The Postal Service has used the same independent public accounting firm (supplier) since 1972 for professional services, which included providing an opinion on the Postal Service’s financial statements. The supplier was last non-competitively awarded a time and materials contract for professional services on March 1, 2014. This type of contract is most commonly used when the quantity of labor required for the work to be accomplished cannot be adequately estimated in advance. The contract consisted of a two-year base period, with five one-year renewable options.
In addition to professional services, the Postal Service required the supplier to develop a formal Continuous Process Improvement Plan (improvement plan). The improvement plan deliverables consisted of a one-time draft improvement plan, a semiannual continuous improvement performance review report (review report), and an annual improvement plan update.
The draft improvement plan required the supplier to identify the methodology, goals, objectives, significant cost drivers, and planned actions to improve efficiency and reduce costs. The review reports required the supplier to identify specific actions taken and progress achieved during the reporting period to meet improvement plan goals. The annual improvement plan update required the supplier to quantify targeted hour reductions, efficiencies gained, and resulting decreases in total fees.
On November 10, 2014, we issued a report that found the supplier’s labor rates exceeded General Services Administration Schedule rates (government-wide contracts that provide products and services at fair and reasonable prices). Subsequent to our review, the supplier submitted an unsolicited proposal to the Postal Service. The proposal reduced hours over five years and offered a reduction in the five-year average blended labor rate in exchange for the Postal Service exercising all five one-year options simultaneously.
On November 20, 2015, the Postal Service modified the contract to incorporate a lower blended labor rate and exercised all five one-year options concurrently. This modification extended the period of performance to February 28, 2021 and incorporated one additional two-year renewable option that would extend the period of performance to February 28, 2023, if exercised.
Our objective was to determine if potential cost savings exist for the supplier’s professional services contract. We began our fieldwork before the President of the U.S. issued the national emergency declaration concerning the novel coronavirus disease (COVID-19) outbreak on March 13, 2020. The results of this audit do not reflect any supply management or financial management process changes that may have occurred as a result of the pandemic.
The Postal Service has opportunities to obtain additional cost savings for the professional services contract. Renegotiating the contract achieved a lower blended labor rate; however, the rate is still, on average, [redacted] higher than the General Services Administration Schedule industry standard.
The Postal Service contracted for higher labor rates because of concerns over lost efficiencies if the work was awarded to a new supplier. Had the Postal Service followed GSA Schedule labor rate standards, it could have saved an estimated $1.9 million annually. Furthermore, if the Postal Service remains in the current contract and exercises the optional two-year extension, it would pay an additional annual cost of $3,630,165.
The Postal Service contracted for these services using a time and materials contract (a contract that obligates the supplier to deliver the product or service specified by the contract for a fixed hourly rate) rather than a firm-fixed price contract. Postal Service policy states that a time and materials contract should only be used when it is not possible to accurately estimate the extent or duration of the work or anticipate project cost with a reasonable degree of certainty. We benchmarked other government agencies and quasi-government agencies similar to the Postal Service and found that 12 of 14 agencies used firm-fixed priced contracts for similar services.
The Postal Service considered using a firm-fixed price contract but believed it had more flexibility and limited liability for termination and settlement costs with a time and materials contract. As a result, the Postal Service assumed greater risk by using a time and materials contract for professional services.
Finally, the supplier did not comply with the contract to submit improvement plan deliverables. Specifically, the supplier did not provide the draft improvement plan and semiannual review reports. Furthermore, the annual improvement plan updates did not quantify targeted hour reductions, efficiencies gained, and resulting decreases in total fees. The supplier claimed additional efficiencies led to cost savings but did not include the supporting documentation required in the improvement plan. Because the Postal Service did not enforce these contract requirements, it missed opportunities for cost savings.
We recommended management:
- Compete the professional services contract at the end of the current performance period and negotiate labor rates considering the General Services Administration Schedule.
- Explore the benefits of awarding a firm-fixed priced professional services contract and implement, as warranted.
- Obtain semiannual review reports, annual improvement plans, and supporting documentation from the supplier, as required in the contract, and review the improvement plan to validate specific actions are taken to increase efficiencies and reduce costs.