U.S. Postal Service: Improved Management Procedures Needed for Parcel Select Contracts
Published: 2015-04-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: USPS faces significant financial challenges. Parcel Select is a key USPS package shipping product to help address these challenges, with revenues growing from $466 million to over $2.5 billion from fiscal year 2009 through fiscal year 2014. As of April 3, 2015, USPS has executed 13 Parcel Select NSAs—customized contracts that lower mailers' shipping prices in exchange for meeting volume targets and other requirements. GAO was asked to review how USPS manages these contracts.
GAO examined (1) USPS's procedures to manage Parcel Select NSAs and (2) its method to determine attributable cost coverage for each contract. To perform this work, GAO reviewed relevant laws and regulations; analyzed documents for all 13 contracts; compared USPS's procedures against selected leading contract management practices most applicable to USPS's role; and interviewed USPS and PRC officials and representatives from 8 mailers that signed 12 of the 13 contracts.
section_title: What GAO Found
paragraphs: In June 2014, the U.S. Postal Service (USPS) established standard procedures that departments should follow to manage all negotiated service agreement (NSA) contracts, including Parcel Select NSAs. Although the procedures, in part, address some leading contract management practices, such as defining performance management activities, they lack documentation requirements and clearly defined management responsibilities for some activities. For example, the procedures do not require USPS to document some key management decisions, such as USPS's decision to forego additional revenue when a mailer did not ship a minimum volume of packages, as contractually required. Documenting such information could improve future decision making and enhance accountability for the effective and efficient use of USPS resources. USPS acknowledged that the procedures contained gaps when they were initially established. Reviewing and updating the standard procedures to include documentation requirements and clearly defined management responsibilities would provide additional assurance that USPS's Parcel Select NSAs are effectively managed.
USPS's costing method for Parcel Select NSAs does not account for package size or weight or use contract-specific cost estimates. Each Parcel Select NSA is required to earn sufficient revenues to cover USPS's costs—referred to as “attributable costs” in the postal context. The Postal Regulatory Commission (PRC), which annually reviews compliance, determined that each contract met this requirement. However, USPS's analysis of attributable costs for Parcel Select NSAs is limited, because USPS has not studied the impact of package size or weight on specific contracts or developed contract-specific cost estimates.
Package size and weight information : USPS does not collect information on the size of NSA packages and has not studied the impact of package size and weight on USPS's delivery costs for specific contracts. However, larger and heavier packages can increase USPS's costs. For example, carriers must walk packages that are too large for a centralized mailbox to the customer's door, which increases costs. Moreover, mailers use size and weight to inform their own business decisions. For example, one mailer continually assesses package size and weight to make cost-effective decisions about the delivery method it chooses. If mailers route larger or heavier packages via Parcel Select, collecting and studying such information could improve USPS's analysis of attributable costs for Parcel Select NSAs.
Contract-specific cost estimates : USPS's method to determine attributable costs uses average cost estimates for the Parcel Select product instead of contract-specific cost estimates. USPS's use of averages further limits its analysis of the extent to which each Parcel Select NSA covers its attributable costs, because USPS had not studied the extent to which the size and weight of packages shipped under individual contracts deviated from the characteristics of packages USPS used to estimate the average.
USPS officials questioned whether the benefits of developing contract-specific cost estimates would exceed the costs; however, USPS has used less intensive methods, such as sampling, to improve estimates for other products in the past.
section_title: What GAO Recommends
paragraphs: GAO recommends that USPS update its standard procedures to address gaps in documentation requirements and contract management responsibilities. Also, USPS should identify cost-effective methods to collect and study information on delivery costs for Parcel Select packages of varying characteristics to develop contract-specific attributable cost estimates. USPS agreed with these recommendations, but stated that the cost impact of package size and weight is likely small given where these packages enter the mail stream.

section_title: Letter
paragraphs: The U.S. Postal Service (USPS) faces significant financial challenges  including insufficient revenues to cover its expenses and financial  obligations. Among the many factors that contribute to USPS’s  continuing financial challenges are precipitous declines in its most  profitable product, First-Class Mail, with its volume falling over one-third  from fiscal years 2006 to 2014—resulting in an $8 billion decline in  revenue during the same time period. Although USPS anticipates that  First-Class Mail volume will continue to decline, it has identified package  shipping as an increasingly important source of future revenue and  volume growth.
