• on Aug 12th, 2013 in Finances: Cost & Revenue | 6 comments

    Performance-based contracting lets government agencies acquire services using contracts that define what is to be achieved, not necessarily how the work is done. The idea is that contractors have the freedom to define how they will achieve the objectives, which allows them to use innovative approaches. The government benefits by receiving best-value products and services.

    Procurement professionals believe performance-based contracting makes acquisitions better by helping government procurement officials be good stewards of taxpayer dollars — which government contracting is all about. At first glance, it might appear that performance-based contracting transfers a large share of responsibility from government to contractor by requiring the contractor to come up with the actual solution to meet the government agency’s metrics. However, the government procurement official’s responsibilities are not less, they are just different. Performance-based contracting has four attributes: a statement of objectives that describes the desired outcome, measurable performance metrics, a quality assurance plan to monitor the contractor’s performance, and incentives to encourage better performance. Government officials need to be educated in methodologies and metrics to ensure success.

    The U.S. Postal Service uses performance-based contracting for some of its contracts, but not all. A recent Office of Inspector General audit found that the Postal Service does not have adequate controls to oversee performance-based contracts and it does not track this method in its data systems. Thus, it does not always take advantage of the benefits of performance-based contracting. Although officials did not track these contracts, our audit identified six performance-based contracts with incentives valued at $602 million. We also identified two additional contracts that could have been awarded as performance-based contracts but were not, even though postal policy encourages their use because of the potential benefits, such as cost reduction and revenue generation.

    The Postal Service has worked to streamline and improve its procurement process to create a more business-like approach to purchasing and to reduce purchasing costs. The performance-based contracting approach gives the Postal Service an opportunity to further the goals of streamlining and reinvention because it gives contractors more latitude for determining methods of performance, with more responsibility for performance quality.

    What do you think is the best way for the Postal Service to monitor contract performance? How should the Postal Service determine what to monitor and how frequently? What other ways could the Postal Service improve the procurement process?

  • on Jan 9th, 2013 in Finances: Cost & Revenue | 3 comments
    Some have argued that the U.S. Postal Service should be allowed to raise prices in order to increase revenue and ensure that the sales of their products cover their costs. Others have argued that the current costing system may overstate the cost of some products, as it assumes the Postal Service is able to adjust its capacity, such as quickly closing a facility or eliminating a tour, to match the decline in mail volume. So, the second argument goes, if the Postal Service is unable to adjust its capacity, it should temporarily lower the prices of certain products, in order to encourage volume, as it did in the past with its “summer sales.” The latter argument was briefly discussed in the OIG’s recently released paper “A Primer on Postal Costing Issues.” As a follow-up to that paper, we asked Professor Michael D. Bradley of George Washington University, an expert in postal economics, to co-author a paper on the use of short-run costing and pricing. Essentially, short-run costing varies from the current costing system in that it does not assume that the Postal Service can reduce its capacity as fast as volume falls. Using short-run costs to develop prices would allow the Postal Service to temporarily lower prices, at least on some products, to encourage volume that would make use of the excess capacity while the Postal Service creates a plan to reduce the excess capacity. However, the paper warns that short-run costs should only be used to set prices if they can be measured accurately and updated regularly and the Postal Service can be sure that a lower price will lead to a large enough increase in volume, otherwise they will simply lose revenue. Other issues that need to be considered when using short-run costs to set prices include:
    • Using short-run costs can result in prices that may generate additional revenue in the short term but will still not allow the Postal Service to cover its institutional costs.
    • Prices based on short-run costs would be more volatile.
    • Customers may be unsure as to whether prices are permanent or temporary.
    • Accurate measurement is difficult and would require significant effort from experts in postal operations.
    • The Postal Service may lose the incentive to shed the excess capacity.
    What do you think – should the Postal Service lower prices on some products to reflect current excess capacity? Or would lowering prices only lead to further revenue declines?
  • on Dec 10th, 2012 in Finances: Cost & Revenue | 0 comments
    To borrow a saying often attributed to Yogi Berra, “It’s tough to make predictions, especially about the future.” Whenever people make estimates about liabilities for long- term expenses, such as pension and retiree health payments, they’re making predictions about the future. The problem is that predictions are based on the present, and the present is always changing. Since 1992, the Postal Service has had a surplus in the Federal Employees’ Retirement System (FERS) program, according to the Office of Personnel Management (OPM). A surplus occurs when assets exceed the amount of the liability. In October, the OIG released a white paper called Causes of the Postal Service FERS Surplus. The paper, produced with the assistance of Hay Group actuarial firm, examined the reasons behind the FERS surplus. Hay Group found that the surplus had emerged in part because of differences between the Postal Service and the rest of the federal government and recommended using assumptions based just on the Postal Service population rather than everyone in FERS. Hay Group developed an estimate of the surplus under Postal Service-specific assumptions. After the OIG released the paper, the Office of Personnel Management (OPM) released a new estimate of the FERS surplus as it does every autumn. In this new estimate, OPM used a different prediction for future interest rates and also made changes to demographic assumptions such as how long postal employees and retirees will live. OPM’s estimate of the FERS surplus declined substantially. To take into account this new information, the OIG asked Hay Group to update their previous estimate of the surplus to reflect OPM’s assumption changes and new 2011 data. Hay Group also included the most recent Postal Service-service forecasts about future salary increases. Hay Group found the projected surplus under Postal Service-specific assumptions to be $12.48 billion as of fiscal year (FY) 2012; whereas OPM, using FERS-wide assumptions, projected the surplus to be $3.0 billion.In either case, the Postal Service’s FERS fund is more than 100 percent funded, while Fortune 1000 companies are on average only 80 percent funded according to 2010 data. You can read more about the FERS surplus in the update to the original paper on our website.

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