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Student Transportation Contract Consideration

These have been challenging times for school districts as they manage their student transportation services through the utilization of contracted services. From a once in a lifetime pandemic; to skyrocketing inflation; to supply chain restrictions; to unprecedented labor shortages, districts have been required to balance the needs of the school districts with the realities of the student transportation contractors.

Everyone who has ever initiated or managed a contracted service knows that a good contract must be good for both the district and the contractor. The district needs to receive the quality and reliable services necessary to support their function of consistently educating students. The contractor needs to have a fair and equitable contract that provides sufficient monies to meet their true operating expenses while generating a fair financial return.

As districts look to secure new contracted services, renew existing contractor relationships, or manage outsourced services, there are several key components that we have evaluated in the past few years as we work with our client school districts.

Before we list some of the issues that we believe districts should consider, it is important to us to delineate standard disclaimers (also known as: every district is unique). Student transportation is frequently driven (no pun intended) by State or municipal mandates. These mandates may control the methods of obtaining contracts, limitations on cost increases, operating criteria, reporting requirements, and a myriad of other factors. Therefore, not every factor that we have included in this article will pertain to every district.

District operations are also influenced by numerous variables such as program size/scope, demographics, regulations, competitive marketplace with contractors, weather, and much more. These variables have a very direct impact on the cost of operations, efficiency of programs, and the ability to generate a competitive environment in the contracting process.

Here are a few of the key issues that we believe districts should consider as they evaluate new or existing contracted relationships:

Pandemic:

Three years ago districts did not factor the massive challenge of dealing with a pandemic into the use or solicitation of a school bus contractor. Districts did not envision the need to consider paying for services that were not rendered just to keep the contractor in business, and staff members employed. Districts did not consider the need to increase fleet size in order to provide social distancing on buses. No one thought about parking spaces for more buses that might be required from the contractor, or increased maintenance time for the contractors due to the need to sanitize the buses every day, or twice per day, or even between runs. Who thought about the increase in fuel due to the need to double or triple runs in order to accommodate the transportation needs?

We could write an entire article, or maybe even a book, about the specific ramifications of the pandemic on district transportation programs. Although parties have adjusted, there are still challenges ahead. However, there are some key take-aways as districts look to the future with their contracted services.

Contracts need to address the potential that we could again experience this type of major disruption in services. Maybe it’s a natural disaster, or a new pandemic, or some other unforeseen factor that will confront both the district and the contractor. As new specifications and contracts are developed, either through the bid/RFP process or negotiations, language should be included that addresses the rights of both the district and the contractor. Will payments be made by the districts and under what circumstances? Will contractors be insulated from major disruptions to some level, even if just to protect them from their fixed costs that will occur regardless of whether or not they operate for a period of time?

Based on our experience, specifications (or contracts) should contain “pandemic language” that provides flexibility to districts to address the key financial issues while offering some guidance to the contractor on what options might be available to satisfy legitimate financial needs with operating issues that could not have been foreseen. Obviously, regulatory limitations become a key factor in this area so any contract or specification will need to consider what’s permissible in the specific environment of the district.

Additionally, pricing methodologies in the contract should consider changes in the vehicle usage and service levels that might be brought on by major changes to the school days. This is another area where regulatory considerations must be a focus as some states and municipalities mandate fixed contract pricing without the ability of the parties to negotiate changes during the term of the contract.

What if new and unforeseen “money sources” should arise similar to the Paycheck Protection Program of the past two years? If the contractor is eligible for a significant payment to help offset some of their costs, how will the district deal with this as changes occur in the payment levels and fixed cost reimbursements? The contract/specifications should address this issue.

Inflation:

At the time of the writing of this article the Nation is experiencing a level of inflation that we have not seen in three decades. This impacts everything from fuel, to wages, to buses, to parts, to basically everything in the operation of a transportation program. Given that most transportation contracts are for five years, consideration needs to be given to the use of fixed versus variable pricing models – all within any confines imposed by local or State regulations.

Districts should understand that contractors need some level of price protections to offset rampant and unexpected inflation. For example, if a district issues a bid for five years with fixed annual prices – and if the current inflation levels are in place – the contractor will need to build in annual cost increases that are sufficient to protect them during the term of the contract. They will tend to be conservative in the event that inflation increases at an even greater level. This could become very expensive to the District, especially if inflation comes under control and costs decrease. The fixed price model (which may be mandated in some states) requires the contractor to have a “crystal ball” as they look at their costs during the term of the contract.