In its glossary of postal terms, USPS defines a “parcel” as a package or mail that does  not meet the mail processing category of letter-size mail or flat-size mail. A parcel is  usually enclosed in a mailing container such as a carton. packages bypass most of USPS’s processing and transportation network,  because mailers drop package shipments closer to their final destination.
Parcel Select is attractive to high-volume mailers because it can lower  ground shipping costs and allow them to take advantage of USPS’s  extensive delivery network. The product is important to USPS because it  capitalizes on its last-mile delivery strengths to gain additional revenue.  Revenues from Parcel Select have grown from $466 million to over $2.5  billion from fiscal year 2009 through fiscal year 2014. USPS has  provided Parcel Select package delivery service for specific mailers under  negotiated service agreements (NSA). NSAs are customized contracts  between USPS and specific mailers that provide customer-specific  rates—generally lower prices than those available to the general public— in exchange for the mailers meeting volume targets and other  requirements. For example, each competitive product, such as Parcel  Select contracts, must generate enough revenue to cover the costs  caused by providing the service, referred to as “attributable costs” in the  postal context. As of April 3, 2015, USPS has executed 13 Parcel Select  NSAs. You requested that we review how USPS manages its Parcel  Select NSAs. We examined (1) the procedures USPS has established to  develop, monitor, and evaluate the performance of its Parcel Select  NSAs, and (2) the method USPS uses to determine the extent to which  each contract meets the requirement to cover its attributable costs.
To examine the procedures that USPS has established to develop,  monitor, and evaluate the performance of its Parcel Select NSAs,  including implementation, we reviewed relevant laws and regulations as  well as USPS’s and the Postal Regulatory Commission’s (PRC)  documents that describe these procedures. We also analyzed copies of  all 13 Parcel Select NSAs implemented by USPS along with their  supporting file documentation, such as contract performance reports. We  compared USPS’s procedures for managing the contracts against  selected leading contract management practices. To select these  practices, we analyzed our standards for internal control in the federal  government and documents from organizations with expertise in contract  management, such as the Office of Federal Procurement Policy and the  National Contract Management Association. We then selected practices  that, in our judgment, were most applicable to our review given USPS’s  unique role as an independent establishment of the executive branch of  the federal government and as the service provider under Parcel Select  NSAs. The selected practices are defining roles and responsibilities;  establishing procedures for the contract management process; planning  and negotiation; managing performance; communicating effectively; and  documenting management activities and decisions. We conducted  interviews with USPS officials responsible for developing, monitoring, and  evaluating the performance of the Parcel Select NSAs; PRC officials  responsible for reviewing the contracts; and representatives from 8  mailers that signed 12 of the 13 Parcel Select NSAs to determine how  USPS implements its procedures. We did not report volume, revenue, or  mailer-specific information for individual NSAs because USPS and  mailers consider the information proprietary and, according to USPS  officials, public disclosure would violate contractual confidentiality  provisions.
To examine the method that USPS uses to determine whether each  Parcel Select NSA covers its attributable costs, we reviewed relevant  laws and regulations that establish requirements for the contracts. We  reviewed USPS documents that describe or discuss the methodology that  USPS uses, such as its fiscal year 2014 Annual Compliance Report and  PRC’s Annual Compliance Determination Reports for fiscal years 2008  through 2013, the most recent reports available during the time of this  review. We also reviewed relevant federal agency, academic, and GAO  reports that describe issues related to USPS’s costing approach  generally, such as the USPS Office of Inspector General’s audit reports.  In addition, we conducted interviews with USPS and PRC officials to  obtain their views on USPS’s cost coverage methodology. We did not  review USPS’s postal costing methodology generally, such as methods to  divide costs into attributable and institutional costs and methods to  distribute attributable costs to various USPS products and services. See  appendix I for more information on our scope and methodology.
We conducted this performance audit from April 2014 through April 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: The Package Delivery Market Is Complex and Changing Rapidly
paragraphs: The package delivery market is growing and changing rapidly. In 2013,  U.S. businesses and consumers reportedly spent more than $68 billion to  ship packages domestically using the three largest national package  delivery providers in the U.S.—United Parcel Service (UPS), Federal  Express Corporation (FedEx), and USPS. This spending is driven in  large part by recent growth in electronic commerce, which is forecast to  grow in the double digits year-over-year to bring electronic commerce’s  share of overall U.S. retail sales to almost 9 percent, or $490 billion, by  the end of 2018. According to USPS, revenues from its Shipping and  Packages services—which includes Parcel Select—have grown from  about $11.6 billion in fiscal year 2012 to over $13.7 billion in fiscal year  2014, and generate about 20 percent of USPS’s total operating  revenues. USPS is placing increased emphasis on growth in these  services to partially offset a continued decline in First-Class Mail.
