The Bridge: Price Gouging the Pentagon

Delivered to our subscribers on Thursdays, the new version of The Bridge is an email exclusive product that wades through the jargon of our government and gets straight to the key insights. Sign up here.

Spare parts shakedown

Next year’s defense budget is likely to cross over the watershed $1 trillion threshold. But it turns out that playing with the big bucks doesn’t necessarily make you a smart spender. A six-month-long 60 Minutes investigation recently found that the Pentagon overpays for almost everything. They ran down the list of affected items in the broadcast: “For radar and missiles, helicopters, planes, submarines, down to the nuts and bolts.”

The Pentagon’s getting ripped off on essential spare parts by the mighty conglomerate of defense contractors. What’s worse: This pricing practice is completely legal, because Congress has chipped away at the regulations meant to prevent this.

Overpriced parts and weaponry undermine effective spending and our military readiness. And let’s not forget — at the end of the day, it’s taxpayers who are getting shortchanged.

In this edition:

• Spare parts price hikes
• Defense contractors united
• Lawmaker-championed loopholes
• How Congress can correct things

To better understand this pricing shakedown, I connected with my colleague, Julia Gledhill, an analyst at POGO’s Center for Defense Information.

“Companies have been price-gouging the Pentagon for decades,” Julia told me. “POGO actually got its start exposing $7,600 coffee pots and $435 hammers in the ’80s, and unfortunately not much has changed for the better. In fact, things have gotten worse because lawmakers have created so many loopholes in the regulatory framework.”

But first, some context. 

All machines are vulnerable to the wear and tear that comes with time and use. Even our weapons systems wear down, no matter how many trillions of dollars are poured into building them in the first place. The Pentagon therefore needs to purchase spare parts to fix and replace damaged or lost components in our arsenal.

“The companies that make spare parts often have a unique ability to price gouge because no other companies make those parts — we call these companies sole-source providers,” Julia explained. “Because they have no competition, they have even greater ability to overcharge the government.”

And just how bad is it? In a recent op-ed, Julia highlighted an instance where the Army paid $1,678.61 each for a small helicopter part, which the Pentagon happened to already have in stock at its own warehouse for $7.71 each. TransDigm, a niche spare parts provider notorious for excessive profiteering, was found to have been pricing 4,000% higher than what it actually costs to manufacture certain parts.

How did we get here?

In 1993, in an effort to cut costs for themselves, the Pentagon urged defense companies to merge — an effort that completely reshaped the industry and provided us with the five major contractors that dominate the defense industry today: Lockheed Martin, Raytheon, Boeing, General Dynamics, and Northrop Grumman. Because the industry is so small and consolidated, the Pentagon is often tied into sole-source contracts with these companies. Since these companies are the only ones making certain parts, they’re at liberty to set prices however they’d like, and the Pentagon has no choice but to pay.

Spare Parts Contractor Profits from Broken System

The Pentagon has little negotiating power here. It’s in contractors’ best interests not to provide transparent pricing data, so they won’t do so unless they’re required to. But loophole-ridden regulations, like excessively high spending transparency thresholds and arbitrarily broad designations of “commercial” products have exempted contractors from having to justify their pricing at all.

Lawmakers Work to Prevent Military Price Gouging

“Cost data is the best tool for the Pentagon to ensure it’s paying fair prices, so when the Pentagon doesn’t have it, it’s way easier for companies to rip off the government,” Julia explained. “Even despite a contracting officer’s best efforts, they may still negotiate a bad deal because they didn’t have the information they needed to set a fair contract price during the negotiation process.”

The cherry on top of it all is that even if contractors are caught price gouging, they are rarely required to issue refunds. From January 2017 to June 2019, TransDigm made at least $20.8 million in excess profits from the Pentagon but refused to refund the money.

Who’s to blame? 

Who is the onus on here: maybe the contractors for engaging in such crude business practices, or the Pentagon for failing to do more to negotiate fair contracts?

“The onus is on Congress,” Julia argues. “It’s the lawmakers who’ve made contracting regulations almost entirely ineffective by creating so many loopholes that the law is essentially a shell of its original intent. Sadly, many members of Congress are unwilling to scale back these loopholes and strengthen contracting regulation because of conflicts of interest.”

Julia does an excellent job explaining how these conflicts of interest are playing out in Congress, tracing overfunded and overspent Pentagon dollars to the pockets of defense contractor shareholders, in her recent op-ed. Read her breakdown on TomDispatch.

The Ultimate All-American Slush Fund

Reclaiming our buying power.

Spare parts swindling has become a business of its own in the defense industry. But with the defense budget fast approaching a trillion dollars, letting the practice of price gouging on spare part or any other contracts go unchecked is unacceptable. If the Pentagon is getting ripped off, the taxpayers are too.

Congress needs to undo the damage it has caused and lower the threshold at which contractors are required to provide transparent data and strengthen the Truthful Cost or Pricing Data statute, the existing contracting law that could close these loopholes. Redefining commercial products to ensure they are truly commercial — that is, sold to the general public — is another pro-taxpayer reform that Congress should embrace.