AirDrop Contacts Only requires the following:
* Both people have WiFi and BT enabled on their devices, and the screen is on (it does not state if password entered, but I unlock the iDevice before using it)
* Both users are logged into iCloud
* The recipient of AirDrop has the iCloud e-mail address of the sender in their contacts
* Both people need to be within 30 ft of each other (radio range of BT)
* Both people must have the Contacts Only option selected (I have not tested to see if it works with one as Contacts Only and the other as Everyone).