Mailers have developed new delivery options to grow their businesses as  the package delivery market evolves. For example, Amazon and Google  started offering same-day package delivery service in select metropolitan  areas. Some mailers have also introduced services that allow consumers  to avoid package deliveries when they are not at home by picking-up  packages themselves at alternative delivery locations. This development  could reduce the need to provide last-mile delivery to individual  residences. For example, Amazon allows customers to retrieve packages  at self-service lockers in shopping centers, retail stores, transit stations,   Similarly, in October 2014  and other access points in selected locations.UPS announced that consumers in two cities may retrieve packages from  nearby locations—primarily neighborhood convenience and grocery  stores—and it plans to expand the service to cover all major U.S.  metropolitan markets in 2015.
In addition to large national mailers, smaller regional companies compete  for business in the package delivery market. For example, LaserShip is a  regional package delivery company that provides last-mile delivery to  major East Coast markets. Similarly, OnTrac provides regional overnight  package delivery service within several states on the West Coast.
As the package delivery market has changed, USPS must manage  complex business relationships with its competitors. For example,  although UPS and FedEx both pay USPS to deliver packages the last  mile under certain circumstances, they also compete with USPS for end- to-end package delivery business—a concept that USPS officials refer to  as “coopetition”. Similarly, FedEx is USPS’s largest contractor providing  air transportation for Priority Mail Express (formerly Express Mail), Priority  Mail, and First-Class Mail. UPS also is one of USPS’s largest contractors  providing long-distance mail transportation.
section_title: Parcel Select NSAs Provide Increased Volume and Revenue to USPS and Discounted Prices to Mailers
paragraphs: USPS uses Parcel Select NSAs to encourage additional mail volume and  revenue by providing mailers with discounted prices in exchange for  meeting the contract’s terms and conditions. USPS data show that the  Parcel Select product, including Parcel Select NSAs, is an increasingly  important source of additional volume and revenue (see fig. 1).
While USPS uses Parcel Select NSAs to generate additional revenue,  among other benefits, mailers use them to lower delivery costs and to  take advantage of USPS’s extensive “last mile” network that serves more  than 140 million residential delivery points 6 days a week. Contracts  may require the mailer to ship a minimum volume of packages each  contract year (minimum volume requirement) to qualify for discounted  prices. Some contracts may require the mailer to pay USPS the  difference between the discounted price and published price for Parcel  Select if the mailer fails to meet this minimum volume requirement.
Shipping packages under Parcel Select lowers mailers’ delivery costs by  allowing them to enter bulk shipments of packages into USPS’s  network—generally at Destination Delivery Units (DDU)close to the final delivery point (see fig. 2). As a result, these packages  generally bypass most of USPS’s mail processing and transportation  network. Prices vary, depending on package weight, entry point, and the  total volume shipped.
USPS must ensure that all Parcel Select NSAs comply with statutory  requirements under the Postal Accountability and Enhancement Act  (PAEA). Notably, each Parcel Select NSA is required to generate  enough revenue to cover its attributable costs. For Parcel Select, these  costs primarily include USPS labor involved in sorting packages at postal  facilities and delivering them to the final delivery point. PRC reviews each  Parcel Select NSA to ensure that it is projected to comply with this and  other requirements before USPS can implement it. According to PRC, this  pre-implementation review is justified to preserve fair competition.also reviews each contract after implementation to ensure compliance  with statutory criteria—including the contract’s attributable cost  coverage—in its Annual Compliance Determination Report.
section_title: USPS’s Recently Established Standard Procedures for Parcel Select NSAs Have Gaps
subsections: section_title: USPS Established Standard Procedures in June 2014
paragraphs: USPS’s Sales Department (Sales) has lead responsibility for managing  Parcel Select NSAs and recently established standard procedures for  managing NSA contracts. Specifically, in June 2014, Sales created the  Standard Procedure for Managing NSA Contracts (Standard Procedures),  which is an internal document that provides guidance that USPS  departments should follow to manage all NSAs. Sales officials told us that  they created the guidance in an effort to incorporate best practices and to  improve USPS’s NSA contract management procedures by balancing  standardization with flexibility. The Standard Procedures address, in part,  some leading contract management practices. For example, as we  discuss below, the procedures define some contract management  responsibilities, such as performance monitoring and evaluation activities.  Previously, USPS officials told us that no document or policy outlined  USPS’s contract management procedures. Absent such guidance, USPS  managers told us that they relied primarily upon their professional  expertise and experience to manage the contracts.
