Amtrak:

Improved Management and Controls over Food and Beverage Service Needed

GAO-05-867: Published: Aug 24, 2005. Publicly Released: Sep 26, 2005.

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Food and beverages have been served on board National Railroad Passenger Corporation (Amtrak) trains since Amtrak was created. Amtrak's 11 commissaries, located around the country, are responsible for receiving, warehousing and stocking food, beverages, and other items for Amtrak's on-board dining and cafe service. January 1999, Amtrak ran these commissaries with its own employees. Since then, Amtrak has contracted out the responsibility for the commissaries and for ordering and stocking all food, beverage, and related items under a contract that expires in September 2006. Gate Gourmet, the contractor, is also a supplier of food and beverages to several major airlines. During fiscal years 2002 through 2004, the period we focused on in our audit work, Amtrak paid Gate Gourmet between $59 million and $64 million a year in reimbursements and fees. Gate Gourmet personnel operate Amtrak-owned commissaries and order, receive, store, and stock trains with food, beverages, and other related items, such as table linens and napkins. Food and beverage supplies are charged to Amtrak employees who provide on-board food and beverage service and account for the food and beverages en route. When a train arrives at its final destination, all remaining stock items are returned to a commissary. Gate Gourmet charges Amtrak for the items used, as well as for labor, management, and other fees.Since Amtrak started operations in 1971, Amtrak has struggled financially and has depended on a federal subsidy of more than $1 billion a year since fiscal year 2003 to remain solvent. For fiscal years 2002 through 2004, Amtrak's food and beverage expenses were about $487 million--or only about 5 percent of the company's total expenditures. However, during that same time period, Amtrak's food and beverage service earned about $243 million in revenue. This means that Amtrak spends about $2 to earn $1 in food and beverage revenue. Because of the importance of food and beverage operations to Amtrak and the continued interest of Congress in Amtrak's financial performance, Congress asked us to review Amtrak's food and beverage costs. We examined the following three areas: (1) the provisions written into Amtrak's contract with Gate Gourmet International (Gate Gourmet) to control costs, (2) the types of management controls Amtrak exercises to prevent improper payments, and (3) the information Amtrak collects and uses to monitor the service and to report to stakeholders such as its Board of Directors.

The provisions of the contract for food and beverage services provide little incentive for Gate Gourmet to reduce or contain the costs of food and beverages. The contract is a cost reimbursable contract, and under it, the contractor can charge for the costs of items purchased, in addition to management and other fees. Given the way Amtrak is managing the contract, none of the contractor's profit is tied to controlling costs. Although the contract included a discussion of performance standards, these standards and related measures were never created, even though they were required 45 days after the contract was signed in January 1999. Performance standards would have allowed for performance incentives and penalties. If these incentives had been developed, they could have been used to pay Gate Gourmet based on such things as finding lower-priced food products of similar quality. Amtrak is not fully exercising prudent management techniques to control its food and beverage costs and prevent potential improper payments. We found three examples of this mismanagement at Amtrak. First, Amtrak has never required the contractor to submit an annual report (that would be independently audited) of budget variances for key line items, even though the contract requires such a report. Such a report could detect improper payments by Amtrak to Gate Gourmet for food and beverage items. Second, Amtrak has not implemented processes to ensure that rebates and discounts received directly from suppliers or indirectly through its contractor are accurate and complete. Amtrak has not established formal procedures to review and verify the amount of rebates and discounts actually received from either its suppliers or to determine whether there are other rebates that Amtrak is entitled to from the contractor. Finally, Amtrak does not adequately monitor purchase prices reported by the contractor to identify variances or products with high costs. Although Amtrak had some processes that compare prices, the process was not robust enough to include a record of price trends or follow-up actions taken. The establishment of internal control procedures that ensure the documentation of the identification and correction of errors and approval for emergency purchases would ensure that adequate documentation is readily available for review by internal and external parties. The level of information Amtrak collects and uses to monitor its food and beverage service and report results to stakeholders inhibits accountability for its performance. Amtrak does not report food and beverage expenditure information in its monthly performance reports or its annual consolidated financial statements. While Amtrak reports the combined revenue of its food and beverage services in its monthly performance reports, it does not do so for its food and beverage expenses. By combining revenue, it is difficult for managers to determine the amount of revenue attributable to food services compared with beverage services. By not reporting expenses, it is difficult to determine how much is spent on food and beverage service. This lack of information inhibits Amtrak's ability to assign accountability for performance internally or allow for any external accountability to key stakeholders. Other transportation companies we studied have a different accountability structure for their food and beverage service. Because VIA Rail has a fixed subsidy from the federal Canadian government, VIA Rail's management has an inherent incentive to control its costs in all areas of its operation, including its food and beverage service. The Alaska Railroad receives biweekly reports from its contractor detailing its labor and food costs that show, among other things, contractor performance against the contractual cost caps.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Beginning in its February 2010 Monthly Performance Report (which is publicly available on Amtrak?s website), Amtrak had added F&B financial reporting (including total revenue, total expense, and net contribution/loss) as well as summary F&B metrics both its monthly and fiscal year to date key performance indicators reports. The metrics include: cost recovery ratio, revenue per rider, and cost per rider. These metrics show how well Amtrak is running its F&B business, especially showing revenues in relation to costs and riders. As a result of our recommendation and these actions, Amtrak?s management and external stakeholders will have more information to both hold Amtrak accountable for its F&B results and data to measure and improve its F&B business. GMH 06/21/10 Waiting for monthly F&B performance reports from Amtrak Finance Dept. to determine how Amtrak is monitoring its F&B business and its contract with Aramark. Amtrak's Marketing and Sales Department, which has responsibility for Amtrak's Food and Beverage function, is reviewing our recommendations and our related follow-up questions. Amtrak is in the midst of assembling a new senior management team and will respond to these recommendations after the new team has had time to review the issues brought by this GAO report.