If a district resides in an area with a strict regulatory environment that forces fixed prices, the district may want to consider a shorter initial contract period in order to mitigate some of the hypothetical cost increases that are considered by the contractor. The district may also consider efforts to modify the somewhat antiquated regulatory restrictions that will end up costing more money while negatively impacting their ability to generate quality competition during any bid/RFP process.

Wages:

I believe it is safe to say that every district, and every contractor, has been challenged by a shortage of qualified transportation employees. Some employees have been absent for short and long periods of time due to illness, while other employees have simply left the marketplace. The recent pandemic exacerbated the labor shortage in the industry given that driver demographics show an age level toward the older side while the older persons were more susceptible to illness or concerns about the illness. Without drivers the buses just don’t roll.

The shortage of drivers, mechanics, and support personnel are an excellent example of the law of supply and demand. Back to Economics 101 – as supply decreases and demand increases, the point of equilibrium is achieved by an increase in price. In theory. In the case of transportation employees, price would be defined as the terms and conditions of the labor agreements that cover the wages and benefits offered.

Unfortunately, many employees are covered by formal labor agreements that are restrictive and outdated. These agreements have a fixed term that may not allow the employer to be flexible to reacting to market needs. If a sudden change to staffing levels occurs, and if sufficient personnel cannot be obtained, the employer needs the ability to react and adjust. Frequently this just doesn’t happen.

Additionally, the “price” of employing personnel is a combination of wages and benefits. Therefore, the employer needs to be creative to establishing a wage and benefit program that is transportation sensitive and that provides the ability to aggressively compete in a marketplace with limited resources.

This is a challenge for any contractor in a structured transportation contract environment. However, just imagine the level of challenge for a school district where the transportation department is part of an overall support service labor agreement, and creative approaches to meet transportation needs just cannot be implemented in an employee universe where more employees are full-time personnel working in school buildings.

The entire issue of labor agreements and creative solutions will be dealt with in future articles as districts need assistance with developing approaches to this critical area of operations.

Technology:

Transportation is ever changing and technology is adapting to assist in this change. From routing software to vehicle maintenance to management reporting to student tracking to almost every area of transportation program management, technology is assisting in maximizing the effectiveness of a transportation department.

Districts need to consider what mandates they require from a contractor, how they will interface with the district, and how the technology will be evaluated and evolve. Is the technology really a program enhancement that will generate specific benefits to the district, or is the software just something “cute” that might be nice to consider but which in reality will not provide any type of tangible benefit to the program? Districts must be critical in their evaluation of technology mandates and uses.

Competition:

The level of competition from contractors will vary greatly from market to market. Although contract/specification development is a key issue in generating interest from contractors, there are a great many factors that must be considered, with some of these factors outside of the control of the districts.

Issues such as contract term; pricing methodology; technology mandates; program scope; management oversight; labor requirements; facility availability; historical relationships; timing; and much more all factor into the ability of a district to generate quality competition in a bid/RFP process.

As districts consider the contracting process, it is important to keep in mind that contracted relationships must be an on-going focus. For example, if a district is coming into the final year of a contract, the district should not make the mistake of assuming that the contractor will be willing to renew the contract. There must be active and specific conversations no later than the beginning of the final year of the contract (i.e September/October for a contract that expires the following June).

Throughout the term of the contract, districts should have periodic meetings with contract supervisors or Company managers in order to understand any challenges that are facing the contractor. This will help to forestall “surprises” that may place the quality of the services at risk. Additionally, it facilitates the district providing updates to the contractor on potential program changes such as building reconfigurations, modifications to bell times, enrollment projections, and much more. In fact, we typically recommend to our Bid/RFP clients that they incorporate mandated meetings into the bid or contract specifications.

As all districts have experienced over the past two years, the provision of student transportation services is a challenging and critical aspect of the education of students. Whether a district is self-operated, or contracted, there are a myriad of issues that should be considered in a proactive fashion in order to enhance the transportation experience. Not every situation can be foreseen, but the past two years have provided great insights into some key issues that can be, and should be, addressed in student transportation.

Transportation Advisory Services (TAS) was founded in 1987 and provides third-party, independent student transportation consulting services to school districts, agencies, and universities throughout the United States. In the past 35 years, TAS has worked with almost 600 school districts in 21 states. More information can be found at www.TransportationConsultants.com.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.