Contracting transit operations
Transit agencies may contract for a portion or all of their operations needs. Smaller, newer transit agencies without historical relationships with unionized labor are more likely to contract all of their service. Larger, older agencies with standing relationships and long histories with unionized labor typically contract only a portion of their labor, if any at all. Reducing the number of union contracts would be politically difficult.  When contracting out just a portion of services, an agency can choose to contract for labor, advertising, policing, technology services, and maintenance of vehicles, as well as operation of entire lines. The prevalence of contracting for public transit services has grown since the 1980s with many examples of its success in reducing costs, especially in contracting ADA services and paratransit. About 18 percent of all vehicle hours, including both fixed-route and demand-responsive services, are provided through contracted services. Demand-responsive services are much more likely than standard bus services to be contracted - at about 66 percent and 6 percent, respectively.
Views on contracted labor
Three general perceptions about how contracted labor reduces operating costs dominate contemporary views. First, contracting labor capitalizes on any difference in the cost of non-union labor in the private sector. Typically, non-union labor is believed to be less costly than unionized labor. Second, contracting with the private sector introduces competition into the labor market, creating an incentive for labor unions to reduce wages in their contracts with the public sector. Third, transit agencies contract out inefficient service in order to maintain efficient operations under their direct control.  This may include utilizing more flexible non-union labor such as in split shifts. Split shifts are shifts in which a worker logs two four-hour shifts in the same day rather than a continuous shift of eight hours or more. This model fits well with peak hour travel in which operators are needed in the morning and afternoon but not necessarily in the middle of the day. Split shifts avoid overtime pay.
Contracted service is also seen as flexible over the long-term. Transit agencies view contracted labor as easier to initiate and terminate than directly hired labor. Rather than directly hiring workers for experimental routes, transit agencies may benefit from reduced political risk by contracting for service until the service is deemed to be permanent. Along these same lines, contracted labor is viewed as faster to initiate service than directly contracted labor. For new service routes, transit agencies may hire contracted operators in order to expedite start of service. 
Efficiency achieved through contracting
Despite these commonly held views, contracted service yields only moderate cost savings. In a study of 400 transit agencies spanning a 10 year period from 1992 to 2002, partially contracted service yielded a 7.8% cost savings while contracting all service yielded only a 5.5% savings. Research has also shown a strong self selection bias to be present among transit agencies. If an agency can achieve cost savings through contracting either a part or all of its service, it will do so. Other agencies efficiently delivering their own directly provided service are much less likely to contract service. Thus, transit agencies cannot necessarily look to other agencies for guidance on the choice of contracting.
Based on a survey of over 150 providers in 2001, the most common contract is about three years, with two one-year options. This length of time encourages frequent reevaluation and many transit agencies with this contract structure had multiple bidders even for contracts with incumbent providers. This competition is regarded as a source of cost savings. Further, contracts with very explicit expectations outlined for providers tend to help avoid declines in service quality.
Of the savings achieved through privatization of transit operations, the vast majority appear to come at the expense of labor rather than from an increase in productivity. Contracted workers earn 38% less per hour and 34% less per year than their publicly employed counterparts. Benefits were the most severely differentiated form of compensation with contracted workers receiving 58% less in benefits than public employees.  These reductions in benefits might also be considered one of the 'ripple effects' that accompany privatization, which tends to mean lax labor rules and a better negotiating position for management. 
One study of data from the National Transit Database found a few important differences between private and public providers, in terms of driver compensation. First, privatized systems pay drivers less, and offer fewer benefits than public agencies. By offering reduced benefits and wages, private transit operators can attain higher labor efficiency - they can offer the same level of service at a lower cost. However, contracted transit workers work more overtime than publicly employed transit workers, which can undercut some of the labor savings. Next, private contractors have higher insurance and training costs in part because they have a higher rate of driver turnover.
Contracting labor has been associated with a decline in service quality. Contracted transit service has been found to have up to 70 percent more collisions and 34 percent more mechanical breakdowns than through comparable publicly provided service. 
- Iseki, Hiroyuki, Amy Ford and Rachel J. Factor (2006), “Contracting Practice in Fixed-Route Transit Service: Case Studies in California”, Transportation Research Record, 1927: 82-91.
- Kim, Songju and Martin Wachs.“Transit and Contracts: What’s Best for Drivers?” 2006.
- Transportation Research Board. ”Special Report 258: Contracting for Bus and Demand-Responsive Transit Services. A Survey of U.S. Practice and Experience.” 2001.
- Taylor, Brian, Karen Frick and Martin Wachs (2008), "Contracting for Public Transit Services in the US", Privatisation and Regulation of Urban Transit Systems, Transport Research Centre Round Table 141: 47-62.
- Iseki, Hiroyuki (2004), “Does Contracting Matter? The Determinants of Contracting and Contracting’s Effects on Cost Efficiency in US Fixed-Route Bus Transit Service”, University of California, Los Angeles, unpublished dissertation.
- Kim, Songju (2005), “The Effects of Fixed-Route Transit Service Contracting on Labour”, University of California, Berkeley, unpublished dissertation.
- McCullough III, William Shelton, Brian D. Taylor, and Martin Wachs. ”Transit Service Contracting and Cost-Efficiency.” 1998.
- Kim, Songju and Martin Wachs.“Transit and Contracts: What’s Best for Drivers?” 2006.
- Nicosia, Nancy (2002), “Essays on Competitive Contracting: An Application to the Mass Transit Industry”, University of California, Berkeley, unpublished dissertation.
Frick, Karen Trapenberg, Brian Taylor, and Martin Wachs. "Contracting for Public Transit Services: Evaluating the Tradeoffs." 2006.
- This synthesis offers historical background on the practice of contracting for public transit services, as well as guidelines for transit agencies to make contracting successful. These guidelines also explicitly outline situations in which contracting may not work. The synthesis is careful to point out that contracting has had mixed results and cites a variety of studies on the practice.
McCullough III, William Shelton, Brian D. Taylor, and Martin Wachs. ”Transit Service Contracting and Cost-Efficiency.” 1998.
- This article explains the nuances of the benefits and costs of contracting, with a focus on fixed-route transit services. The authors analyzed a set of 142 transit providers, contracting out for a range of services. In the end, their analysis showed that labor productivity and vehicle scheduling were more important factors than whether services were contracted or not. This study was sponsored by the U.S. Department of Transportation and California Department of Transportation through the University of California Transportation Center.
Transportation Research Board. ”Special Report 258: Contracting for Bus and Demand-Responsive Transit Services. A Survey of U.S. Practice and Experience.” 2001.
- This study was sponsored by the Federal Transit Administration and created by a committee of the Transportation Research Board. It includes a survey of general managers of transit systems who use contractors or had in the recent past in 2001, when the report was written.
Federal Transit Administration. “Third Party Contracting Guidance.” 2008.
- This FTA Circular offers guidance for public transit providers that receive federal funds and wish to utilize a third party for provision of some part of their services.