In for a TransDigm, Out for Billions

A recent report by the Department of Defense Inspector General shows that contracting laws are insufficient to make sure the military pays fair prices for the goods and services it purchases. The inspector general conducted the investigation after being asked by Members of Congress, who had become concerned that the TransDigm Group, having purchased numerous U.S. and European aircraft part manufacturers, might be using its position as a sole-source supplier for a number of military contracts to act as a “hidden monopolist” and charge excessive prices.¹ The Project On Government Oversight has repeatedly documented that excessive overcharges are the sign of a widespread problem in the acquisition process that hamstrings the ability of the government to negotiate fair and reasonable prices.² Examples of overcharges by other companies include the Army being forced to pay Anham LLC $71 for a pin that should have cost less than a nickel, and $80 for a drain pipe segment that should have cost $1.41.³ In another case Boeing overcharged the government $13 million for 18 parts.⁴

While the inspector general report focuses on excessive overcharges by TransDigm, the company’s behavior demonstrates the many ways Congress’s recent changes to acquisition laws have legalized price gouging and increased the risks of waste and abuse. Pressure from the defense industry, Congress, and some Pentagon insiders on the Defense Department to speed up acquisition through risky buying methods, including one known as Other Transaction Authority, makes excessive prices more likely.

The public may assume the prices contractors offer to the government are fair and reasonable. The Truthful Cost or Pricing Data statute (formerly known as the Truth in Negotiations Act) is meant to require contractors to submit certified current, accurate, and complete cost and pricing data to the government.⁵ Yet contractors only have to submit that data if the acquisition contract is above a certain price threshold. Congress continues to raise that threshold, reducing the number of goods and services for which the Defense Department and other agencies can obtain cost and pricing data.⁶ Congress has created additional “exceptions” as well,⁷ including one for a so-called “commercial item.”⁸ Items designated as commercial are exempt from certain taxpayer protection requirements because, at least in theory, the item is sold to the public, and market forces ensure fair and reasonable prices. That’s not always true in practice, however. The current definition of commercial items includes items that are “offered for sale, lease, or license” to the general public—even if a non-governmental customer has never actually purchased it—and items that are “of a type” that is commercially available.⁹ In many cases this definition has been allowed to apply to sole-source contracts, where there is no price competition.¹⁰ Contractors argue that a host of items are commercial in the hopes that the government will agree to buy those items without any information from the contractors about the real cost or prices of the goods or services.

In the most recent report, the inspector general estimated that TransDigm received $16.1 million in excess profits for 46 parts sold to the Defense Logistics Agency and the Army from 2015 to 2017. The vast majority of the contracts they examined—45 of 47—were under statutory dollar thresholds, so they had “less restrictive requirements for determining price reasonableness.”¹¹ It should be noted that this estimate of excessive costs and prices was only possible because the inspector general had access to information that is not in the hands of the officials who negotiate contracts and agree to the final terms of the deal.

Specifically, the inspector general’s report shows increased risks due to:

• A definition of commercial items that prevented contracting officers from questioning price reasonableness, even though the government was the only customer;
• Contracting officers having little recourse to challenge prices for items that had been designated as commercial when TransDigm Group companies refused to provide additional cost or pricing information;
• Congress increasing the thresholds for which transactions have to provide documentation demonstrating that prices are fair and reasonable;
• Forcing contracting officers to rely on old prices to determine price reasonableness;
• Forcing contracting officers to rely on previous determinations of whether an item is commercial.

The laws have contracting officers so hamstrung that it’s too administratively burdensome to negotiate prices and ensure that the government—and therefore the American taxpayer—is getting a fair deal. Even asking to see a sticker price for accountability has become a tool of last resort.

