Reduce Needless Bus Customization

This piece is part of IFP’s Transit Abundance Playbook, a collection of proposals for reducing American transit construction costs.

Summary

US transit agencies pay from $500,000 to over $1 million for each transit bus they procure, while our international peers regularly pay under $400,000 for comparable vehicles. At the root of this problem is the structure of federal cost sharing. Agencies receive an uncapped 80–85% reimbursement for bus purchases, a bad incentive that has encouraged excessive customization and hindered scale economies. We propose a three-pronged solution: cap the federal cost share, address the over-customization habit directly, and jump-start scale economies for bus manufacturing. 

Problem

US transit agencies pay far more for comparable buses than our global peers. In Europe, standard, non-articulated diesel buses often cost less than $350,000, while electric buses sell for double the price of diesels.¹ In the US, the average diesel bus costs around $500,000; the average electric bus costs over $1 million. After accounting for inflation, the $500,000 cost of a diesel bus has remained practically unchanged over the last 20 years. Had the bus market followed the 21% decline in real prices of private automobiles over the same time period, a new diesel bus might cost under $400,000 in the US as well.² 

Buses form the backbone of public transit in most US regions — of the 412 urbanized areas with transit, 373 rely solely on buses. For taxpayers and transit riders, inflated procurement costs have real consequences: the same federal dollars can afford fewer buses, and the resulting smaller bus fleets limit service frequency or coverage. This inefficiency is particularly detrimental amid post-COVID budget crises, when many agencies must stretch every dollar to avoid service reductions. 

American bus procurement is dysfunctional largely due to the poor incentive design baked into federal funding. Under 49 USC § 5339 and § 5307, the Federal Transit Administration (FTA) typically covers 80% of the cost of the vehicle, increasing to 85% under § 5323 if the vehicle is compliant with the Americans with Disabilities Act or the Clean Air Act; the local transit agency procuring the bus is responsible for only the remaining 15–20%. This creates a moral hazard: procuring agencies don’t bear most of the cost of their decisions.

Federal funding enables agencies to buy costly, customized buses. According to a recent AEI-Brookings report, 70% of bus contracts in 2024 were unique in at least one feature, ranging from transmissions to seat designs to window tint. Customization has increased significantly in the past 20 years: only 45% of contracts were unique in at least one feature in 2005. To be clear, some level of customization is to be expected — different climates, operating regimes, and union requirements may necessitate bespoke features. But bus manufacturers suggest that they receive customization requests well in excess of these necessities. 

It’s clear that the FTA’s oversight processes have proven insufficient to curb spending, given that over half of bus procurement contracts are guilty of overcustomization. One industry expert noted that universities (which do not receive federal funding for buses) and airports (which receive limited federal support dedicated to buses) demonstrate greater cost discipline and customize bus purchases less than typical transit agencies do, because those institutions bear more of the cost burden.

The costs of over-customization and the resulting market fragmentation have long been understood. Prior to the 1930s, American streetcars were largely customized for each operator and each order. However, rising cost pressures led the (then largely private) transit operators to work together to design a standardized streetcar specification “so that mass production of cars and their equipment could effect lower prices and higher quality.” The result was the Presidents’ Conference Committee (PCC) streetcar, which was widely produced by multiple manufacturers for over two decades. The success of the PCC is proof that agencies can coordinate to benefit from economies of scale.

The bus specifications issued by most agencies are a mix of performance-based specifications and prescriptive design specifications. In a pure performance-based specification, agencies would specify only functional requirements: passenger capacity, vehicle handling, climate performance, etc. But many agency specifications are so prescriptive that they effectively mandate specific products from specific component vendors. The bus manufacturer is contractually obligated to include these products in the final vehicle — as if each of Dell’s laptop customers required a different motherboard as a condition of purchase. Under these conditions, component vendors can name their own price when selling to bus manufacturers because agency mandates give third-party component vendors near-total leverage in negotiations. This significantly increases component costs, which either drives up final bus prices or puts a financial squeeze on the bus manufacturer.

Because mandated components vary and demand patterns for each individual component are unpredictable, bus manufacturers are forced to maintain extensive inventories of specialized parts for each production run. As one industry insider interviewed by Niskanen explained, “[bus] manufacturers must float hundreds of thousands of dollars worth of parts” per bus per run. Since agencies typically pay upon delivery, bus manufacturers must often finance this cost themselves. 

Another potential cost driver is market consolidation. Buy America mandates that 70% of component and subcomponent costs be sourced from domestic suppliers and that all final assembly takes place in the US.³ This doesn’t just prohibit agencies from buying cheaper overseas buses, but also inflates domestic production costs by restricting access to imported components. Excessive customization demands have only further strained bus manufacturers, forcing acquisitions and exits from the US market while limiting new entrants. As a result, the two major remaining domestic bus manufacturers — New Flyer and Gillig — have gained increased pricing power. Insofar as market power could be a primary cost driver, it would make sense for the FTA to leverage its controlling share of bus purchasing power to negotiate and drive down costs.