section_title: Standard Procedures Define Some Contract Management Responsibilities
paragraphs: The Standard Procedures define some responsibilities for USPS  departments involved in developing, monitoring, and evaluating the  performance of Parcel Select NSAs, as indicated below. USPS officials  told us about other responsibilities that are not specifically included in the  Standard Procedures.
subsections: section_title: Contract Development
paragraphs: The Standard Procedures delineate contract development responsibilities  for various departments within USPS, including Sales, USPS’s Finance  Department (Finance), and USPS’s Legal Department (Legal) (see fig. 3).
After PRC issues an order approving a Parcel Select NSA, USPS begins  to monitor and evaluate the performance of the contract. These  responsibilities include internal performance reporting by Sales and  Finance, submission of an annual compliance review to the PRC by  Finance, periodic business reviews between USPS and mailers, and  following contract termination or renewal procedures, as described below.
Internal performance reporting: The Standard Procedures call for Sales  and Finance to use internal reports to monitor and evaluate performance  under each Parcel Select NSA. Thus, Sales or Finance creates monthly,  quarterly, and annual reports that analyze data that include the volume of  packages shipped and revenue generated under the contract. For  example, Finance develops a quarterly performance report that is used  internally by Sales. This report communicates the Parcel Select NSA’s  contractual requirements, actual and projected volume and revenue data,  as well as descriptive information such as the contract’s effective and  expiration dates.
Submission of compliance review to the PRC: In addition to internal  reporting, USPS reports each NSA’s performance externally to the PRC.  Specifically, Finance files USPS’s Annual Compliance Report to the PRC;  this report covers the extent to which USPS finds that each NSA has met  statutory requirements including whether each contract has covered its  attributable costs. According to PRC officials, all Parcel Select NSAs have  complied with these statutory requirements each year. However, PRC  officials noted that they do not review and are not statutorily required to  review the extent to which mailers or USPS have complied with other  contractual requirements, such as minimum volume requirements and  any payments to USPS for failure to meet these requirements as part of  its Annual Compliance Determination Report.
Business reviews: USPS officials said that they use performance reports  to conduct business reviews with mailers. Business reviews are meetings  where USPS and the mailer discuss business opportunities, contract  terms—such as volume requirements and pricing—and contract  performance. The Standard Procedures define additional  responsibilities USPS should perform if a mailer is at risk of failing to meet  contractual conditions. For example, if Parcel Select NSA performance is  below contractual terms, Sales should establish a plan and timeline for  improved performance. Furthermore, Sales should schedule additional  monthly or bi-monthly business reviews to ensure performance improves  in accordance with the established plan.
Contract termination or renewal: According to Sales officials, the final  activity for managing a Parcel Select NSA is to terminate, renew, or allow  the contract to expire. Each Parcel Select NSA describes how the  contract can be terminated. Contract terms and conditions typically allow  USPS and mailers to terminate a Parcel Select NSA by mutual  agreement in writing for convenience. According to the PRC, USPS  should promptly notify the PRC if a Parcel Select NSA is terminated prior  to the scheduled expiration date. Sales officials said that they generally  contact mailers 3 to 6 months before a Parcel Select NSA expires to  explore whether renewing the contract would be mutually beneficial. If  both parties agree, Sales officials told us that USPS and the mailer  should follow the same procedures used to create the original contract to  execute the renewal. If either party does not wish to renew the contract,  the Parcel Select NSA expires on its contractually specified date.
section_title: Standard Procedures Have Gaps in Contract Monitoring and Evaluation
paragraphs: While the Standard Procedures address some responsibilities involved in  managing Parcel Select NSAs, some gaps exist. Specifically, the  procedures lack documentation requirements and clearly defined  management responsibilities for some contract monitoring and evaluation  activities. A senior USPS official acknowledged that the Standard  Procedures contained gaps when the document was initially established  and that Sales had not reviewed or updated the procedures, which could  have provided USPS with an opportunity to identify and address such  gaps.
Documenting contract monitoring and evaluation activities: USPS’s  Standard Procedures lack documentation requirements for some  contract monitoring and evaluation activities such as the occurrence  and results of business reviews for active Parcel Select NSAs. Each  of the seven contracts that were effective in October 2014 requires  USPS to conduct business reviews to discuss contract performance  semiannually. However, Sales officials told us they did not know the  extent to which they conduct business reviews for each contract,  because they do not always document that the meetings actually  happen. Sales officials verified—through emails, meeting agendas,  and other documents—that staff scheduled or conducted at least one  business review for five of these seven contracts.