Without a significant overhaul of buying laws, profiteering and waste will continue to unnecessarily increase costs for the military and syphon valuable resources from other Defense Department programs and from the warfighters. Such examples, including this latest example involving TransDigm, support then-Senator Harry Truman’s observation about government contractors: “I have never yet found a contractor who, if not watched, would not leave the Government holding the bag.”¹²

Some transactions for spare parts have avoided public scrutiny because the definition of “commercial items” doesn’t actually require evidence that an item is sold in the marketplace. The current commercial item definition was developed by industry and enacted into law in the 1990s as part of so-called “acquisition reform.”¹³ The definition prevents federal agencies from obtaining cost or pricing data even if there isn’t adequate price competition—which would exist if there were a real commercial market for the service or item. As a result, the government has little to no information about the relative cost of a product or service it is purchasing, and has little ability to audit the numbers behind the price the government is paying.

The problems identified in the latest inspector general report reflect systemic and expensive problems for the Department and taxpayers. Previous inspectors general have found a litany of instances in which contractors overcharged the Department for spare parts.¹⁴ The inspector general’s report identifies similar instances: TransDigm overcharged the Department by as much 4,451 percent for one part.¹⁵

Seeing the costs of these problems firsthand, the Department proposed that Congress redefine the definition of commercial items to only apply to goods and services actually sold to the general public in “like quantities.”¹⁶ Instead, Congress expanded the definition of what could be considered commercial, making it easier for contractors to price gouge and more difficult for the government to prevent and recoup significant overcharging.¹⁷ This resulted in excessive costs that divert money from training, procurement, research and development, and other Department priorities.

An inspector general report on TransDigm in 2006 shows how contractors can claim an item is commercial even when the government is the only customer, and can abuse its market power for excessive profit. The IG’s audit of the company found the Department paid $5.3 million more than was fair and reasonable for 77 parts.¹⁸ These overcharges occurred, among other reasons, because contracting officers “wrongly considered prices to be reasonable based on competition between a sole-source manufacturer and dealers” who purchased the part from TransDigm.¹⁹ “A sole-source manufacturer and a dealer cannot compete independently when the dealer is reliant on the sole-source manufacturer to fill the Government requirement,” the inspector general found.²⁰ TransDigm had essentially created a false market by selling the parts to other vendors. Contracting officers were further stymied because the company refused to provide information to support price increases.²¹ This report detailed just one of many instances in which the government bought commercial items without any actual or genuine competition. And such practices are likely to continue. Unless Congress institutes reforms to this definition and to the ability of contracting officers to have adequate access to cost and pricing data, contracting officers will continue to be, at best, blindfolded.²²

Jump ahead 11 years, and a Congressional investigation raised concerns that TransDigm acted as a “hidden monopolist,” acquiring small aerospace part manufacturers and increasing prices.²³ In 2017, Representative Ro Khanna (D-CA) pointed to examples of excessive price increases following acquisitions that included a cable assembly that went from $1,737 to $7,863, a motor rotor that went from $654 to $5,474, and a connector that went from $310 to $1,109.²⁴ Representatives Tim Ryan (D-OH) and Jackie Speier (D-CA) and Senator Elizabeth Warren (D-MA) raised concerns as well. These examples led one news article to label the company the “Martin Shkreli of defense contracting.”²⁵

The Pentagon’s then-pricing czar submitted a response to the IG’s recent report stating that new loopholes in pricing statutes allowing contractors to avoid providing cost and pricing information undermine the government’s ability to prevent “war profiteering” and “price gouging.”²⁶ For example, contracting officers who question the price reasonableness of an item or the assertion that an item is commercial must appeal to their bosses to put pressure on companies to provide additional information. Perhaps the most troubling example is how companies use these loopholes to extort more money from the Department while simultaneously undermining the ability of the military to meet their war needs: One subsidiary of TransDigm, AeroControlex, would not provide contracting officers justification for a $747 unit price increase for a part needed to support war efforts in Iraq and Afghanistan. An Air Force independent review team found the company “took advantage of its superior position to force the prime contractor to pay higher prices for a military helicopter part by holding up the shipment.”²⁷ Such actions are not unprecedented: the Defense Logistics Agency paid Pentagon contractor Ontic what the agency believed to be higher than a fair and reasonable price for helicopter spare parts—specifically, housing and insulation—because they worried further delays “jeopardized the readiness level of the CH-53 Sea Stallion helicopter.”²⁸

POGO has long supported narrowing the definition of a commercial item or service to mean goods or services that are actually sold to the general public at market prices in like quantities.²⁹ Such a change would be a significant improvement over the current definition that labels as commercial any goods or services “of a type” that are merely “offered” for sale or lease, a definition that allows labeling as commercial items or services that are never actually sold in the commercial marketplace.³⁰ The recent inspector general report shows why this change is overdue.

