Contracting out for services is a controversial issue in public transit. Proponents argue that contracting always saves money in comparison with public operation, while critics respond that cost savings through contracting are overstated and come almost exclusively at the expense of labor. In order to determine the medium term effectiveness of contracting out transit services, this paper examines the impacts of contracting on the cost per vehicle hour of fixed-route bus services. A national sample of operators is studied, including some that contract out none of their routes, others that contract out all of their routes, and some that contract out a portion of their service. The effects of contracting on costs are examined for the years between 1989 and 1993. The findings show that bus services operated under contract are sometimes, but not always, less costly than directly operated services. A regression model is used to test the influence of a variety of factors on cost per vehicle hour, and contracting is found not to be the most significant variables influencing operating costs. The findings indicate that vehicle and labor utilization have far more influence on cost efficiency than either wages or a contracting arrangement. We conclude that cost efficiency can be achieved in many different ways, depending upon local conditions, and contracting should not be assumed to be the most appropriate strategy in every situation.