Fair allocation of transmission loss is a challenging task for power engineers in deregulated electricity market. One of the key roles of Independent System Operator (ISO) is to provide the details of transmission loss in real time and to allocate the associated cost to the involved parties. For effective and reliable operation of power system, compensation of real and reactive power loss in real time is essential. For a bilateral contract, a generator and a load is involved in the transmission loss allocation process. This paper presents a simple, novel and a fair method to allocate real power loss due to bilateral contracts. The total cost for supply of loss is allocated to the generators and loads based on loss factors. Two loss factors are computed namely generator loss factor for generators and load loss factor for loads. Loss factors are computed from the AC load flow. The proposed method is tested on IEEE 30 bus system and a comparison is made with the other existing methods like proportional sharing, Zbusand modified Zbus. MATLAB R2014a is used for all simulations. © 2016 IEEE.