Championing Responsible National Security Policy

Spare Parts Contractor Profits from Broken System

A new report from the Pentagon’s watchdog has shown that, yet again, the Pentagon is paying too much for spare parts. The Department of Defense inspector general found that one supplier, TransDigm, received at least $20.8 million in excess profit on 105 spare parts over two and a half years. In one instance, auditors found that TransDigm’s profit level was as high as 3,850.6%.

Before this new report, TransDigm had become notorious for its practice of acquiring companies that have sole-source contracts with the government and then dramatically hiking up the price for spare parts. A 2018 Air Force review found that one of TransDigm’s subsidiaries “took advantage of its superior position” and refused to provide its justification for a $747 unit price increase for a part needed to support U.S. operations in Iraq and Afghanistan.

In the sole-source environment, there’s no competition, so the department’s contracting officers can’t compare prices to assess what is fair and reasonable. “When sole-source spare parts are sold, contracting officers must successfully negotiate a reasonable price with the one source,” the Pentagon watchdog wrote. “If the contracting officers are unable to negotiate a reasonable price, they will have to award the contract at whatever price the contractor is willing to accept in order to meet mission requirements or risk weapon systems sitting idle from a lack of spare parts.”

A Troubling ThresholdImpedes Fair Prices

The lack of competition isn’t the only reason the government struggles to challenge price hikes. The government also has problems accessing contractor prices when contract awards slide under certain thresholds. At the time of TransDigm’s reviewed deals, companies were required to provide certified cost or pricing data only when the transaction exceeded the Truth in Negotiations Act’s then-threshold of $750,000. For the period reviewed, the inspector general found that TransDigm’s deals fell under that threshold 95% of the time, making it nearly impossible for agency officials to ensure the prices the company offered were fair and reasonable.

In one instance auditors found that TransDigm’s profit level was as high as 3,850.6%.

This problem is exacerbated because companies may refuse or delay providing information requested by a government contracting officer. The new inspector general report notes that when contracting officers did request uncertified cost or pricing data — a low bar given that a company can provide nearly any data it wants — TransDigm often refused. Nothing in their contracts required such disclosures. The inspector general concluded that no contract provisions contain “a specific element that requires or compels contractors to provide cost or pricing data to the contracting officer before contract award if the contract value is below the [Truth in Negotiations Act] threshold.” Essentially, government officials are forced to accept what is offered or waste time finding price lists or catalogs or doing market research. 

The worst part about this latest report is that this is all legal. “The report makes clear that there was no wrongdoing by TransDigm, its businesses, or by the DOD,” the company said in a press release. The company also questioned the validity of the watchdog’s calculations of excess profit, arguing that the report did not include all of the costs to the company. 

In this case, the best the Pentagon can do to get its money back is ask for a voluntary refund, which may happen. A 2019 inspector general report found TransDigm had made $16 million in excess profits, and following pressure from the House Oversight and Reform Committee, the company agreed to return the money. This latest report was a follow-up to that investigation, and it came at the request of both the House Oversight and Reform Committee and Senator Charles Grassley (R-IA). In a joint press release, Representatives Carolyn Maloney (D-NY), Stephen Lynch (D-MA), Ro Khanna (D-CA), and Jackie Speier (D-CA) all called for TransDigm to refund the overcharges.  

Without the necessary legislative changes, the [Department of Defense] will continue to be unable to perform adequate price reasonableness determinations.

Department of Defense Inspector General report

Recovering those funds is an important first start, but a whack-a-mole approach won’t address systemic policy failures. “Without the necessary legislative changes, the [Department of Defense] will continue to be unable to perform adequate price reasonableness determinations,” the inspector general wrote.

TransDigm isn’t the only company these changes would affect. The recent inspector general report details other companies that refused to turn over cost or pricing data for sole-source spare parts dating back to 1998.

