USPS OIG – Air Cargo Contract Compliance

Objective

Our objective was to assess contractual compliance and oversight of the Postal Service’s air transportation agreement with [redacted] (aviation supplier or supplier). We did not review the operational aspects of these provisions, such as mail transportation efficiency.

Beginning in [redacted], the Postal Service entered into a contract with the aviation supplier to provide air transportation and ancillary services for moving mail to and from destinations within the contiguous 48 states and non-contiguous areas including Alaska, Hawaii, and Puerto Rico. The original agreement was effective beginning [redacted] and was extended through [redacted], for a total estimated value over this time period of $17.6 billion.

The Postal Service’s air transportation network consists of services by this aviation supplier, commercial airlines, [redacted], supplemental charters, and terminal handling services for combined value of about $3.1 billion in fiscal year (FY) 2019. This supplier, the [redacted] in the network, transported [redacted] percent of the Postal Service’s airmail during FY 2019.

The supplier’s air transportation contract included the statement of work, attachments, and modifications. As of June 2020, there were 179 modifications, including 141 (or 79 percent) related to monthly fuel adjustments and supplemental flights. The contract included over 90 requirements and provisions. We identified 15 provisions that we deemed significant based on the following criteria: 1) impact on Postal Service cost and revenue, 2) commitment of the supplier to the service, and 3) protection of the Postal Service’s interests.

These provisions were related to management planning and operational reports, volume accommodation and commitment, volume ordering processes, mail transport and scanning, performance requirements, reconciliation, payments and payment deduction, and mail protection. We shared our methodology for selecting the provisions with Postal Service management for their consideration and they offered no changes.

Although our fieldwork started after the President of the U.S. issued the National Emergency Declaration concerning the novel coronavirus disease outbreak on March 13, 2020, the results of this audit do not reflect process or operational changes that may have occurred as a result of the pandemic.

Findings

The aviation supplier complied with all 15 provisions we reviewed, including those related to volume, mail tendering, delivery performance, and scan data. However, the Postal Service did not provide sufficient oversight of protection of the mail handled by the supplier. In addition, the Postal Service continued to waive payment reductions through monthly contract modifications, even though the supplier did not always meet required delivery performance goals.

The Postal Service did not adequately monitor damaged mail. Although the Postal Service assigned a manager and staff to the aviation supplier’s hub, it had not reported any damages. During our visit to one of the supplier’s hubs on July 7, 2020, we observed damaged mail throughout the facilities. For example, we noticed many packages were broken open, torn, bent, or crushed. We also observed packages falling off the conveyor belts. However, we were unable to determine if the damaged packages belonged to the Postal Service since they were processed with other packages handled by the supplier and we were not allowed access to inspect individual packages.

The contract states the supplier must protect and safeguard the mail from loss, theft, and damage while it is in their custody or control. The contract also establishes liquidated damages which may be assessed against the supplier for damaged and unprotected mail.

According to Postal Service personnel, there is no process in place to monitor lost and damaged mail or to ascertain whether packages transported for the Postal Service were damaged while in the aviation supplier’s custody or prior to tendering to the supplier. Further, Postal Service management personnel stated that no liquidated damages have ever been assessed against the supplier for lost or damaged mail.

Recording the damage to mail and imposing penalties on the aviation supplier for that damage would bring to the supplier’s attention unsatisfactory conditions they must correct to improve the quality of mail service. In addition, damaged mail could impact customer satisfaction and result in customers filing claims to be paid by the Postal Service.

In addition, the Postal Service did not reduce payments to the supplier when it did not meet required delivery performance goals. The contract states that payment reductions will be assessed if the calculated delivery performance is less than the on-time performance goal. However, contract modifications agreed to by the Postal Service and supplier for additional mail volume transported by the supplier waived day network service and scan payment reductions if the Postal Service used charter flights.

The Postal Service suspended reconciliation of the day network delivery performance data between the aviation supplier and the Postal Service due to the waiver. Based on our review of Postal Service unreconciled summary data from October 2019 through May 2020, we found that the supplier did not meet the delivery performance goal for four of eight months, specifically from November 2019 through February 2020. The supplier’s records show they met the performance goals in all eight months; however, without reconciling, the Postal Service and the supplier’s own delivery data, the Postal Service would not know whether the supplier actually met performance goals.

Had the Postal Service completed the reconciliation and determined that the aviation supplier met performance goals, there would be no reduction in payment. However, since the reconciliation was not being completed to validate actual performance, there is a possibility that the supplier did not meet the goals and, thus, would be subject to payment reduction. We estimated payment reductions could have been as high as $5.5 million during the four months that the supplier did not meet the goals had there been no waiver in place. Without the ability to reduce payment, the Postal Service cannot hold the supplier accountable for delivery performance goals.

We previously reported this issue in FY 2019 when we found that the aviation supplier’s unreconciled service performance did not meet the contractual delivery performance goals in any of the months reviewed. However, we determined there was no reduction to the payments due to the waiver created when the Postal Service orders charters from the supplier.

Based on that report’s recommendations, the Postal Service communicated with the supplier in an effort to remove the contract stipulation waiving payment reductions, but the supplier would not agree with its removal until charters were significantly reduced. The Postal Service had reduced charter flights by 27 percent in FY 2019 compared to the prior year. However, the number of charter flights increased significantly starting in March 2020 during the novel coronavirus disease outbreak as the Postal Service lost mail transporting services from commercial airlines. Therefore, we are not making a recommendation regarding payment reduction at this time. We will continue to monitor the effects of charters on Postal Service operations once operations normalize.

Recommendation

We recommend management determine the sources of the damaged mail and, based on the outcome, enhance and enforce procedures for reporting and compensating the Postal Service for damaged mail caused by the aviation supplier.

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