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Association Attorney Report at Eastern-Southern Regional Meeting, National Star Route Mail Contractors Association Newsletter

December 01, 2010

For those of you who missed the Eastern-Southern Regional meeting in Memphis, TN on November 3-4, 2010, below is a summary of my report, without all the ums, uhs, and I-don't-knows. For those of you who attended the meeting and heard me speak, this is what I meant to say!

Terminating CDS contracts in North Carolina

A group of CDS contractors were given notice that their CDS contracts would be terminated by December 31, 2010 to comply with a two-year old agreement with the letter carriers union. Under that agreement, USPS agreed to a ban on "subcontracting" in roughly 3,000 post offices designated as city delivery only. The CDS contractors, however, note that USPS has had CDS contractors in some of these locations for decades. From what I've heard, it does appear a mistake was made in designating these locations for the elimination of CDS contracts. Even the union itself has not argued that CDS contracts should be terminated in areas where they have traditionally been employed.

As a direct response to efforts by the Association, the Postal Service has deferred the planned termination until March 31, 2011. Still, the question remains as to whether the Postal Service and the union have exceeded the intended scope of the Memorandum of Understanding, and if so, what should be done about it. In any case, even if the planned terminations do come within the intended scope of the agreement, such action could constitute a breach of contract with the CDS contractors impacted. For an explanation of that point, see directly below.

Terminating an existing contract to get a better deal.

In a previous article, I described a recent case in which a government agency terminated a contract to obtain a better price. The Civilian Board of Contract Appeals hearing the case ruled that agencies generally have broad discretion in exercising their contract termination rights, but that discretion is abused when it is employed for the purpose of getting the same work done at a better price. Such action constitutes a breach of contract, entitling the contractor to recover all of its costs and all of the profit it would have earned under the contract. See Sigal Constr. Co., CBCA No. 508, 10-1 BCA ΒΆ 34,442.

Similarly, the Postal Service is planning to terminate existing CDS contracts to get a "better deal." Not a better deal in the sense of a lower price. To the contrary, even though USPS ended this fiscal year with a crushing $8.5 billion loss, replacing CDS contractors with city carriers is an expensive proposition. The cost of a CDS contractor performing a route is much less than the cost of a city carrier -- and that doesn't even take into consideration the retirement costs that continue long after that city carrier has ceased working. No, the "better deal" here is the benefit that USPS (perhaps mistakenly) believes it gains from better labor relations by agreeing to limit its contracting out.

In your humble author's opinion, terminating an existing contract to "get a better deal" is the same as terminating it to "get a better price." In both cases, the agency would be abusing its discretion to exercise its termination rights. One might argue that the Postal Service is not terminating the CDS contracts to get a better deal, but rather to comply with an agreement it negotiated with its labor union. But the Postal Service agreed to that labor agreement just as it agreed to the CDS contract. The labor agreement is, in this respect, just another contract, and an agency may not terminate one contract simply to get a better deal on a different contract.

USPS and fuel -- a combustible mix

When USPS initially implemented the "fuel program," it specifically allowed contractors to use postal fuel on non-postal contracts. The Postal Service allowed this probably because the more fuel that it purchased on behalf of its contractors, the more leverage it would have with fuel suppliers in negotiating volume discounts. The Postal Service's interests were protected because contractors who used fuel beyond their allotment would have to repay USPS for the excess fuel use after an annual reconciliation.

In recent iterations of the Fuel Management Program (FMP) plan, the Postal Service has gone in a different direction and now states that postal fuel may only be used on postal contracts. Not all contractors are aware of this change. Moreover, this new direction would only apply if it was negotiated as part of your contract. And what is a contractor to do if it pools fuel with other contracts that contain the earlier versions of the FMP that do not have these restrictions?

Another question that has arisen is who owns the "surplus"? By surplus, I mean any gallons remaining below the contractor's annual allotment. Prior to the implementation of the Voyager Card and new fuel program, there was no question that contractors owned the surplus. But when the Postal Service took over the purchase of fuel, either by supplying fuel to the contractor's bulk tank or providing a Voyager card, did USPS also take over the surplus? Could it do so contractually?

The question becomes even more complicated because under the fuel index method there is no question that the contractor does own the surplus (if there is one). This is true even under the most current FMP. So if USPS does not own the surplus when a contractor uses the fuel index method, how could it acquire it when the contractor uses a different method?

