Capital Projects Return on Investment
Background
The U.S. Postal Service uses return on investment (ROI) to approve capital project investments and measure their success. The Postal Service initially calculates ROI by comparing the projected cost of a project to its projected savings, which typically come in the form of labor savings or reduced operating costs. Capital projects are investments in real property such as land, buildings, mail automation equipment, or vehicles, and the higher the ROI, the better the value of the projected capital investment for the Postal Service. Capital projects greater than $5 million are approved by the Postal Service’s Investment Review Committee (IRC) or referred to the postmaster general for final approval.
The Postal Service has a policy for developing a cash flow document to project the ROI that also provides guidance on how to develop the funding request narrative for IRC approval.
Our objective was to evaluate the Postal Service’s ROI for capital projects of at least $5 million for fiscal years (FY) 2012 through 2014.
We selected and reviewed nine capital investment projects with investments totaling over $1 billion. The projects’ investments ranged from about $6.6 million to almost $683.3 million, with projected ROIs ranging from 21.3 percent to 147.9 percent. For FYs 2012 through 2014, the IRC approved 79 capital projects totaling over $2.6 billion.
What The OIG Found
We found the methodology used to calculate projected ROIs for the nine capital projects was reasonable; however, reporting improvements are needed after project approval to ensure the observed ROI reflects a project’s performance. Specifically, program managers did not always update and report the cash flow when operating changes impacted an investment’s ROI. In addition, management does not routinely do interim cost studies to evaluate the ongoing performance of a capital project. Therefore, they do not always have the information necessary to re-evaluate capital investment deployments.
Management did not take these steps because current policy does not require program managers to update or revise cash flows when significant operating changes occur or require all investment projects to be subject to an interim cost study. As a result, program managers do not always report the observed ROI, which is a revised estimate of the ROI based on the most recent observations of cash outflows and savings to the IRC.
We found the actual ROI for six of the nine projects, on average, exceeded the projected ROI by about 87 percent, while the remaining three projects did not meet the anticipated ROI, on average, by almost 41.3 percent. The amount of money expected to be saved but not actually realized was about $73,766,488.
In addition, we found there is no comprehensive knowledge management process in place to ensure the Postal Service captures and leverages all capital project information. This would be useful when program managers retire, leave, or move to another assignment.
As we noted in a previous audit (Postal Service Knowledge Management Process, Report Number DP-AR-14-002, dated March 7, 2014), the Postal Service does not have a comprehensive knowledge management policy or process to ensure systematic and collaborative knowledge sharing. In response, management disagreed with that report’s recommendation to develop a comprehensive Postal Service knowledge management strategy.
In this audit, five of the program managers for the nine projects we reviewed were retired or in another position and their knowledge of the capital project had not been preserved, making informed strategic investment decisions difficult.
What The OIG Recommended
We recommended management require cash flows to be updated when operating changes will impact the capital investment’s ROI, require interim cost studies for all capital investments approved by the IRC, and establish a comprehensive knowledge management strategy for all capital projects.