Numerous Exemptions to Pricing Transparency

Hamstringing Contracting Officers from Challenging Excessive Prices

“The best intentions of procurement personnel to obtain cost data can and often have been thwarted,” the director of the Defense Logistics Agency said in his response to the inspector general’s 2006 audit of TransDigm spare parts. “Absent statutory authority to obtain cost data under the [sole-source] circumstances of these buys, DLA contracting officers were obliged to base their price reasonableness decisions on price analyses of offered prices” rather than on certified accurate cost data.³¹ And if that offered price seems unreasonable, contracting officers have little recourse to challenge it.

While recent legislative changes have exacerbated these problems, the problems are longstanding. The Defense Department inspector general noted in the 2006 report that both the Federal Acquisition Streamlining Act of 1994 and the Federal Acquisition Reform Act of 1996 increased the difficulty of contracting officers to obtain cost data.³² This shouldn’t be surprising: the bill was literally written by contractors.³³ The result of legislative changes to the definition of commercial items is that items defined as commercial are exempt from most pricing mechanisms like the Truthful Cost or Pricing statute and the Cost Accounting Standards, which would require contractors to provide certified cost or pricing data.³⁴ Those and other procurement laws, standards, and regulations protect agencies and taxpayers, but decrease profits for contractors, who seem more than happy to not have them apply whenever possible.³⁵

A newer loophole, created by the fiscal year 2016 National Defense Authorization Act, eliminated the requirement that contracting officers first have the data to assess reasonableness before determining whether an item is commercial.³⁶ If the Department determines an item is commercial without first obtaining this data it loses its leverage to obtain the data necessary to negotiate fair prices.³⁷ The Department has felt the impacts of the loss of that leverage numerous times, including after a contracting officer designated an oil pump assembly housing manufactured by TransDigm’s subcontractor, AeroControlex, as commercial without adequate documentation. When the contracting officer questioned a subsequent 71.8 percent hike in the price, AeroControlex would only provide commercial sales information, not certified data: “After the commercial determination was made, AeroControlex refused to provide more detailed cost data to support the substantial price increase.”³⁸

While the Defense Department’s ability to know pricing on goods and services has been impeded by commercial item designation—and therefore its ability to keep costs in check—these designations aren’t the only thing resulting in increased spending. The Department’s ability to use competition and pricing information to negotiate fair prices is also reduced on transactions that fall below the Simplified Acquisition Threshold and the Truthful Cost or Pricing Data contract amount thresholds. And Congress has continued to increase these thresholds.³⁹ Simplified acquisition thresholds are based on the idea that they are lower-dollar acquisitions and consequently should be considered lower risk, but the inspector general identified the reduced requirements for award under this threshold as “high risk” in its report on TransDigm.⁴⁰ Contracting officers may not request certified cost and pricing data except in limited circumstances for transactions under the Truthful Cost or Pricing Data threshold, even if it’s a sole-source procurement.⁴¹ It’s only in cases with higher award amounts that contractors are required to provide access to certified cost or pricing information to ensure the government receives a fair price. As these thresholds increase, and the definition of commercial items expands, the government’s access to cost or pricing data has shifted to be the exception rather than the rule. Congress has also legislated a “preference” for commercial buying,⁴² which continues to exclude more transactions from informed buying and government scrutiny.⁴³