Similarly, the Standard Procedures lack requirements for documenting  some key management decisions pertaining to contract monitoring  and evaluation. For example, USPS did not document management  decisions about an underperforming contract. Specifically, according  to Sales officials, when one mailer did not reach its minimum volume  requirement, Sales did not document any discussions with the mailer  to address the issue. Moreover, USPS did not require the mailer to  pay the difference between the discounted price and the published  price, as called for under the contract. Sales officials told us that they  decided not to require the payment for business reasons, including  maintaining this mailer as a source of package volume and allowing  the mailer time to adjust to changing market conditions that influenced  its performance. Although we recognize that USPS should have  flexibility to reach management decisions based upon the facts and  circumstances of each contract, Sales officials did not document the  reasons for their decision to leave the performance issue unresolved  and forgo the additional revenue. Documenting such information  would help ensure that future decisions are based upon past results  and enhance accountability for the effective and efficient use of USPS  resources.
Internal control standards state that information should be  documented in a form and within a time frame that enables individuals  to carry out their internal control and other responsibilities and that the  documentation should be properly managed and maintained.  Reviewing and updating the Standard Procedures to include  documentation requirements would provide additional assurance that  USPS’s Parcel Select NSAs are effectively managed. Inconsistent  management and maintenance of documentation also increases the  risk that USPS may not retain important institutional knowledge. As  previously mentioned, management responsibility for Parcel Select  NSAs has transitioned among three different USPS entities since  calendar year 2008 (see fig. 4). USPS officials told us that  documentation of key management decisions was lost or discarded  when lead responsibility for managing the contracts transitioned from  Domestic Products to Sales in 2012. The projected importance of  package shipping and Parcel Select NSAs to USPS’s financial future  highlights the importance for USPS to document contract  management activities to retain institutional knowledge and inform  future decision-making.
Defining management responsibilities for contract monitoring and  evaluation activities: USPS’s Standard Procedures do not define who  is responsible for addressing unresolved contract performance issues  and how staff should resolve them. Internal control standards state  that organizations should clearly define key areas of responsibility and  establish procedures to ensure that management promptly resolves  performance issues. Without clearly defining who is responsible for  promptly addressing performance issues and the procedures these  individuals should follow, USPS is at risk of leaving performance  issues unresolved—such as the example of a mailer’s failure to reach  minimum volumes discussed above—issues that could impact future  contract performance.
In addition, the Standard Procedures do not clearly define who is  responsible for reporting contract changes, such as rate adjustments  and amendments, to PRC. Internal control standards and leading contract management practices we identified state that  organizations should establish appropriate lines of reporting. Without  clearly defining who is responsible for reporting information to PRC in  the Standard Procedures, USPS is at risk of not reporting contract  changes to PRC as required. For example, although PRC requested  that USPS file an amendment to a Parcel Select contract in November  2014, USPS did not file the requested amendment as ordered.  Similarly, according to PRC notices, on several occasions USPS did  not report discretionary rate adjustments for Parcel Select NSAs as  required.
section_title: USPS Could Improve Its Method to Estimate Attributable Costs for Parcel Select NSAs
paragraphs: Each competitive product, including each Parcel Select NSA, must earn  sufficient revenues to cover its attributable costs; however, USPS’s  costing method to estimate attributable costs for individual Parcel Select  contracts does not account for all key cost factors. USPS compiles  attributable costs for the Parcel Select product by using data from various  information systems—notably financial accounting systems—that collect  data on employee compensation and benefit costs. USPS then estimates  how much employee time is spent handling Parcel Select packages by  collecting additional data.USPS then estimates the total attributable costs for the Parcel Select  product. However, USPS officials told us that they do not collect or study  some information that could improve these estimates for individual Parcel  Select contracts. Specifically, while USPS does collect data on the weight  of all Parcel Select packages, it does not collect information on the size of  NSA packages and has not studied the impact of either of these factors  on USPS’s delivery costs for specific contracts. This limits USPS’s  analysis of attributable costs for Parcel Select NSAs.
