Amtrak: Improved Management and Controls over Food and Beverage  
Service Needed (24-AUG-05, GAO-05-867). 			 
                                                                 
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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-867 					        
    ACCNO:   A34277						        
  TITLE:     Amtrak: Improved Management and Controls over Food and   
Beverage Service Needed 					 
     DATE:   08/24/2005 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Contractors					 
	     Cost analysis					 
	     Cost control					 
	     Financial analysis 				 
	     Food services					 
	     Food services contracts				 
	     Internal controls					 
	     Monitoring 					 
	     Performance measures				 
	     Railroad industry					 
	     Erroneous payments 				 
	     Data collection					 
	     Cost effectiveness analysis			 
	     Data integrity					 

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GAO-05-867

     

     * Report to the Chairman, Subcommittee on Railroads, Committee on
       Transportation and Infrastructure, House of Representatives
          * August 2005
     * AMTRAK
          * Improved Management and Controls over Food and Beverage Service
            Needed
     * Contents
          * Results Summary
          * Conclusions
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Comments from the National Railroad Passenger Corporation (Amtrak)
     * Testimony, Amtrak: Management and Accountability Issues Contribute to
       Food and Beverage Service Losses
     * Contact and Staff Acknowledgments

                 United States Government Accountability Office

Report to the Chairman, Subcommittee

     on Railroads, Committee on Transportation and Infrastructure, House of
                                Representatives

August 2005

AMTRAK

     Improved Management and Controls over Food and Beverage Service Needed

                                       a

GAO-05-867

Contents

Letter                                                                   1 
                            Results Summary                                 2 
                            Conclusions                                     5 
                            Recommendations for Executive Action            5 
                            Agency Comments and Our Evaluation              6 
Appendixes                                                              
                Appendix I: Comments from the National Railroad Passenger  
                            Corporation (Amtrak)                            8 
              Appendix II:  Testimony, Amtrak: Management and              
                            Accountability Issues                          
                            Contribute to Food and Beverage Service Losses 10 
              Appendix III: Contact and Staff Acknowledgments              27 

  Abbreviations

Amtrak National Railroad Passenger Corporation Gate Gourmet Gate Gourmet
International VIA Rail VIA Rail Canada

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A

United States Government Accountability Office Washington, D.C. 20548

August 24, 2005

The Honorable Stephen LaTourette Chairman Subcommittee on Railroads
Committee on Transportation and Infrastructure House of Representatives

Dear Mr. Chairman:

Because of the importance of food and beverage operations to the National
Railroad Passenger Corporation (Amtrak) and the continued interest of
Congress in Amtrak's financial performance, you 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. To gain background
information on how other passenger transportation companies conducted
their food and beverage services, we also talked with three other
passenger transportation providers. We also collected supplemental
information from Amtrak and information on the food and beverage
operations of VIA Rail Canada (VIA Rail) and Alaska Railroad-two other
providers of intercity passenger rail. We also contacted two major U.S.
air carriers-Northwest Airlines and American Airlines.

On June 9, 2005, we presented our statement in a hearing to the
Subcommittee on Railroads of the House Transportation and Infrastructure
Committee.1 Appendix II contains the statement we presented at that time.
The information in this letter and in our statement was based on completed
work done in the course of our ongoing review of Amtrak's management and
performance, which we will report on later this year.

Food and beverages have been served on board 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.

1GAO, Amtrak: Management and Accountability Issues Contribute to
Unprofitability of Food and Beverage Service, GAO-05-761T ( Washington,
D.C.: June 9, 2005).

Until 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 2006.2 Gate Gourmet,3 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.4 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.5 This means that Amtrak spends about $2 to earn $1 in food and
beverage revenue.

We conducted our work from May 2004 through June 2005 in accordance with
generally accepted government auditing standards.

Little incentive to reduce costs. The provisions of the contract for food

  Results Summary

and beverage services provide little incentive for Gate Gourmet to reduce

2There is an option for a 5-year extension. 3Gate Gourmet International
was known as Dobbs International prior to 2001. 4Gate Gourmet has
contracts with food and nonalcoholic beverage suppliers for Amtrak's

food and beverage service. Gate Gourmet purchases alcoholic beverages from
distributors, but Amtrak is directly billed as Amtrak holds the liquor
license to serve alcohol on its trains. 5All 2004 figures are unaudited.