The thresholds and commercial exemptions make it effectively impossible for contracting officers to get cost and pricing information, and companies can more easily increase prices if their contracts fall under these exemptions. When the government buys goods or services for contract amounts that fall below the thresholds or when it designates items it purchases as commercial, it is allowing companies to avoid turning over the certified data that would ensure fair and reasonable pricing. Even when the government requests other than certified pricing data for these transactions,⁴⁴ companies have refused to turn it over and government officials are then in the undesirable position of having to do their best to determine if prices are reasonable by using alternative methods like market research. Yet numerous inspector general reports have found that alternative methods are less effective than obtaining the certified data and more likely to lead to excessive prices.⁴⁵

Of the 47 TransDigm contracts the inspector general looked at, 32 contracts were below the simplified acquisition threshold, 13 were between the simplified acquisition threshold and the Truthful Cost or Pricing Data statute threshold, and 1 had a commercial item exemption. “The one contract in our sample awarded with a reasonable profit was the only contract for which the contracting officer used cost data to determine price reasonableness,” the inspector general found. For every spare part they examined for which TransDigm didn’t have to provide cost data the company earned “excess profits without detection by the contracting officers.”⁴⁶ Emails obtained by the House Oversight and Government Reform Committee showed “DOD [Defense Department] and TransDigm purposely structured contracts to stay below the Simplified Acquisition Threshold.”⁴⁷ A former sales director for TransDigm also told the Committee that the company shortened the terms of a contract (to reduce the cost of the transaction) to avoid triggering a threshold that would invoke Truthful Cost or Pricing Data requirements.⁴⁸

The amount of money is significant: One Pentagon official stated that in fiscal year 2018 the Department spent $62.1 billion in commercial transactions.⁴⁹ But it can be difficult to track the full scope of how the Department is using its commercial buying authority. As the Government Accountability Office pointed out, the federal government’s system for tracking this spending (called the Federal Procurement Data System-Next Generation) “only captures information on whether or not commercial item acquisition procedures were used to acquire the product or service, and not whether items purchased are commercial or not commercial.”⁵⁰ The Department has a history of buying items designated as commercial, even when there’s no evidence there were any other customers.⁵¹

Claiming Commercial Deals, Charging Artisanal Prices

The Defense Department is the only customer for many of the goods and items labeled as “commercial,” and it pays excessive prices accordingly.⁵²

The opportunities for waste and abuse have only increased over time. For example, the fiscal year 2016 National Defense Authorization Act included a provision that weakened pricing by requiring contracting officers to follow previous commercial item determinations by their own and other components.⁵³ As a result, contracting officers may be locked into treating an item as commercial even if the government is now the only customer. Challenging that determination requires an appeal to the head of contracting for their agency.⁵⁴

In the past the Department has abused this designation. For example, the Air Force initially used a commercial item acquisition strategy for its new tanker program, and also tried to purchase C-130J and C-17 transport planes under that authority as well.⁵⁵

Relying on previous determinations is leading to “price gouging,” according to the Pentagon’s former pricing czar. The change to the law came directly from Honeywell, a global technology contractor.⁵⁶ Unsurprisingly, Honeywell is now trying to convince the Department that a Chinook helicopter engine it manufactures is commercial—and worth 100 percent more than the Department previously paid.⁵⁷

Waste Through “Historical Pricing”

Contractors and their allies have long been pushing for contracting officials to rely on historical pricing in an attempt to reduce oversight of their cost information.⁵⁸ While relying on historical pricing can be valid for establishing an initial benchmark for price negotiations, the Federal Acquisition Regulation previously required contracting officials to do the analysis necessary to determine that these prices remained valid over time. In one instance, the Defense Department inspector general found in 2015 that contracting officials failed to follow this requirement and were relying on prices from a 10-year-old contract, even though more recent information was available to determine whether the price was fair and reasonable.⁵⁹ The problems with this approach become obvious when applied in an actual commercial context—who would want to buy an HD TV for the $2,000 it once cost when it now only costs $200?⁶⁰ But while consumers can walk away or go to another store when they are offered outdated and inflated prices, the Department is often stuck paying what the contractor wants to charge.