USPS uses three basic delivery modes: door, “curbline,” and centralized delivery. Door  delivery includes delivery to mail slots in the door as well as mailboxes attached to  houses. Curbline delivery includes delivery to curbline mailboxes that are typically  unlocked mail receptacles on a post and commonly used on routes serving residential  customers. Centralized delivery is provided to centrally located mail receptacles, such as  apartment house mailboxes and cluster box units. As we reported in May 2014, USPS  estimated that its delivery costs in fiscal year 2012 ranged from about $380 annually for  the average door delivery point to about $240 for curbline delivery and about $170 for  centralized delivery. See GAO, U.S. Postal Service: Delivery Mode Conversions Could  Yield Large Savings, but More Current Data Are Needed, GAO-14-444 (Washington, D.C.:  May 12, 2014). or split routes, resulting in decreased operational efficiency and additional  operating costs (see fig. 5).
Moreover, private sector mailers use package weight and size information  to inform their own business decisions. For example, UPS and FedEx— both of which pay USPS to deliver packages the last mile under certain  circumstances and compete with USPS for end-to-end package delivery  business—recently began basing the ground delivery rates they charge  on both the size and weight of packages, a concept called “dimensional   Representatives from another mailer told us that in serving  weighting.”their own customers, they continually assess the characteristics of each  package—including weight and size—to determine the costs of handling  each package and to make cost-effective decisions regarding the delivery  method they choose. If mailers choose to route larger or heavier  packages via Parcel Select, collecting and studying information on the  weight and size of packages could position USPS to better understand  how this affects its delivery costs and the extent to which revenues for  individual Parcel Select NSAs cover their attributable costs.
In addition to not collecting detailed cost information that accounts for key  package characteristics, USPS’s method to estimate attributable costs  uses national averages for Parcel Select packages instead of contract- specific cost estimates for each NSA. This estimating further limits  USPS’s analysis of the extent to which each contract covers its  attributable costs. Specifically, because USPS does not have contract- specific cost estimates, USPS compares (a) the average cost per piece  for Parcel Select packages with (b) the average revenue per piece for  each Parcel Select NSA.
PRC officials told us that based on currently available information, they  had not observed significant variations in the characteristics of packages  shipped under individual Parcel Select NSAs that would suggest that  using average costs is not reasonable. However, as we describe above,  USPS does not collect or study information that could help inform the  reasonableness of its method to estimate attributable costs. Finance  officials stated that because the weight of packages shipped under the  Parcel Select NSAs did not vary significantly from the average weight,  they had no reason to believe that heavier Parcel Select packages  delivered under the NSAs would be more costly to process and deliver  than the average cost to deliver packages that are not under the NSAs.  However, these officials noted that they had not studied the extent to  which package characteristics—including package weight and  dimension—varied under individual Parcel Select NSAs or whether they  deviated from the characteristics of packages that USPS used to estimate  the national average.
USPS officials questioned whether the time and expense required to  develop contract-specific attributable cost estimates that account for  package weight and dimension would significantly improve decision- making. Specifically, USPS officials said that for packages that mailers  enter at DDUs, developing such estimates would require USPS to  determine the costs that each DDU in its network would accrue— including costs associated with package size, package weight, delivery  mode, and exact handling and delivery personnel—for each contract. For  packages entered higher in USPS’s delivery stream (at sectional center  facilities and network distribution centers), USPS officials noted that  obtaining contract-specific information would require USPS to fully  integrate the entire USPS mail data system and entirely replace its  existing cost system, which would cost many hundreds of millions of  dollars.
We recognize that USPS must carefully balance the costs and benefits  associated with developing contract-specific attributable cost estimates  for Parcel Select NSAs. However, without taking steps to collect and  study key cost information to develop these estimates, limitations on  USPS’s analysis of attributable costs will persist. In the past, USPS has  used other less intensive methods to improve its cost estimates for other  products. For example, USPS has used “special studies” to improve  cost information by examining operations at a sample of USPS facilities  over a limited period of time. According to USPS officials, such special  studies have generally cost hundreds of thousands of dollars to conduct  in the past, with costs varying depending on the study’s scope. For  example, in 2008 PRC noted that disaggregated Parcel Select and Parcel   To disaggregate these costs, USPS  Return Service costs were needed.conducted a field study at sampled DDUs in the summer of 2008 and  used the data it collected to isolate transportation and mail processing  costs specifically for Parcel Select and Parcel Return Service products.
