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.

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
Fares
Vehicle types
Infrastructure requirements
Transitional aspects