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. In
addition, another agreement to supply Amtrak's Acela train service for
food and beverage items from Gate Gourmet's flight kitchens was made
verbally between Amtrak's former president and the president of Gate
Gourmet. Amtrak does not have documentation for the contract terms for
this service.

Poor control over costs. 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.
Using data mining6 and other audit techniques, we selectively

6Data mining applies a search process to a data set, analyzing for trends,
relationships, and interesting associations. For instance, it can be used
to efficiently query transaction data for characteristics that may
indicate potentially improper activity.

    Page 3 GAO-05-867 AMTRAK

reviewed more than $80 million of purchase order information for fiscal
years 2002 and 2003 and found that the contractor was generating purchase
orders with significant variances in unit prices. For example, purchase
order and payment support provided to us by Amtrak's contractor in March
2005 show that Amtrak ordered 12-ounce bottles of Heineken beer and
received and paid $3.93 per bottle. Though Amtrak believed this was a data
entry error, no supporting documentation was provided prior to the
hearing. However, based on information Amtrak provided to us after our
June 9, 2005, testimony, it appears that Amtrak purchased 10 half-kegs of
Heineken beer rather than 10 cases, as indicated on the original
documentation. In another instance, the purchase order price of a 10-ounce
strip steak ranged from $3.02 to $7.58. Amtrak officials testified that
the strip steak examples were "emergency purchases." However, following
our request for documentation to support this claim, an Amtrak official
told us on June 29, 2005, that documentation to support the assertion that
these were emergency purchases does not exist. 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.

Insufficient data for monitoring costs. 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.

  Conclusions

Amtrak's food and beverage service may represent a relatively small part
of the company's operating budget, but it speaks volumes about Amtrak's
need to get its operations in better order. In administering this
contract, basic steps for good management have been ignored or otherwise
set aside. Omissions include not completing agreed-upon provisions of the
contract, not carrying through with basic oversight called for in the
contract, and not ensuring that the organization was getting products at
the most reasonable price. A stronger effort is required, beginning with
carrying out steps that, under the contract, should have been taken all
along. Amtrak needs to take immediate steps not only to curb the losses in
this program, but also to help convince the public it is acting as a
careful steward of the federal dollars that continue to keep it operating.

To improve Amtrak's management of its food and beverage operations, we

  Recommendations for

are making the following four recommendations. We recommend that

  Executive Action Amtrak

     o 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;
     o 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;
     o 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; and
     o 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 Comments and Our Evaluation

We provided a draft of this report to Amtrak for its review and comment.
In its response, Amtrak did not take a position on our recommendations but
reiterated that it has initiated a number of reforms to lower costs and
achieve greater efficiencies in managing its food and beverage service.
These include such actions as closing the commissary in Albany, New York,
eliminating food and beverage service on its New York City to Albany
trains, and reducing the number of attendants on Acela and Metroliner
trains. Also, to further lower costs, Amtrak said it is currently
renegotiating its contract with Gate Gourmet and is in the process of
identifying other providers who could offer either localized or regional
food arrangements.

While not being specific, Amtrak disputed our findings on certain aspects
of Amtrak's food and beverage purchasing oversight and said that Amtrak
officials are taking "every reasonable step to ensure that prices we pay
are equitable and correct." While we acknowledge that Amtrak has made some
improvements in this area, we do not think they have gone far enough in
managing and overseeing its food and beverage service. In line with our
recommendations, further efforts are needed to enforce the contractual
requirement for an annual report from Gate Gourmet, to audit discounts and
rebates, and to implement a robust process for monitoring of product
purchase prices.