As another example, USPS recently conducted a comprehensive study of  city carrier street time activities and costs, which involved collecting data  on sampled city routes to help attribute city carrier costs to various types  of mail, including parcels.
section_title: Conclusions
paragraphs: USPS continues to face significant financial challenges. Parcel Select  helps to address these challenges by providing USPS with a revenue  source that has increased from $466 million in fiscal year 2009 to over  $2.5 billion in fiscal year 2014. Over time, USPS has taken important  steps to standardize the procedures it uses to develop, monitor, and  evaluate the performance of its Parcel Select NSAs, including developing  its Standard Procedures in June 2014. However, the Standard  Procedures lack documentation requirements and clearly defined  management responsibilities for some contract monitoring and evaluation  activities. Reviewing and updating the standard procedures to address  these gaps would provide additional assurance that USPS’s Parcel Select  NSAs are effectively managed. In addition, collecting and studying  information on the size and weight of Parcel Select NSA packages could  improve USPS’s analysis of attributable cost coverage for each contract  and position USPS to better understand how mailers’ business decisions  affect these costs. This may prove to be important, as mailers have  developed more discrete costing methods based on both the size and  weight of packages, which may influence the characteristics of packages  that they provide to USPS for last-mile delivery.
section_title: Recommendations for Executive Action
paragraphs: To provide additional assurance that the procedures USPS uses to  develop, monitor, and evaluate the performance of its Parcel Select NSAs  are effective, the Postmaster General should direct executive leaders in  Sales to:  review the Standard Procedures to identify gaps in contract  management responsibilities, including documentation requirements  and assigning clearly defined management responsibilities for  contract monitoring and evaluation activities, and update the  procedures to address the identified gaps.
To better understand attributable costs for individual Parcel Select NSAs,  the Postmaster General should direct the appropriate staff to:  identify and implement cost-effective methods, such as using a  sample, to collect and study information on the costs of delivering  Parcel Select packages of varying characteristics in order to develop  contract-specific attributable cost estimates.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USPS and PRC for review and  comment. USPS and PRC provided written comments, which are  summarized below and reproduced in appendix II and appendix III,  respectively. USPS and PRC also provided technical comments, which  we incorporated, as appropriate.
In its comments, USPS agreed to update its Standard Procedures and  concurred in principle to develop contract-specific attributable cost  estimates for Parcel Select NSAs. USPS noted that it did not believe that  package size and weight significantly affect the costs of Parcel Select  NSAs, because most packages are entered at the DDU and thus bypass  much of USPS’s processing and transportation network. However, as the  report notes, while USPS does collect data on the weight of all Parcel  Select packages, it does not collect information on the size of NSA  packages and has not studied the impact of either of these factors on  USPS’s delivery costs for specific contracts. This limits USPS’s analysis  of attributable costs for Parcel Select NSAs. USPS stated it would explore  obtaining additional mailer characteristics and ascertaining their  relationships to costs for specific Parcel Select NSAs. USPS noted in its  comments that it has already taken steps to obtain contract-specific  characteristics for Sunday delivery of NSA packages. Sunday delivery,  however, currently constitutes a relatively small percentage of Parcel  Select volume.
As the report notes, collecting and studying information on the size and  weight of Parcel Select packages is important, because larger and  heavier packages can increase USPS’s delivery costs. The report also  points out that private sector mailers use package weight and size  information to inform their own business decisions, such as making cost- effective decisions regarding the delivery method they choose. As the  report concludes, collecting and studying information on the size and  weight of Parcel Select NSA packages could improve USPS’s analysis of  attributable cost coverage for each contract and position USPS to better  understand how mailers’ business decisions affect these costs. This  understanding will be important given the rapidly changing package  delivery market.
In its comments, PRC said that it found our draft report well-researched  and balanced and agreed with both of our recommendations. PRC  supported the cost-effective development of more accurate attributable  cost estimates for Parcel Select NSAs. PRC also clarified that USPS’s  method to estimate average costs for Parcel Select packages excludes  Parcel Select mail weighing less than one pound. We modified the  relevant text to note this clarification.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, Postmaster General, Acting Chairman of  PRC, USPS Office of Inspector General, and other interested parties. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at 202-512-2834 or rectanusl@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff making key contributions to this report are  listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the procedures that the U.S. Postal Service (USPS) has  established to develop, monitor, and evaluate the performance of its  Parcel Select negotiated service agreements (NSA), including  implementation, we reviewed relevant laws and regulations such as the  Postal Accountability and Enhancement Act (PAEA). We also examined  USPS documents such as the Standard Procedure for Managing NSA  Contracts that describe the procedures. We also reviewed copies of all 13  Parcel Select NSAs executed by USPS along with their supporting file  documentation, such as contract performance and business review  reports. This includes eight Parcel Select and five Parcel Select & Parcel  Return Service contracts. For purposes of our report, we refer to both of  these contract categories as Parcel Select NSAs, since each includes the  Parcel Select product. We also examined Postal Regulatory Commission  (PRC) documents, such as orders and notices. We did not review the  extent to which USPS complied with all of its management procedures  because this did not fall within the scope of this review. We also did not  report volume, revenue, or mailer-specific information for individual NSAs  because USPS and mailers consider the information proprietary, and  according to USPS officials, public disclosure would violate contractual  confidentiality provisions.