    Recommendation: To improve management of its food and beverage operations, Amtrak should create separate revenue and expenditure reporting metrics and other basic food service metrics to allow for internal and external accountability for its food and beverage service and create incentives to reduce costs and increase revenue.

    Agency Affected: National Railroad Passenger Corporation (AMTRAK)

  2. Status: Closed - Implemented

    Comments: Amtrak officials stated that the current contract with Aramark includes commissary services for Acela first class food and beverage service. Gate Gourmet is retained as a supplier of pre-plated meals for the service, but a separate supplier contract is currently being finalized for that relationship. All of the auditing and reporting requirements as specified in the Aramark contract for other Amtrak routes apply for Acela service as well. Amtrak's Marketing and Sales Department, which has responsibility for Amtrak's Food and Beverage function, is reviewing our recommendations and our related follow-up questions. Amtrak is in the midst of assembling a new senior management team and will respond to these recommendations after the new team has had time to review the issues brought by this GAO report.

    Recommendation: To improve management of its food and beverage operations, Amtrak should prepare a written contract for food and beverage service on Acela trains that specifies the service to be provided, includes incentives to ensure efficient and effective contractor performance, and includes regular annual reports and audits.

    Agency Affected: National Railroad Passenger Corporation (AMTRAK)

  3. Status: Closed - Not Implemented

    Comments: While Amtrak may be following all of its current procedures under its new commissary management contract with Aramark, it is not issuing or planning to issue annual reports that are independently audited by an outside auditing firm for its food and beverage service. Any audits will be conducted by Amtrak's Office of Inspector General and will be only on an as-needed basis. Waiting for monthly F&B performance reports from Amtrak Finance Dept. to determine how Amtrak is monitoring its F&B business and its contract with Aramark. Amtrak's Marketing and Sales Department, which has responsibility for Amtrak's Food and Beverage function, is reviewing our recommendations and our related follow-up questions. Amtrak is in the midst of assembling a new senior management team and will respond to these recommendations after the new team has had time to review the issues brought by this GAO report.

    Recommendation: To improve management of its food and beverage operations, Amtrak should better contain its food and beverage costs by following its own procedures for ensuring proper contracts and payments and enforcing key provisions of the current Gate Gourmet contract, including issuing annual reports that are independently audited by an outside auditing firm and certified by Gate Gourmet officials, and conducting regular audits of discounts and rebates.

    Agency Affected: National Railroad Passenger Corporation (AMTRAK)

  4. Status: Closed - Implemented

    Comments: Through its recent contract bid process, its Simplified Dining Initiative and other cost reduction initiatives, Amtrak management has taken steps to comprehensively review the revenue and cost structure of its food and beverage service. Amtrak's implementation of a 3-way match has also resulted in cost reductions caused by billing errors, and Amtrak's contract with Aramark guaranteed a minimum NVD ($1.1 million) for FY 2009 immediately improving the F&B cost recovery ratio. These efforts have provided a more transparent and favorable commissary operations contract with Aramark and an improved food and beverage cost recovery ratio since FY05. While challenges remain to continuously improve the financial contribution of this function, the improved contract, consistent reporting and heightened management attention to this function by the Amtrak Inspector General and our report provide more assurance that these improvements can be made. Amtrak's Marketing and Sales Department, which has responsibility for Amtrak's Food and Beverage function, is reviewing our recommendations and our related follow-up questions. Amtrak is in the midst of assembling a new senior management team and will respond to these recommendations after the new team has had time to review the issues brought by this GAO report.

    Recommendation: To improve management of its food and beverage operations, Amtrak should comprehensively review the revenue and cost structure of its food and beverage service to determine the most cost-effective solution that can increase the financial contribution of its food and beverage function.

    Agency Affected: National Railroad Passenger Corporation (AMTRAK)

 

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