Amtrak also contends that despite improvements it has made or could make,
it would still lose money on its food and beverage service, mainly because
of high labor costs. Amtrak said that we failed to address this issue in
our report. To the contrary, we identified in our report that Amtrak's
labor costs made up about 52 percent of its total food and beverage
expenditures, a figure substantiated by Amtrak's Inspector General. Amtrak
contends that changes it has recommended to the Railway Labor Act, if
adopted by Congress, would greatly enhance its ability to reduce labor
costs and hence the overall costs of its food and beverage service. We
have not evaluated the potential impact of Amtrak's recommended changes to
the Railway Labor Act on labor costs for its food and beverage service.
However, while we acknowledge that labor costs are a major cost element in
its total food and beverage expenditures and that lowering these costs is
not easy, this does not obviate the need to develop effective internal
controls and oversight-in full compliance with our recommendations-as a
way of reducing food and beverage costs and providing greater
accountability and transparency.

As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies to the congressional
committees responsible for intercity passenger rail issues, the President
of Amtrak, the Secretary of Transportation, and the Administrator of the
Federal Railroad Administration. We will also make copies available at no
charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-2834 or at [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this report
are listed in appendix III.

Sincerely yours,

JayEtta Z. Hecker Director, Physical Infrastructure Issues Appendix I

Comments from the National Railroad Passenger Corporation (Amtrak)

Appendix II

Testimony, Amtrak: Management and Accountability Issues Contribute to Food and
Beverage Service Losses

                 United States Government Accountability Office

Testimony

GAO

  Before the Subcommittee on Railroads, Committee on Transportation and
  Infrastructure, House of Representatives

For Release on         AMTRAK                                              
Delivery Expected at   
9:30 a.m. EDT          
Thursday, June 9, 2005 
                          Management and Accountability Issues Contribute to  
                          Unprofitability of Food and Beverage Service        
                          Statement of JayEtta Hecker, Director Physical      
                          Infrastructure Issues                               

GAO-05-761T

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to testify on issues concerning the National
Railroad Passenger Corporation's (or Amtrak) food and beverage service,
which will clearly illustrate Amtrak's challenges in controlling its
costs. 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. Of Amtrak's total food and
beverage expenditures, about 53 percent was for labor costs for Amtrak
employees serving the food, about 38 percent was for food costs and fees
to Gate Gourmet International (Gate Gourmet)-the contractor for food and
beverages and operation of Amtrak commissaries-and about 9 percent for
other Amtrak costs.

At your request, my statement today relates primarily to the contractor's
portion of this expense, as well as Amtrak's oversight and control over
its food and beverage service, and what Amtrak is doing to oversee and
control contract costs. I will specifically address what we have learned
in examining three major types of cost controls: (1) the provisions
written into Amtrak's contract with Gate Gourmet1 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. We
also talked with three other passenger transportation providers to get
background and comparison information on their food and beverage services.
The information I will present is based on completed work done in the
course of our ongoing review of Amtrak's management and performance which
we will report on later this year. We also collected supplemental
information from Amtrak, and on the food and beverage operations of VIA
Rail Canada (VIA Rail) and the Alaska Railroad, two other providers of
intercity passenger rail, and two major U.S. air carriers-Northwest
Airlines and American Airlines.

1

Gate Gourmet International was formerly known as Dobbs International prior
to January 1, 2001.

Page 1 GAO-05-761T

In summary, we found that:

     o 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, then they could have been used to pay Gate Gourmet based on
       such things as finding lower-priced food products of similar quality
       to what is being purchased now.
     o 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 (which 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 never audited the
       contractor's purchase data-which is allowed under the contract-to
       ensure that the contractor is passing along any discounts or rebates
       the contractor receives on items purchased. For example, Gate Gourmet
       reported passing along about $550,000 in rebates and discounts on
       purchases for Amtrak totaling about $6.5 million out of $90 million
       total purchases for Amtrak from fiscal year 2002 through fiscal year
       2003.2 Finally, Amtrak does not adequately monitor purchase prices
       reported by the contractor to identify variances or products with high
       costs. To further test purchase data, we non-statistically selected 37
       payment transactions and reviewed the underlying supporting
       documentation and found evidence of widely variable product prices.
       For example, Amtrak paid between $0.43 and $3.93 per 12-ounce bottle
       of Heineken beer. (See fig. 1.)