In addition, we conducted interviews with USPS officials from the Sales,  Finance, and Legal departments, who are responsible for developing,  monitoring, and evaluating the performance of Parcel Select NSAs; PRC  officials responsible for reviewing the contracts; and representatives from  eight mailers that signed 12 of the 13 Parcel Select NSAs to determine  how USPS implements its procedures. The number of mailers is less than  the number of implemented contracts because some mailers signed more  than one contract. We did not interview representatives from one of the  mailers that signed a Parcel Select NSA, because the company was sold  and knowledgeable representatives were no longer available to meet with  us. According to USPS, no packages were ever shipped under that  contract. We compared USPS’s procedures for managing the contracts  against selected leading contract management practices. To select these  practices, we:  Identified criteria sources that included leading contract management  practices and then confirmed that these sources were appropriate  through consultation with internal stakeholders. These sources  included: (a) our standards for internal control in the federal  government; (b) guidance documents and regulations for federal  agencies, such as best practices issued by the Office of Federal  Procurement Policy; and (c) documents from contract management  and administration organizations including the National Contract  Management Association and the Institute for Supply Management,  which were recognized for their expertise in this area.
Reviewed information included in each criteria source to identify  practices that are relevant to either (a) buyers and sellers or (b) just  sellers. Because the Postal Service is the service provider (or seller)  under Parcel Select NSAs, we excluded leading practices that are  only pertinent to buyers. In addition, we identified practices that were  applicable to USPS and its unique statutory and regulatory  requirements as an independent establishment of the executive  branch of the federal government.
Exercised professional judgment to select practices that we identified  as particularly relevant to the managing Parcel Select NSAs.
Based upon these steps, we selected the following leading contract  management practices: defining roles and responsibilities; establishing  procedures for the contract management process; planning and  negotiation; managing performance; communicating effectively; and  documenting management activities and decisions. USPS agreed that  these practices were relevant and reasonable.
To determine revenue and volume trends for Parcel Select, which we  describe in the background of our report, we reviewed USPS Revenue,  Pieces, & Weight reports, which present official USPS estimates. We  assessed the reliability of these data by reviewing related documentation,  such as a December 2007 USPS Office of Inspector General report on   and by collecting information from knowledgeable  USPS’s data system,USPS officials, and determined that the data were sufficiently reliable for  our reporting purpose.
To examine the method that USPS uses to determine whether each  Parcel Select NSA covers its attributable costs, we reviewed relevant  laws and regulations that establish requirements for product categories  and contracts such as PAEA. We also analyzed agency documents that  describe or discuss the methodology that USPS uses, such as USPS’s  fiscal year 2014 Annual Compliance Report and PRC’s Annual  Compliance Determination Reports for fiscal years 2008 through 2013,  the most recent reports available. We also reviewed relevant federal  agency, academic, and GAO reports that describe USPS’s costing  approach and related issues, such as the USPS Office of Inspector  General’s audit reports. In addition, we conducted interviews with USPS  and PRC officials to obtain their views on USPS’s cost coverage  methodology. Finally, we made written requests for information regarding  the methodology used to calculate attributable cost to USPS and PRC  officials, who provided written responses on the subject. We did not  review USPS’s postal costing methodology generally, such as methods to  divide costs into attributable and institutional costs and methods to  distribute attributable costs to various USPS products and services.
We conducted this performance audit from April 2014 through April 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the United States Postal Service
section_title: Appendix III: Comments from the Postal Regulatory Commission
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, key contributors to this report  were Lorelei St. James (Director); Derrick Collins (Assistant Director);  Amy Abramowitz; Teresa Anderson; William Colwell; Aaron Colsher;  Caitlin Dardenne; Colin Fallon; Kenneth John; DuEwa Kamara; Kimberly  McGatlin; SaraAnn Moessbauer; Josh Ormond; Amelia Shachoy; Crystal  Wesco; and Bill Woods.