I won't try to answer these questions in this article. But the posing of these questions itself shows there is a lack of clarity, consistency, and consensus. Notwithstanding these uncertainties, the OIG has been investigating contractors in areas related to these questions. That's unfortunate, as there is honest disagreement over what the contract requires.

OIG review of USPS purchasing policies

On September 20, 2010, the USPS OIG issued an audit report on USPS Purchasing Policies. Noting that Congress had given the Postal Service increased contracting freedom and flexibility, the OIG concluded that necessary safeguards were not consistently established or followed. The OIG recommended that the Postal Service establish additional controls on non-competitive purchasing. Anticipating the OIG's recommendation, the Postal Service in late June 2010 issued a new Management Instruction on Noncompetitive Purchasing (MI). While the MI did not change the four factors that can justify a noncompetitive procurement, it did create several additional procedural hurdles. In addition, the MI requires procuring and program office officials to sign a set of certifications, most of them focused on preventing conflicts of interest.

So far, the MI has not been applied to the renewal of HCR contracts. With only five or so highway transportation contracting officers, it would be next to impossible for the Postal Service to apply this policy to HCR renewals without substantially increasing the workforce.

Postal finances

The Postal Service ended fiscal year 2010 with a $8.5 billion loss. About $5.8 billion of that amount was the payment USPS was required to make to pre-fund future retiree health care costs. The Postal Service's request for a special rate increase above the rate of inflation for its market dominant products was turned down by the Postal Regulation Commission. And Congress has not reacted kindly to the Postal Service's request for freedom to move from six to five day delivery.

The wild card here is the Office of Inspector General's and Postal Regulatory Commission's determination that since 1971 the Postal Service has hugely overfunded its employee retirement obligations -- by $50 to $75 billion. Congressional action would be required to recognize this overpayment and rectify it. If that were to occur, it would be a game-changer for the Postal Service.

As it stands now, Congress will have to come to the aid of the Postal Service or it will not have sufficient funds at year end to meet all of its commitments. If Congress does not do so, the Postal Service will, most likely, simply default on its obligation to make the $5.8 billion payment to pre-fund retiree health care expenses. The Postal Service would then continue to make payments to its employees and suppliers, so this default would have little actual impact on the agency's operations. The real disaster would be the public relations nightmare it would produce, with the press trumpeting such action as another example of a supposedly dysfunctional agency in a dying market.


The Supplier Dispute Resolution Official (SDRO) hears "disagreements" relating to the procurement process. Trent Ensley is the new SDRO. He can be reached at (202) 268-5787. If you have a complaint or protest over how a purchase is being conducted, or how a contract has been awarded, you can employ the disagreement process by filing a letter of disagreement. Initially, the letter must be sent to the contracting officer for his or her review. There are strict time limits, and generally you must do so within 10 days after you are aware of the grounds for the disagreement. If the contracting officer's response does not resolve the matter to your satisfaction, you may lodge the disagreement with the SDRO for his review.

Postal operators in other countries

Mail volumes have declined worldwide, not just here in the United States. At the recent Post-EXPO conference -- an exhibition of postal operators and suppliers from over 80 countries -- I learned what other postal operators have been doing. It turns out that postal operators in other countries have much greater freedom to act than the U.S. Postal Service. For example, in Estonia, electronic bill payment is done through the national postal operator. And many postal operators have expanded beyond traditional postal services, such as banking, telecommunications, logistics, and even IT support. A few countries have consolidated their national postal operators into a single entity.

A particularly interesting concept is the role that postal operators should play in the creation and administration of permanent electronic addresses for individuals. Electronic addresses are now just as important as physical addresses in the distribution and receipt of vital communications. Currently, an individual's email address is dependent on that person's job, internet provider, or one of the many free email services. None of these are independently regulated concerning email distribution, and all of them are subject to being taken away or substantially changed. For example, if you lose your job, you also lose that email address. While there are many free services available, there is no guarantee they will remain that way, nor is there an independent check on their operations. Postal operators may have an important role to play in this area.

David P. Hendel
Husch Blackwell LLP
750 17th Street, NW, Suite 1000
Washington, D.C. 20006-4607
Direct Phone: 202.378.2356
Direct Fax: 202.378.2319


David P. Hendel