2

Fiscal year 2004 audited financial information was not available when we
conducted our analysis.

Page 2 GAO-05-761T

Background

How Does Amtrak Operate Its Food and Beverage Service?

Food and beverages have been served onboard Amtrak trains since Amtrak was
created. Amtrak's eleven commissaries are located around the country and
are responsible for receiving, warehousing and stocking food, beverages,
and other items for Amtrak's onboard dining and cafe service. Until
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, beverages, and related items under
a contract that expires in September 2006.3 Gate Gourmet (the contractor),
is also a supplier of food and beverages to several major airlines. During
fiscal years 2002 through 2004, the 3-year period we focused on in our
audit work, Amtrak paid Gate Gourmet between $59 and $64 million a year in
reimbursements and fees.4 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 stock are charged to Amtrak employees who account for the
food 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. The contract requires that Gate Gourmet provide Amtrak an
independently audited annual report within 120 days following the
expiration of each contract year.

Amtrak's model for handling its food and beverage service is similar to
other passenger transportation companies, with some important differences.
Northwest Airlines has outsourced their kitchen and commissary operations
and have food and beverages delivered to each airplane before each flight.
VIA Rail Canada, Canada's national passenger railroad, serves food on most
of its trains and owns and operates its own commissaries. Food and other
items are delivered to each train, consumed during the train's run and
restocked at the destination. The Alaska Railroad, however, has a private
contractor that orders, stocks, delivers, prepares, and serves all of its
food and beverages on its trains using their

3

There is an option for a 5-year extension.

4

Gate Gourmet has contracts with food and non-alcoholic beverage suppliers
for Amtrak's food and beverage service. Gate Gourmet purchases alcoholic
beverages from distributors but Amtrak is directly billed as Amtrak holds
the liquor license to serve alcohol on its trains.

Page 4 GAO-05-761T

How Much Is Amtrak Losing on Food and Beverage Operations?

own labor force. With certain exceptions and limits, all food and beverage
revenues and expenses are the responsibility of the contractor.5

Amtrak's financial records show that for every dollar Amtrak earns in food
and beverage revenue, it spends about $2-a pattern that has held
consistent for all 3 years we reviewed. (See table 1 and fig. 2.) Amtrak's
financial records also indicate that Amtrak has lost a total of almost
$245 million for fiscal year 2002 through fiscal year 2004 on food and
beverage service. Section 24305(c)(4) of Title 49, United States Code,
states that Amtrak is not to operate a food and beverage service whose
revenues do not exceed the cost of providing such service. About half of
the total food and beverage expenditure is labor cost for Amtrak staff who
prepare and serve the food aboard the trains. About 38 percent is
reimbursements and fees to Gate Gourmet, representing the cost of food and
other products in addition to other fees paid to Gate Gourmet. About 9
percent is for other Amtrak costs. While Amtrak's labor costs for its food
and beverage service are significant, these costs are part of Amtrak's
overall labor cost structure, and as such, are beyond the scope of work we
did for this testimony. However, a recent Amtrak Inspector General report
suggested that Amtrak could save money on its food and beverage labor if
the cost of this labor was similar to that of the restaurant industry.6

5

Under the Alaska Railroad contract, the contractor is guaranteed a 5
percent profit margin. If food and beverage sales do not provide this 5
percent margin, then Alaska Railroad makes up the difference. If margins
exceed 5 percent, then the contractor and Alaska Railroad split the excess
amount.

6

Evaluation Report: Food and Beverage Financial Performance, Report
E-05-03, Amtrak Inspector General.