While this market structure might suggest price gouging, bus manufacturers appear to be exiting the market due to poor financial performance rather than predatory mergers. Most alarmingly, the Canadian Nova Bus subsidiary of Volvo gave up a guaranteed market with the MTA — America’s largest bus purchaser — citing low profitability, despite being the only bus manufacturer able to meet Buy New York preferences for non-federal MTA funds. Nova Bus continues to make and sell buses in Canada, suggesting that the cost of American buses is largely driven by transit agency behavior (such as component vendor mandates) and state and federal regulations, rather than duopolistic price gouging.

Many bus procurement stakeholders, including the American Public Transit Association (APTA) and FTA, recognize that customization and small order sizes have become a problem. A few reforms have been attempted. Most notably, Congress included language in the 2015 Surface Transportation Reauthorization (the FAST Act) to incentivize joint procurements, encouraging agencies to jointly solicit bids from bus manufacturers. Another provision legalized the use of cooperative procurement programs across state lines, establishing a list of products at negotiated prices. 

However, the evidence for actual cost reductions using these provisions remains mixed at best. The AEI-Brookings report compared the costs of buses purchased using cooperative purchasing agreements or joint contracts and those purchased using the traditional competitive bidding process; when controlling for major features like bus type, length, fuel, and bus manufacturer, the report found no significant difference in price between buses purchased traditionally and non-traditionally. In fact, they found that bus purchases on Washington State’s cooperative purchasing contract were, on average, $150,000 more expensive than those purchased through traditional procurement methods.

The failure of these reform attempts has at least three explanations. First, joint procurements and cooperative purchasing agreements still allow for some flexibility for customization, so long as they are not “cardinal” changes. The FTA’s third-party contracting guidance defines a cardinal change as a change so large “the contractor is required to perform very different work from that described in the original contract.” However, this guidance provides wide latitude for changes outside of the fuel type, whether the bus is high- or low-floor, or whether the bus is a double-decker. In particular, federal guidance explicitly allows for “changes to seating, fabrics, colors, exterior paint schemes, signage, and floor covering” and other attributes of the same magnitude, making it possible for agencies to extensively customize their orders even while purchasing through a joint procurement. Agencies participating in such a scheme may enjoy cost savings from some increased administrative efficiency, but they would fail to capture savings from increased economies of scale.

Second, some cooperative agreements struggle to provide the promised standardized, large volume orders. The organization managing a cooperative agreement may lack the technical expertise to determine standardized specifications on their own. Even if aggregating requests from agencies that do have the technical knowledge, the managing organization may still lack the expertise to evaluate whether a particular participating transit agency’s customization request is reasonable, or may lack the authority to overrule them. As a case in point, one cooperative agreement in Washington state resulted in a list of over 500 possible customization options for 40-foot buses from both major OEMs, including seven or eight options for brake lights. 

Third, bus manufacturers may see reduced incentives to compete on price: since cooperative agreements define a schedule that legitimizes current prices, agencies may choose the bus manufacturer with whom they have a pre-existing relationship, even if the schedule includes a cheaper model by a different bus manufacturer. And cooperative agreements typically include nearly every bus manufacturer as an option due to the politics of excluding one (the Washington agreement offers nine). This contrasts with traditional competitive procurements, where price competition is a more explicit criterion in the process.   

Solution

We recommend a three-pronged solution to the interrelated challenges of bus procurement. First, Congress and the FTA should address the root cause of soaring costs by fixing the bad incentives created by the current 80%+ federal cost share. Second, FTA should discourage excessive customization by revising third-party contracting guidance. Finally, the federal government should create additional infrastructure and provide technical assistance to help agencies pool orders and enable bus manufacturers to benefit from economies of scale.

1. Fixing the federal cost share
   To curb the exploitation of federal reimbursement, Congress should direct FTA to establish benchmarks for a reasonably priced bus and only cover up to 85% of that sticker price, setting a ceiling for federal cost share. Different classes of bus should have different benchmark prices to take into account bus length and other significant variations, such as propulsion technology. This would result in benchmarks for diesel, compressed natural gas (CNG), hybrid, and electric buses, of varying lengths. 
   
   Under this model, agencies that buy expensive buses would be responsible for any cost in excess of the relevant benchmark; those that buy cheaper buses would be rewarded with a higher federal cost share. This incentivizes agencies away from customization and toward more “basic” buses that may not have custom flooring but can pick up passengers just as effectively.
   
   This benchmarking strategy is not unprecedented — the Metropolitan Transportation Commission (MTC), the Metropolitan Planning Organization for the San Francisco Bay Area, has used a similar intervention since 2015, maintaining an annual price list. MTC allows the agencies they fund to pay for more expensive buses or to hold their buses beyond their useful life benchmark, but will not cover the extra cost. Conversely, operators that purchase cheaper buses are allowed to pocket the extra money for other capital replacement or rehabilitation expenditures. MTC determined their price list by reviewing bus costs across all agencies in the Bay Area and tracking the average price for different classes of buses (based on attributes like propulsion and length).⁴ These prices were allowed to rise based on the projected inflation rate defined in Plan Bay Area 2050, the region’s long-range planning document.⁵
    
   Although MTC’s price list disincentivizes customization, its benchmarks are still high — $736,000 for a 40-foot diesel bus — compared to international costs. This is at least partially explained by the premise for the policy: the price list was conceived primarily to equitably distribute funds across the region’s 27 agencies, with cost control as a secondary concern. In this context, targeting the average current bus price for the benchmark prices makes sense. However, it means that the benchmark will skew higher to account for the price of heavily customized buses purchased by larger agencies with substantial local funding, and result in an average far above the cost of the cheapest buses in the region, which presumably represent the base bus required by regional weather.
   