Hearing about the long history of this problem, one might think that Congress would step in and help its co-equal branch of government. But instead, it recently made the system even more opaque. In the fiscal year 2018 National Defense Authorization Act, Congress increased the Truth in Negotiations Act threshold to $2 million. It did so despite the findings of the Pentagon’s acquisition shop, which in 2015 analyzed proposals to increase the threshold and judged them “unlikely to provide cost savings.” The cost risks, however, continue to be clear.

The 2021 report is vague on what specific legislative changes should be implemented, though it notes that the 2019 recommendation for the department to look at current acquisition laws and recommend changes “to ensure that contracting officers obtain uncertified cost data when requested” remains open.

We’re happy to be more specific. As we wrote in 2019, Congress must change the laws to empower the department to be a smarter buyer. This would include two key steps:

  • Directing that the Federal Acquisition Regulation be amended to require contractors to provide certified cost or pricing data to contracting officers before receiving a sole-source contract of more than $500,000.
  • Requiring the Department of Defense to track which companies refuse or delay providing pricing information. This should include requiring contracting officers to report contractors’ refusal to turn over cost and pricing information to the Federal Awardee Performance and Integrity Information System (FAPIIS) and the Contractor Performance Assessment Reporting System (CPARS). The department took initial steps to track this information internally with a 2019 memorandum, but the Government Accountability Office raised concerns last year that this reporting would be incomplete without tracking companies that delay providing the information. The department was supposed to provide its initial report to Congress at the end of 2021.

Industry Written Laws Guarantee More Waste

While many seek to demonize TransDigm, it’s far from the only Pentagon contractor that could be faulted for excessive profiteering. As we testified to the Senate Budget Committee last year, previous inspector general reports have found that the department’s top three contractors — Lockheed Martin, Boeing, and Raytheon — have all received excess amounts for spare parts.

In many of those instances, the department’s efforts to assess whether a price is fair and reasonable are stymied by yet another acquisition law loophole, the definition of “commercial items.”

When contracting for commercial items, such as those available for public purchase, the government generally accepts the offered price. By presuming that market forces have ensured that a price is fair and reasonable, it can avoid a lengthy review process. The problem is that the government’s definition of “commercial”— largely written by industry lobbyists — expands beyond items available to the public. It also applies to items that are similar (“of a type”) or “offered” for sale. Ironically, due to this loophole, the laws regulating the purchase of commercial items often bar the government from requiring cost or pricing data even in instances when the government is the only customer.

Both Democratic and Republican administrations have asked Congress to strengthen the laws to prevent so-called commercial item overcharges. Since 2012 POGO has supported and called on Congress to adopt the department’s request to reform the definition. We also support Congress adopting a subsequent 2020 proposal to give the department more flexibility to determine whether something is truly commercial. As the Trump administration noted in that proposal, “generally once a conversion to a commercial product or commercial service is made, it is common for prices to increase and subsequent contracting officers find it difficult to obtain data necessary to determine price reasonableness and negotiate fair and reasonable prices on behalf of the taxpayer.” While it is not the primary focus of the inspector general’s newest report, other watchdog reports have shown why these reforms are overdue.

While many seek to demonize TransDigm, it’s far from the only Pentagon contractor that could be faulted for excessive profiteering.

As valuable as this latest report is, POGO would be remiss if we didn’t note our continued disappointment in the inspector general redacting so much of the publicly available report. A lot of the power of independent watchdogs comes from their shouting their findings of waste, fraud, and abuse. Hiding details like prices for these parts undermines its mission to help the public understand the true scale of the problem.

Nearly $21 million in excess company profits may not sound like a lot in the context of $768 billion defense budget, but those overcharges add up to a lot of waste and undermine the readiness of our forces as maintaining our existing weapon systems becomes increasingly costly. As former Pentagon whistleblower and POGO founder Ernie Fitzgerald pointed out, most of us don’t know what a bomber or fighter should cost, but added together we can see the boondoggle of “over-priced spare parts flying in close formation.” Curtailing this waste will need more agency foot stomping and less congressional foot dragging for overdue systemic reforms.