Page 5 GAO-05-761T

  Table 1: Amtrak's Estimated Food and Beverage Revenue and Expenses (by Major
                      Category), Fiscal Years 2002 to 2004

Percent of Total 2002 2003 2004c Total Expense (%)

  Total food and beverage revenues a $ 84,100,000 $ 78,400,000 $ 80,400,000 $
                                  242,900,000

Expense Category

  Amtrak Labor Costs $ 83,768,416 $ 83,257,574 $ 89,162,529 $ 256,188,519 52.6

 Payments to Gate Gourmet $ 63,754,973 $ 59,769,085 $ 61,893,852 $ 182,422,910
                                      38.0

All Other Amtrak Food and Beverage Expensesb $ 16,961,343 $ 15,775,092 $
13,123,348 $ 45,859,910 9.4

Total Food and Beverage Expenses $ 164,489,732 $ 158,801,751 $ 164,179,729
$ 487,471,212 100.0

 Profit or (Loss) $ (80,389,732) $ (80,401,751) $ (83,779,729) $ (244,571,212)

Source: GAO analysis of Amtrak data.

Notes

aRevenues include a portion of first class ticket revenue dedicated toward
food and beverage revenues. b"All Other" expenses include such items as
utilities, office supplies, crew meals, and reusable

support items such as crockery and glassware. cA

ll 2004 figures are unaudited.

Page 6 GAO-05-761T

Figure 2: Amtrak Food and Beverage Revenues and Expenses, Fiscal Years
2002 to 2004

      Dollars in millions

200

150

100

50

0

2002 2003 2004

Fiscal Year

Total food and beverage revenues

Total food and beverage expenses

Source: GAO analysis of Amtrak data.

Amtrak has responded to these continued losses with some incremental
reductions in food and beverage service. On July 1, 2005, Amtrak plans to
discontinue food and beverage service on its routes between New York City
and Albany, New York, which would allow Amtrak to close its commissary in
Albany. An official in Amtrak's Office of Inspector General stated that
Amtrak lost between $6 to $8 per person on food service on those routes
and that closing the commissary will save Amtrak about $1 million per
year. However, achieving additional savings by closing commissaries could
be limited, as Amtrak's other commissaries serve multiple Amtrak trains
that would continue to offer food and beverage service. In other words,
closing a commissary could affect multiple trains on multiple routes.
According to an Amtrak procurement official, a team consisting of members
of Amtrak's procurement, legal, financial and

Page 7 GAO-05-761T

Current Contract Does Not Provide Incentives to Reduce or Contain Costs

transportation departments is currently working to identify ways to reduce
Amtrak's costs in its next commissary contract.7

Other transportation companies have taken actions to better control their
food and beverage costs in recent years. For example, Northwest Airlines
officials stated that they pay particular attention to food and beverage
expenses. Since 2002, Northwest has reduced its food costs by 4 percent.
This has been achieved by reducing or eliminating complimentary food
service for coach passengers on domestic flights (even to the point of
eliminating pretzels on these flights), aggressive pricing of food
products and flexible budgeting that adjusts each month to reflect
increases or decreases in ridership.8 VIA Rail officials told us they have
considerable flexibility in hiring its onboard service personnel to adjust
its labor force to respond to peak and off-peak tourist seasons for its
long-distance trains. In addition, VIA Rail officials said they have
considerable flexibility in how onboard service staff are used; in
essence, all onboard service staff can be used wherever and whenever
needed. The Alaska Railroad restructured the contract with its food and
beverage service provider to allow for food price fluctuation within
defined limits.

One way to control costs is to build provisions into a contract that
motivate a contractor to keep costs as low as possible. Amtrak's current
cost reimbursable contract with Gate Gourmet creates, if anything, an
incentive to increase Amtrak's costs unless properly monitored. Under the
contract, Gate Gourmet receives a number of reimbursements, including
commissary, labor, and insurance costs, in addition to an operating fee.
The operating fee is defined in the contract as 5 percent of the total
actual cost of the onboard food and beverage items. This fee is an
incentive for the contractor to increase Amtrak's food and beverage costs.
These costs can change in each yearly operating budget. This operating
budget is subject to review by Amtrak and is mutually agreed to by both
Amtrak and Gate Gourmet.

Incentives can also be written into a cost reimbursable contract to
control costs and enhance performance. Although the contract included a

7

The current contract expires on September 30, 2006.

8

Northwest officials noted that in lieu of complimentary food service for
coach passengers they have instituted a "Buy On Board" program which
offers certain food items for sale to passengers.

