Contract Delivery Service (CDS) is a contractual agreement between the Postal Service and an individual or firm for the delivery and collection of mail to and from homes and businesses. The Postal Service considers CDS to be one of its three primary delivery types, in addition to city carriers and rural carriers. CDS suppliers are not Postal Service employees, but independent contractors who provide delivery on specific routes not serviced by Postal Service mail carriers. The Postal Service manages CDS contracts within the transportation functional area, which consists of a wide variety of different contracts related to transportation. In fiscal year (FY) 2020, the Postal Service had more than 7,900 active CDS contracts, which cost a total of about $447 million.
The Postal Accountability and Enhancement Act of 2006 (PAEA) requires the Postal Service to ensure that revenue for mail products and services cover their costs. To meet this requirement, the Postal Service has developed methods to allocate incurred costs to the appropriate mail products and services. The PAEA stipulates that the Postal Service use methodologies that have been authorized by the Postal Regulatory Commission (PRC). It also mandates that we regularly audit the systems and procedures used to collect information and prepare reports that analyze costs.
Our objective was to assess whether all CDS costs are accurately captured and reliably attributed to mail products and services.
Opportunities exist for the Postal Service to more accurately and reliably capture and attribute CDS costs to mail products and services. Using management’s current methodology, we found that the Postal Service overestimated its accrued CDS costs by an average of about 7 percent from FY 2016 to FY 2020. Postal Service personnel used calculations approved by the PRC in September 2014 to estimate its accrued CDS costs. Using these calculations, the Postal Service estimated that it had accrued about $2.1 billion in CDS costs from FY 2016 to FY 2020. However, our review of CDS payment data from the accounts payable system determined that the Postal Service incurred about $2 billion in CDS costs during that time period.
The Postal Service overestimated or underestimated its total accrued CDS costs for product costing purposes, in any given year, over the past five fiscal years because it did not isolate these costs in its general ledger (GL). Instead, it captured CDS costs with transportation-related expenses across 27 different GL expense accounts during FYs 2016 through 2020. The Postal Service used estimated cost proportion percentages to project total accrued CDS costs within two of the transportation GL accounts instead of using CDS payment data from its accounts payable system. Management explained that they focus their accrued cost estimation on the two GL accounts because they contain the majority of CDS costs.
When comparing all CDS payments from across the 27 GL accounts against the Postal Service’s estimated accrued CDS costs, the use of the cost proportions resulted in the Postal Service overestimating or underestimating total accrued CDS costs by an absolute value of about $84 million from FY 2016 to FY 2020. This resulted in a subsequent overestimation or underestimation of CDS product and/or institutional costs. We determined that, from FY 2016 to FY 2020, the Postal Service overestimated CDS product and institutional costs by at least $35 million and $107 million, respectively.
Using costing methodologies that achieve the most precise cost estimates possible would more reliably ensure that the revenue for each product and service covers its costs and that regulatory reports capture the correct allocation of product-specific and institutional costs. Using cost proportions that result in estimates that do not closely align to actual costs may lead to cost misallocations, the reporting of inaccurate product costs, and reliance on incorrect information when determining cost coverage and negotiating prices with mailers.
Opportunities also exist to enhance the precision of CDS cost attribution through updates to the percentages used to attribute CDS costs to mail products and services. The Postal Service uses percentages specific to transportation to attribute CDS costs. The Postal Service uses transportation (instead of rural delivery) percentage rates to attribute CDS costs to mail products and services because this has been the PRC-approved cost attribution methodology since January 1991. However, our review of CDS operational activities and mail mix data indicates that the use of rural delivery distribution keys may result in more reliable attribution of CDS costs than the current methodology.
Management could not confirm whether the percentage rates used for CDS costs should be the same as those for rural delivery costs because it was unknown whether CDS suppliers and rural carriers deliver similar mail volumes. To gauge whether there was a possibility that CDS suppliers’ mail mix was like that of rural carriers, we analyzed available volume data for a random, judgmental sample of CDS and rural routes. Our analysis indicated that the mail mixes for CDS and rural routes were very similar at the delivery facilities we reviewed. The similarities in mail mix between CDS routes and rural routes, in conjunction with the similar operational functions, suggest that rural delivery may be a better proxy for CDS than transportation.
We believe this warrants further study by the Postal Service to determine if it would be appropriate to update percentage rates used to attribute CDS costs because the current transportation percentage rates may not distribute the appropriate amount of CDS costs to mail products and services. A reevaluation of the current methodology would help the Postal Service to determine if there is an opportunity to improve the reliability and precision of cost estimates.
We recommended management:
- Reevaluate the cost proportion percentages used to estimate accrued CDS costs; assess the possibility of using actual CDS payment data to calculate product costs; and, if deemed appropriate, submit a proposal to the PRC to update the costing methodology.
- Conduct a study to determine whether similar mail volumes are delivered on CDS and rural routes; and, based on the results of that study, submit a proposal to the PRC to update distribution keys used to attribute CDS costs, if deemed appropriate.