1). 2). USPS’s Recently Established Standard Procedures for Parcel Select NSAs Have Gaps

		USPS Established Standard Procedures in June 2014

USPS’s Sales Department (Sales) has lead responsibility for managing  Parcel Select NSAs and recently established standard procedures for  managing NSA contracts. The Standard Procedures address, in part,  some leading contract management practices. 3). 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. Specifically, the  procedures lack documentation requirements and clearly defined  management responsibilities for some contract monitoring and evaluation  activities. For example, USPS did not document management  decisions about an underperforming contract. 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. Reviewing and updating the Standard Procedures to include  documentation requirements would provide additional assurance that  USPS’s Parcel Select NSAs are effectively managed. USPS Could Improve Its Method to Estimate Attributable Costs for Parcel Select NSAs

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. This limits USPS’s  analysis of attributable costs for Parcel Select NSAs. See GAO, U.S. 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. 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. In the past, USPS has  used other less intensive methods to improve its cost estimates for other  products. Conclusions

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. 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. Recommendations for Executive Action

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. 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. 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. 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 Postal Regulatory Commission  (PRC) documents, such as orders and notices. 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. We compared USPS’s procedures for managing the contracts  against selected leading contract management practices.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.