Page 8 GAO-05-761T

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, then they could have been used to pay Gate Gourmet based
on such things as finding lower-priced food products of similar quality to
what is being purchased now, or identifying ways the food and beverage
service could be operated more economically or efficiently.

Other factors may not provide the needed incentives for Gate Gourmet to
aggressively seek to reduce Amtrak's food costs. Under current contract
provisions, Gate Gourmet can charge Amtrak for food prepared in Gate
Gourmet facilities and delivered to Amtrak's commissaries. The contract
provides considerable pricing flexibility to Gate Gourmet for these items
with no detailed definitions or price caps. This makes it difficult to
determine whether or not Amtrak is being charged a reasonable price. In
addition, the contract also provides that Gate Gourmet deduct any trade or
quantity discounts on items purchased for Amtrak either immediately from
Amtrak's invoices or retroactively based on the proportion of Amtrak's
purchases. Discounts applied retroactively are to be applied by Gate
Gourmet in "good faith" and retroactive payments are "an approximation and
that [Gate Gourmet] cannot guarantee exactness." The contract stipulates
these payments are subject to an audit by Amtrak. However, these audits
have never been conducted.

In contrast, while Northwest Airlines has cost plus contracts with its
largest food and beverage contractors (including Gate Gourmet),
Northwest's management of them is different. Northwest's caterer contracts
have labor and other rates specified in the contract. According to
Northwest's food and beverage officials, they know quickly if they change
their menu, how much their suppliers will charge them-even to the addition
or subtraction of a leaf of lettuce served as part of an entree. In
addition, Northwest officials stated that each price charged by its
contractors is checked and invoices are audited.

Page 9 GAO-05-761T

We identified five types of management controls that Amtrak did not fully
exercise regarding oversight of its food and beverage service. These Over
Food and include the following:

    Beverage Operations  o  Requirement for an annual report has never been
    enforced.

Not Fully Exercised Amtrak's contract requires Gate Gourmet to provide an
independently audited annual report within 120 days following the
expiration of each contract year; this report must also be certified by
Gate Gourmet officials. This report is to provide actual and budgeted
amounts for key line items and to provide a narrative explanation for any
actual to budget variance greater than one percent in the aggregate for
all commissaries. However, Gate Gourmet has not provided this report
during the five completed years the contract has been in place. Amtrak
food and beverage officials could not provide us with a reason as to why
they had decided not to enforce this provision. They told us that they
relied on contractor-provided monthly operating statements and on reports
from Amtrak's Inspector General instead. Our review found that the monthly
operating statements lacked critical information that was to be included
in the annual report, were prepared by the party seeking reimbursement,
and, perhaps more importantly, were not independently reviewed or audited.
By contrast, the annual report was to be certified by contractor officials
and audited by an independent certified public accountant. The Inspector
General's reports, while providing management with information on some
aspects of Amtrak's food and beverage service activities, should not be
viewed as a substitute for a comprehensive audit and report.

o  Audits of discounts and rebates were not conducted. The contract
provides that Amtrak audit Gate Gourmet's allocations of trade and
quantity discounts received from purchases of food and beverages. However,
Amtrak has never conducted an audit of the discounts credited to it, nor
has it requested that the contractor certify that all of the discounts
that Amtrak should receive have been credited to its account.

Information we reviewed indicates that such audits may yield savings for
Amtrak. For example, Amtrak officials advised us that discounts and
rebates totaling over $550,000 for fiscal years 2002 and 2003 had been
credited on gross purchases of about $6.5 million.9 However, total Gate
Gourmet purchases exceeded $90 million for the 2-year period-roughly 13
times the amount of purchases the contractor reported as being subject to
discounts and rebates. Because Amtrak did not require an independent

9

Audited 2004 financial information was not available during our analysis.

