Railways play a significant role in daily life, offering speed, safety and massive capacity for delivering people from one place to another. However, developing countries such as Indonesia are currently encountering problems related to Operation and Maintenance (OM) contracts. Railway operators are mostly experiencing a negative rate of return when operations depend only on farebox revenue. Thus, an alternative approach that includes government involvement should be instigated to improve project performance. This research aims to evaluate the contract agreement between the state, in the form of the Ministry of Transportation, and business entities in the operation and maintenance phase. The Makassar–Parepare railway section on Sulawesi Island is used as a case study. The study uses a combination of qualitative and quantitative approaches that follow three stages: assessing the initial design; generating an alternative OM scheme; and propose a suitable OM scheme. The results indicate five components that should be considered when developing an OM contract, namely the tariff, risk, feasibility, subsidy and period of the contract. The study recommends a five-year contract for operation and maintenance, and the government should assign a business entity to manage available assets in the project.