Industry finally succeeded in locking the Department into past prices paid as part of the fiscal year 2016 National Defense Authorization Act. At the time the House Armed Services Committee put the proposal forward, POGO told the authorizing committees:

Using recent prices paid by the government in the determination of price reasonableness will harm the government and severely limit the government’s ability to access any cost or pricing information from contractors selling commercial goods or services. Historic pricing data is insufficient to determine fair and reasonable prices and will result in new bad deals being made based on old bad deals. DoD could be locked in to such a designation despite subsequent changes to the item or military unique requirements that alter the item from its commercial nature. Any continuation of commercial item designations could require DoD to buy commercial items that no longer have a commercial market, and thereby pay excessive costs or prices or settle on timeworn products. Moreover, we are concerned that these provisions, which alter the process for determining commercial items, will only exacerbate overpayment problems identified by the GAO [Government Accountability Office] and DoD IG.⁶¹

The latest inspector general report on TransDigm confirmed that relying on historical price analysis was unreliable. “Prices for parts had become inflated over time, and some parts appeared to be inflated at the time the Government first purchased the part further compounding the excess profits.”⁶² As a result, TransDigm “earned excess profit up to 4,436 percent on 34 parts it sold to the DLA and the Army.”⁶³ While it is easy to blame TransDigm, Congress created the problem, and agencies are placed in the undesirable position of relying on outdated, and often outrageous, prices.

Outsourcing Agency Acquisition Authority?

Generally, the government should be determining its own needs and how best to procure services or goods to meet those needs in an affordable way. The Federal Acquisition Streamlining Act created a preference for purchasing commercial items.⁶⁴ Recently, the U.S. Court of Appeals for the Federal Circuit ruled for the first time that this requirement meant the government could be punished for inadequately considering commercial items that may not meet the government’s requirements. In that case specifically, the Court found the Army acted in violation of the Federal Acquisition Streamlining Act when it created its own intelligence analysis software system without sufficiently considering a commercial system offered by Palantir, a contractor that wanted to sell its technology to the Army.⁶⁵ As a result of that action, Palantir recently won the Army contract, which could be worth more than $800 million.⁶⁶

The system developed by the Army was troubled; more than a decade in, it had spent more than $3 billion developing its own software.⁶⁷ But the Court’s decision was not based on performance, and could make it even more difficult for program officers to feel confident they can resist powerful companies trying to sell the Department wares it doesn’t want.⁶⁸ As will be described in further detail, that problem will become even more pernicious as the Department expands its use of Other Transaction Authority.

Other Transaction Authority Expands Risk of Fraud, Waste, and Abuse

Those concerned about the abuse of commercial item buying authorities should be similarly worried by “other transaction authority,” also known as OTA. Unlike traditional contracts, where the government specifies its requirements for goods and services, other transaction agreements give companies the power to define what they’ll do, including pricing, deliverables, and intellectual property rights. The agreements are also generally not subject to many protections against waste, fraud, and abuse in federal contracting laws and regulations.⁶⁹ Many of the changes Congress made to other transactions⁷⁰ may have been intended to reduce costs and increase innovation, but as adopted, other transactions lack the management tools necessary to prevent the risks of waste and abuse.

The hope was that this authority would lead to more innovation, but this comes at significant risk.⁷¹

Are the Risks Worth the Rewards?

First established in 1958 in response to the launch of Sputnik, the authority—and subsequent expansions of it—was meant to advance our technological edge by increasing innovation and attracting nontraditional contractors.⁷² OTAs are not subject to the Truthful Cost or Pricing Data statute, Cost Accounting Standards, or a number of provisions in the Federal Acquisition Regulation (FAR) in order to accomplish those goals.⁷³ In many ways, the government has bought into the idea of OTAs based on a fallacy. A previous Defense Department Inspector General analysis of OTAs for prototypes in 2000 found that instead of bringing in nontraditional contractors, 97 percent of the money awarded was going to traditional contractors.⁷⁴ A Federal News Network investigation using data from 2015 to 2017 found that about two-thirds of the money awarded to companies through this authority went to traditional contractors.⁷⁵ This may be in part because this authority can be used to buy weapon systems even though those are typically supplied by large defense contractors that already sell goods and services to the government.⁷⁶ Even these findings may not reflect the whole story. The nonpartisan Congressional Research Service noted that the Department of Defense does “not have sufficiently reliable data upon which to conduct analysis on the use of OTs.”⁷⁷