Page 10 GAO-05-761T

audit or otherwise analyze the trade and quantity discounts received,
Amtrak does not know whether or not it received all of the discounts and
rebates to which it was entitled. Amtrak could not provide us with reasons
supporting its decision or its consideration of this issue.

o  Adequate monitoring of purchase price information needs improvements.
Amtrak did not adequately monitor its purchase price information for food
and beverage items purchased by Gate Gourmet. Amtrak officials said they
monitored contractor purchases using daily price reports that listed unit
prices for purchases ordered the previous day and the price the last time
the item was ordered. However, given the importance of purchase orders in
a food and beverage operation, internal controls need to be developed to
systematically monitor and analyze purchase information. These controls
should then be monitored on a regular basis to assess the quality of
performance over time.10 For example, controls should include processes to
identify unit price variances over established or pre-set amounts and
actions taken to document follow-up work performed. 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 such as
corrections of amounts billed. Our testing of this control showed that if
Amtrak had approached this review in a more rigorous manner, it may have
identified discrepancies warranting further investigation. For example:

     o Monitoring of Purchase Order Pricing: Using data mining11 and other
       audit techniques, we selectively reviewed more than $80 million of
       purchase order information for fiscal years 2002 and 2003 and found
       that the contractor was generating purchase orders with significant
       variances in unit prices. For example, in 2003, the purchase order
       price of a 10-ounce strip steak ranged from $3.02 to $7.58.
     o Monitoring of Actual Product Price Charged by Gate Gourmet: When
       Amtrak officials told us that purchase order information did not
       always

10

GAO, Internal Control Standards: Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: Aug.1, 2001).

11

Data mining applies a search process to a data set, analyzing for trends,
relationships, and interesting associations. For instance, it can be used
to efficiently query transaction data for characteristics that may
indicate potentially improper activity.

Page 11 GAO-05-761T

reflect actual amounts paid,12 we tested actual prices paid by Amtrak to
Gate Gourmet. To test purchase order data, we nonstatistically selected 37
payment transactions and reviewed the underlying supporting documentation
and found evidence of widely variable product prices. For instance, in
fiscal years 2002 and 2003, payments of over $400,000 for 12-ounce
Heineken beer varied from $0.43 to $3.93 per bottle.

     o Amtrak product pricing excludes labor costs. Our work revealed that
       Amtrak's product price to the customer does not take into account over
       half of Amtrak's total food and beverage costs. Amtrak's target profit
       margin is 67 percent for prepared meals and 81 percent for controlled
       beverages. These target profit margins are expressed as a percentage
       of sales over the item product cost charged to Amtrak. However, these
       target profit margins do not take into account Amtrak's on-board labor
       costs, which our work has determined is estimated at over half of
       Amtrak's food and beverage total expenditures. Amtrak's current food
       and beverage product pricing seems to ensure that its food and
       beverage service will not be profitable.
     o Available procurement expertise not brought to bear. Finally, Amtrak's
       procurement department was not involved in the negotiation of the
       original contract.13 The current contract was signed by officials of
       Amtrak's now defunct Northeast Corridor Strategic Business Unit.14 The
       contract's initial period was for about 7 years (January 29, 1999, to
       September 30, 2006), with a 5-year extension option. In addition,
       another agreement to supply Amtrak's Acela train service for food and
       beverage items from Gate Gourmet's flight kitchens was made verbally
       between

12

For example, a price change may have occurred between the time an item was
ordered and when it was delivered. Record keeping errors may also have
occurred and unit prices in the inventory system may, for example, be
based on a different pack size than that received or from that used for
the last purchase.

13

Since the original contract, Amtrak's procurement department plans to take
the lead role in any future renewal, bidding and negotiating the next
iteration of the outsourced commissary contract.

14

According to Amtrak, Strategic Business Units (or "SBU"s) were a method
for better managing performances and differences in businesses or markets
within a company and were designed to anticipate and facilitate rapid
response to change, place decisionmaking close to the customer, and
establish authority and accountability. Amtrak established 3
SBU's-Northeast Corridor, Intercity, and West. The SBU's were largely
self-contained units that had their own chief executive officers, handled
their own train service, procured their own materials and supplies, and
handled their own financial management and planning.

Page 12 GAO-05-761T

Information for Accountability Is Limited

Amtrak's former president and the president of Gate Gourmet. Amtrak does
not have any documentation for the contract terms for this service.

