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Route Contract: Net Cost
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Route Contract: Net Cost
When an authority issues a contract for the operation of one specified route or a specified group of routes, it’s described as a route contract.

Normally these contracts are awarded on the basis of competitive tenders. During a transition period, however, negotiated route-contracts may be awarded on the basis of negotiation with an incumbent bus operator.

Under a net-cost contract the operator provides a specified service for a specified period and retains all revenue. The authority pays a subsidy to the operator if the bus services in an area are unprofitable. If the services are profitable, the authority pays the operator a royalty. Under a net-cost contract the operator has to forecast both his costs and his revenues.minibus image

A route contract will be appropriate if the authority wishes to:

  • Have mandatory retendering after a certain number of years.
  • Establish a sustainable procedure to constantly test the market to achieve the lowest costs.
  • Determine the routes and daily schedules.
  • Be identified as the bus system provider.
  • Take full responsibility for service planning.
  • To avoid involvement in setting operators profit levels.
  • Offer opportunity to smaller operators to participate.

A net cost contract will be appropriate if:
  • The authority wishes to give an incentive to the operator to increase ridership and revenue.
  • A small percentage of revenue is collected off-bus.
  • Sharing of off-bus revenue is not seen as a problem.
  • The authority wishes to fix the absolute amount of subsidy.

The major disadvantages of a net-cost route contract are:

  • The authority may have to pay more for a net-cost rather than a gross-cost contract since the operator usually makes very conservative estimates of revenue to reduce his financial risk.
  • The authority’s ability to make essential changes to the network are restricted if they adversely affect the revenue of pre-existing net cost contracts.
  • Fewer operators usually bid for net-cost as opposed to gross-cost tenders.
  • There is a possibility of encouraging on-street competition for passengers on streets where more than one company operates

System design for a net-cost route-contract must take into account:
Legal aspects
Institutional requirements
Financial aspects
Vehicle types
Infrastructure requirements
Transitional aspects


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