Commercial Item Contracting Scam Continues

A new watchdog report found that the Department of Defense continues to struggle to obtain the information it needs to make sure it isn’t getting ripped off when it buys spare parts. Past overcharges have included paying $2,286 for a landing gear that should have cost $10; paying $71 for a pin that should have cost less than a nickel; and paying $8,124 for a bevel gear that should have cost $445. The findings of this latest report should compel Congress to adopt overdue reforms to strengthen the department’s ability to negotiate fair and reasonable prices, and stop allowing corporations to conceal important cost or pricing information.

The Government Accountability Office (GAO) review focused on instances where the department was purchasing commercial parts on a sole-source basis. The department spends billions of dollars on sole-source spare parts contracts. While competition should lead to lower prices, in a sole-source environment buyers need more information to ensure they get a good deal. Government buyers are in the strongest negotiating position when they are able to review certified cost or pricing data to determine whether a contractor’s proposed prices are fair and reasonable. But over the years, so-called “acquisition reform” has gutted requirements on companies to provide this data to government officials, including certified cost and pricing data for goods and services that have been designated commercial. Without those requirements contracting officers must use other means to determine price reasonableness. Those other means can include having to do labor-intensive and highly dubious market research rather than just getting the information directly from the companies that sell the parts.

While commercial buying was sold as something faster and more efficient than the usual procurement process, this report shows that is often not the case. The GAO found the running around that government officials had to do to obtain the other information resulted in delays. But these delays were likely intentional efforts by contractors to get the department to agree to pay higher prices and to discourage officials from taking the extra steps needed to negotiate better prices. While no company refused to provide the data, seven of the 10 contracts reviewed were set back at least in part by delays in contracting officials obtaining uncertified cost or pricing data.

For example, efforts by the Defense Logistics Agency to assess a $157.7 million engine parts contract resulted in it taking 459 days to issue the contract. The delay was worth it in the end, since the final price was 25% less than what the contractor initially proposed, but the process shouldn’t be such that an agency is forced to take more than a year to ensure a contractor isn’t ripping off the taxpayers.

For the Air Force, delays in obtaining other types of pricing information compounded problems the service was already experiencing in obtaining bomb rack spare parts. The need for spares became so urgent that the Air Force ended up having to pay 5% more than was initially proposed in the $4.3 million contract. Moreover, that one took 922 days.

The report is yet another case study of the systemic problems we have seen for years at the department. The Government Accountability Office review was in response to a requirement in the fiscal year 2020 National Defense Authorization Act, included after outrageous prices charged by defense contractor TransDigm were uncovered. A 2019 Department of Defense inspector general review found the company made “excessive profits” on spare parts, in one case at a rate of 4,000%. The inspector general report led to a House Oversight and Reform Committee investigation that included assertions by a former TransDigm director of sales that they had been coached not to provide cost data to the government.

In another instance, the Air Force found a subsidiary of TransDigm, AeroControlex, held up a shipment of parts to force the price to go up. Ultimately the company responded to Congress’s concerns by voluntarily refunding $16 million to the department.

There are two root causes of these overcharges. The first is that Congress has created a definition of commercial that is antithetical to free market principles. Under the current definition, the government can be the sole customer for an item and that item still might be deemed commercial, restricting the ability of the government to obtain certified cost and pricing data from the company.

To remedy this problem, the Department of Defense offered, and POGO supported, a proposal in 2012 to revise the definition to apply only to items that are actually sold to the general public in like quantities. But that reform has been repeatedly defeated by industry, which has instead advanced proposals to expand the definition in their favor.

The most recent attempt to fix this problem in favor of taxpayers and the military was a bipartisan amendment offered by Representatives Tim Ryan (D-OH) and Tom Cole (R-OK), which failed to make it past the House Rules committee. Industry is trying, if anything, to exacerbate the department’s current problems by attempting to persuade Congress that the department should also be barred from asking for certified cost or pricing data for “emerging commercial items.” That jargon presumably refers to parts that might someday (never?) be offered to non-government customers, further expanding opportunities for future taxpayer ripoffs.

The second root cause is that the department is restricted from requesting certified cost or pricing data for transactions under $2 million. This is an amount that has increased approximately threefold in the last several years, and twentyfold since 1994. While there isn’t comprehensive data on the degree to which companies try to keep transactions under the $2 million threshold, the House Oversight and Reform Committee investigation found TransDigm and Pentagon officials broke contracts down into multiple smaller contracts to avoid the reporting requirements.

While TransDigm is the most notorious of the contractors engaging in overpricing, they’re far from the only one. Department of Defense inspector general reports have also found that the department paid excessive amounts for spare parts to Boeing, Lockheed Martin, Raytheon, and other top defense contractors.

In the wake of the TransDigm scandal, the Department of Defense issued a memo requiring contracting officials to report instances when contractors refuse to provide cost or pricing information. That memo did not include asking those officials to track how efforts to obtain the information resulted in delays, which the GAO recommended the department include.

The Government Accountability Office report reviewed 2019 contracts, but the concerns about the reasonableness of costs are far from being in the past and continue to plague the department. Defense News reported that the Air Force now has concerns that $10 million in costs for KC-46 tanker spare parts may not be fair and reasonable. One part alone now costs 15 times more than what the Air Force previously paid for it. As we’ve written elsewhere, there are myriad changes to the laws that seem to disproportionately benefit contractors when it comes to the government buying spare parts.

At the very least, companies should be required to provide certified cost or pricing data for sole-source procurements, even when contractors claim that the goods or services are commercial. Without actual reform, the examples of excessive prices will only continue to stack up.