In contrast to Amtrak, other transportation companies we interviewed
closely monitor their invoices and contractor payments through periodic
audits or have given the responsibility for costs and pricing to the
contractor. For example, Northwest Airlines officials stated that they
conduct regular audits of "every [food and beverage] price" they are
charged from their contractors and have found errors in either prices or
labor charges in their contractor invoices. VIA Rail selectively audits
their food supplier invoices that are attached to every billing statement
they receive. Finally, the Alaska Railroad food and beverage business
model gives responsibility for food and labor costs to the contractor,
subject to contractual limits.

Finally, information that would provide accountability over this service,
both internally and externally, is limited. We noted that while Amtrak
reports the combined revenue from its food and beverage services in its
monthly performance reports, it does not identify for stakeholders the
revenue attributable to each service. Amtrak also does not include any
information about its food and beverage expenses in any of its internal or
external reports, including its monthly performance reports, its internal
quarterly progress reports, or its annual consolidated financial
statements. Absent this information, it is difficult for internal and
external stakeholders to determine the amount of expense attributable to
the food and beverage service and to gauge the profit or loss of the
operation. This hinders oversight and accountability.

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. VIA Rail controls its
food and beverage costs in many different ways including fixed fee
supplier contracts, item price reports, monitoring of supplier markups and
item prices, and fixed food cost budgets to VIA Rail menu planners.
Northwest Airlines has a flexible monthly food and beverage budget that
increases or decreases with ridership levels. In addition, each supplier
contract has established markups on product prices and its contracts with
food preparation and delivery providers have detailed labor rates that are
all audited for accuracy. The Alaska Railroad receives biweekly reports
from its contractor detailing its labor and food costs that show, among
other

Page 13 GAO-05-761T

Conclusions

things, contractor performance against the contractual cost caps. In
addition, the contractor and the Alaska Railroad will conduct annual
audits of its contractor's performance under the contract.

Amtrak's food and beverage service may represent a relatively small part
of the company's operating budget, but it speaks volumes about Amtrak's
need to get its operations in better order. In administering this
contract, basic steps for good management have been ignored or otherwise
set aside. Omissions include not completing agreed-upon provisions of the
contract, not carrying through with basic oversight called for in the
contract, and ensuring that the organization was getting products at the
most reasonable price. Prudence requires a stronger effort, beginning with
carrying out those steps that, under the contract, should have been taken
all along. Amtrak needs to take such steps not only to curb the losses in
this program, but to help convince the public that it is acting as a
careful steward of the federal dollars that continue to keep it operating.

Based on our work to date, we anticipate making recommendations to

Recommendations

Amtrak to improve controls over its food and beverage operations. Since we
did not have sufficient time to obtain Amtrak's comments, as required by
government auditing standards prior to this hearing, the recommendations
remain tentative until that process is complete. At that time, we
anticipate making the following recommendations that Amtrak:

1. Better contain its food and beverage costs through:

     o Following its own procedures for ensuring proper contracts and
       payments;
     o Enforcing key provisions of the current Gate Gourmet contract
       including annual reports that are independently audited by an outside
       auditing firm and certified by Gate Gourmet officials and conduct
       regular audits of discount and rebates.
orts and audits.
s food and
beverage service to determine the most cost effective solution that can
increase the financial contribution of its food and beverage function.

Mr. Chairman, this concludes my testimony. I would be happy to answer
whatever questions you or the other members might have.

For further information, please contact JayEtta Z. Hecker at

Contacts and

[email protected] or at 202-512-2834. Individuals making key contributions

Acknowledgements to this statement include Greg Hanna, Heather Krause,
Bert Japikse, Richard Jorgenson, Steven Martin, Robert Martin, Irvin
McMasters, Robert Owens, and Randy Williamson.

Page 15 GAO-05-761T

      (544106)

Appendix III

                       Contact and Staff Acknowledgments

JayEtta Z. Hecker, (202) 512-2834

  GAO Contact

In addition to the contact named above, Greg Hanna, Irvin McMasters,

  Staff

Robert Owens, and Randy Williamson made key contributions to this

  Acknowledgments report.

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