurements are also crucial.  She also emphasized the importance of an opt-out clause in case the contractor is not the right fit.  The first contract was for one year, with the option to renew for four years after.  FRTA had the option to terminate the contract at any point after the first year. 

Lastly, she emphasized the importance of a good general manager and having a strong relationship with the contractor.  If there is an issue with the general manager, make sure that the contractor will “have your back” in the event changes need to be made, especially if that change involves the general manager.  Ask the contractor to include the resume of the person they are proposing to fill the position of general manager and set up an interview with that person. The general manager is the person the transit manager will have the most contact with, and he/she will be the person who will go to bat for the team when issues arise.  Because FRTA has such a strong relationship with their general manager and contractor, they have had a positive experience contracting out their operations.

FRTA also contracts with various Councils on Aging (COAs) and agencies to operate demand response services that are not covered under the above contract.  Because the FRTA service area is so spread out (over 1,100 square miles), it would be extremely difficult to use the same contractor for all 41 towns.  Contracts are put in place with each COA to operate an FRTA van.  The COAs hire their drivers (who usually become a town employee) and do their own dispatching and driving.  FRTA reimburses each agency on a monthly basis for costs incurred as a result of the service being provided.  Services are determined by the amount of funding available and the request of each town.  A budget is established at the beginning of the fiscal year and monitored by FRTA.  The COAs still have to participate in driver training and drug testing, and their drivers are subject to criminal background and driving record checks.  In each case, it is imperative that there is a good relationship with the COA and that there is a mutual understanding of how the program operates in addition to a contract that spells out guidelines of the use of the FRTA van.

Read more about Franklin Regional Transit Authority.

Section Sources

Updated May 1, 2019