Faster, Cheaper, and Safer: Making Best Practice Legal

March 1, 2009
Understanding that industries evolve at an ever increasing pace is a lesson crucial to the success of modern businesses. Most of the time innovation and

Understanding that industries evolve at an ever increasing pace is a lesson crucial to the success of modern businesses. Most of the time innovation and efficiency lead the way when the free market is left to prevail. For example, in the 1970's President Jimmy Carter deregulated several major industries such as the airline and trucking industries, which resulted in lower prices and better service.

But, despite valuable lessons from the past, the government hasn't always kept up with commercial best practices. That's why it was a noteworthy shift in government policy when Section 355 of the Duncan Hunter National Defense Authorization Act (NDAA) for 2009 was signed by President Bush in late October 2008. The new law requires the clarification of conflicting government regulations applied to freight forwarders, allowing government vendors to operate by best commercial practices. The new law is considered by many in the industry to be a triumph for military vendors, personnel and taxpayers.

The National Defense Authorization Act specifically addresses conflicting regulations governing airfreight forwarders that were making shipments of freight in the 48 contiguous states less efficient. The inconsistencies were between Department of Defense guidance and the Air Mobility Command Freight Traffic Rules Publication 5 (AFTRP 5). Some in government had interpreted the Air Mobility Command publication to “require“ airfreight forwarders to ship cargo by air even when it made little economic sense and contradicted other governing regulations. However, the Department of Defense's contract airfreight forwarders specifically allows them to use motor and/or air carriers. This mode-neutral, time definite delivery model is being used successfully by the commercial transportation industry but had not been embraced by the Air Force Air Mobility Command when they assumed some minor responsibility for freight forwarders in 1999.

Examining this case of contradictory regulations, which resulted in vendor confusion and inefficiency in shipping for the Department of Defense, offers tremendous insight into the challenges of contracting with the US government as a whole. For example, in many cases the government has an immense amount of leverage over private businesses and doesn't adhere to free market forces and innovation due to an immense bureaucracy and a natural resistance to change. The examples outlined below demonstrate that industries dealing with the government are more limited in their ability to compete and make processes efficient. This is because it takes more time and pressure to effect change in a restrictive regulatory environment.

A letter written by the Chairman and a Ranking Member of the House Subcommittee on Readiness to the Under Secretary Office of Defense for Acquisition, Technology and Logistics noted a single example of these conflicting regulations significantly increasing the costs for a shipper moving freight for the Department. The letter states “… the AFTRP requirement nearly doubled the costs for one shipper moving freight… [which] resulted in an additional cost to the government of $173,140… this amounts to approximately $250,000 in additional annualized costs to the taxpayer for this one DoD shipper.”

Take into consideration that the airfreight forwarding industry as a whole was altering its shipping practices based upon these conflicting regulations when dealing with the government, and these regulations likely resulted in millions of dollars of wasted government funds that could have been used more efficiently.

However, the industry as a whole was attempting to compete based on best commercial practices despite these conflicting regulations. In the case of shipping by air when it made little sense, some vendors in the industry were ignoring the AFTRP 5 regulation and going with best commercial practices when determining their rates for the Bill of Lading.

That's why a shockwave went through the industry when a leading government contractor, National Air Cargo (NAC), was hit with a claim filed by the government related to the conflicting shipping and billing regulations noted above based upon the mode of cargo delivery and payment for carriage. The company ended up paying a significant amount of money to settle with the Department of Defense without admitting any wrongdoing.

Despite going against best commercial practices and Department of Defense policy, the US Attorney took the position that air freight forwarders such as NAC are required to transport cargo by air for at least some part of the shipment. In many cases, this position could result in a significant amount of waste. For example, if you intended to ship something from Baltimore, MD to Washington, DC, the regulation requires that the cargo be flown for a portion of the trip even if it were cheaper and faster to drive the cargo the approximate 39 miles. In addition, AFTRP 5 requires that vendors charge for services performed rather than services requested on the Bill of Lading. AFTRP 5 presumes that carriers should perform self-audits on every shipment and provide rebates without anyone filing a claim. Commercial best practices in every part of the industry show that customers are only entitled to rebate of the service requested if they file a claim. What is even more disconcerting is the fact that carriers are legally restricted from paying any money for loss, damage, or delay without the government filing a written or electronic claim. If carriers were to comply with AFTRP 5 language, they would not only run counter to commercial best practices, they would violate United States law.

Businesses contracting with the government should therefore be aware that the US Government has enormous leverage over vendors. In the case of National Air Cargo, this was because the company operated from day-to-day with no long-term contracts. Therefore, it was entirely dependent on a continuing stream of individual shipment contracts from the DoD. At the same time, under government statues and regulations, an indictment based on the claim would immediately and indefinitely preclude NAC from securing any new government shipping contracts.

The Duncan Hunter National Defense Authorization Act was also an important step in a more balanced government/vendor relationship because it shows that the US Transportation Command recognizes that the government saves money when it employs commercial best practices. In this case, when it allows the commercial sector to select the mode of transportation that makes the most economic sense and meets mandatory delivery dates for government cargo.

Another important lesson is that it took shipper initiatives and industry leaders such as The Air Forwarders Association, along with the American Trucking Associations and other freight forwarders to push the US Department of Defense to change the conflicting regulations.

Other than the lack of regulations governing the financial industry that many are blaming for the current recession, throughout history we have seen that deregulation results in more efficient industry practices. In addition to the ones mentioned above, other examples are the telecommunications industry and the cable industry. Easing up on regulations in each of these industries resulted in more efficient companies.

I have confidence that the new administration, which has shown a propensity to employ the most up to date technologies, will see the value of best commercial practices and continue to deregulate other aspects of government contracting. This change will likely result in more effectiveness and savings for the government, which they will hopefully pass on to taxpayers, something a struggling economy and a government facing a ballooning debt could benefit from immediately.