   Federal implementation could improve on the MTC’s policy by making cost control the primary goal. The AEI-Brookings report offers two suggestions that we echo here. First, the initial benchmark could be set as the 25th percentile of bus purchase prices per class of rolling stock — this price would skew closer to the base cost of a bus, while allowing a generous buffer for necessary (e.g., weather-related) customization costs. Second, benchmarks should be calibrated using actual inflation measures adjusted by a plausible productivity target, such as the Producer Price Index for Transportation Equipment minus, for example, 2%. This model has origins in British utility price regulation, where electricity reference prices are set at an inflation index minus a plausible estimate of achievable long-term total factor productivity improvement in the industry. If the federal government is concerned that lower reimbursement over time might affect experimentation in bus technology, it could offer a separate innovation grant to support bus improvements that meaningfully move the field forward.
   
2. Tackling over-customization directly
   While benchmarking prices would disincentivize customization, the federal government should also directly restrict the most problematic customization practices. First, the FTA should update its third-party contracting guidelines to limit the component vendor mandates that give component suppliers immense pricing leverage over bus manufacturers. 2 CFR § 200.319 already requires an “or equivalent” clause whenever any federal procurement document specifies a brand name. However, both the original regulation and FTA circular citing it are ambiguous as to whether this requirement applies only to the item being procured or also to its components. FTA has implied that this is merely a suggestion in a “Dear Colleague” letter circulated in 2024. However, it is unlikely that this encouragement will change the fundamental incentives that have resulted in current customization practices.  
   
   To be fair, bespoke product specifications are occasionally necessary. For example, some other agency systems may have proprietary lock-ins that require a specific product — monolith fare payment systems are often a culprit.⁶ In some cases, fleet standardization around a specific product (such as a specific transmission) could reduce lifecycle costs due to operational benefits, including factors like inventory harmonization to meet minimum purchase order sizes, or maintenance staff certification and training in the particular bus systems or components. 
   
   As a compromise, FTA should first require that procurement contracts include itemized component prices, at least for common systems where brand names are often necessary. FTA could compile these itemizations to develop “unit cost libraries” with reference pricing for major bus systems, and eventually for individual bus components.⁷ These libraries would help agencies identify opportunities for design savings and help FTA determine if custom sole-source component vendor lock-in on an individual system at a particular transit agency is driving cost growth.⁸
   
   Second, FTA should restrict brand-name specifications to instances where the agency can demonstrate material lifecycle cost savings that exceed the added cost to the bus procurement, using the unit cost library as a counterfactual. Such a regulation could be justified under 49 U.S. Code § 5325(h), which prohibits grant support for procurements with exclusionary or discriminatory specifications. This requirement would impose additional technical burdens on agencies, but they would be avoidable if agencies reduce their brand-name requirements.
   
   To assist agencies that lack the technical capacity to develop a specification devoid of brand-name references, the FTA should develop performance-based specifications for the most commonly purchased bus classes. These models should be developed in consultation with both transit agencies and bus manufacturers to ensure that they meet legitimate agency needs and represent a manufacturable product to avoid the overspecification failures of the 1970s Transbus program.
   
   The FTA should also address the “cardinal change loophole” for joint procurements and cooperative purchasing agreements by adding a cost-based threshold. Any deviation from the negotiated base model that escalates costs by more than a fixed percentage should automatically qualify as a cardinal change. The threshold should be high enough to allow for necessary functional customization, while prohibiting discretionary changes that impede economies of scale.
   
3. Enabling greater federal economies of scale
   Congress should authorize FTA to create its own in-house cooperative purchasing schedule or expand access to the existing federal General Services Administration schedules that are currently only available to agencies in the District of Columbia and the smaller territories. This schedule would list bus models from willing bus manufacturers that are priced below FTA benchmark prices and either fit FTA model performance specifications or have been successfully purchased through an existing schedule or joint procurement. The schedule would provide bus manufacturers a larger market for individual bus models with guaranteed limits to customization, increasing the demand that bus manufacturers could anticipate and creating economies of scale. Eventually, this should result in savings for the bus manufacturers that would get passed on to agencies via price competition between models on the schedule.

Bus procurement reform is a key way to reduce transit costs. Bus purchases could be routine procurements of relatively standardized products, but excessive customization means transit agencies pay far more than they need to. The three-pronged approach outlined here — fixing the federal incentive structure, directly limiting problematic customization, and enabling economies of scale — attacks both the root cause of the issue and the resulting problematic procurement habits, while jumpstarting the scale needed to bring down costs. Successful bus procurement would demonstrate that transit cost reform is achievable, opening pathways to tackle more complex challenges, such as rail rolling stock or fixed guideway infrastructure costs.