And some of the services acquired by agencies across the federal government through this authority are far from innovative. For instance, government data shows that agreements under this authority have been used to acquire management support, custodial/janitorial services, video surveillance, and canine teams.⁷⁸

OTAs are also billed as a mechanism to speed up acquisition.⁷⁹ On that count, the Congressional Research Service found that the Defense Department has not tracked information to confirm or disprove this claim, making the claim “impossible to objectively assess.”⁸⁰ A recent article in the industry-sympathetic Contract Management magazine makes the case that many successful OTAs could have been done through traditional contracting practices, and that rhetoric around OTAs was “misplaced ‘hype.’”⁸¹ The article concluded:

OTs are a valuable acquisition tool if used correctly; however, they are not a panacea for all ills. There is reason for concern that the “hype” which OTs have recently attracted could influence Congress and high-level executive branch officials into halting further improvement upon the convention federal acquisition process.⁸²

There have been a number of instances in the past in which we have seen OTAs used on large, risky programs that should have received the enhanced oversight that would come by awarding the contract through the regular acquisition process specified in the Federal Acquisition Regulation rather than the hands-off approach that comes with OTAs. For example, the Army initially tried to purchase $157 billion in land and air vehicles through the OTA, and only converted it to a FAR contract after then-Senate Armed Services Committee Chair John McCain (R-AZ) questioned the costs and risks of the approach.⁸³

The Air Force has also used OTAs for the Evolved Expendable Launch Vehicle program, which, at the time, was one of the largest other transactions for weapon prototypes the Department had ever negotiated. The Government Accountability Office warned that the use of OTAs in this case would make it more difficult for the Department to protect the government’s interests.⁸⁴ The United Launch Alliance, a joint venture between Boeing and Lockheed Martin that became the sole company participating in the program, received a nearly $1 billion annual subsidy from taxpayers to support the program.⁸⁵ Costs for the program doubled over initial estimates, resulting in two critical Nunn-McCurdy unit cost breaches, requiring the overruns to be reported to Congress.⁸⁶

As Congress and the Department consider the use of OTAs, it may be that agreements for some of the goods and services purchased through that mechanism should be converted to contracting vehicles that restore protections to taxpayers and the government—mainly, Federal Acquisition Regulation Part 15 contracts.

Increasing Innovation or Avoiding Competition?

Competition generally improves performance, increases innovation, and reduces costs for goods and services. Yet under OTAs, follow-on production contracts can be awarded without competition if “competitive procedures were used” to select parties that participated in the initial OTA and if the prototype was “successfully completed.”⁸⁷

The use of this authority must be carefully overseen. Bid protests are one check to ensure competition is fair, but protest jurisdiction largely does not apply to other transactions except in very narrow circumstances. The Army tried to award a $950 million OTA to contractor REAN Cloud to provide cloud migration, but the Government Accountability Office intervened and sided with competing company Oracle’s bid protest.⁸⁸ Industry boosters falsely claimed GAO’s action improperly constrained agencies.⁸⁹ But what the GAO actually did was show how agencies weren’t using this authority properly, and re-established that the GAO has jurisdiction to review whether an agency’s use of an OTA complies with the law.⁹⁰ In a subsequent decision, the GAO further clarified its authority and said it did not include jurisdiction over protests of OTA award decisions.⁹¹ Congressional and agency oversight should be as vigilant as GAO in making sure this authority is used properly.

Congress should also re-examine how “nontraditional contractor” is defined. Under current law “an entity” that is a subsidiary or business unit of a major federal contractor such as Raytheon or SAIC could be considered nontraditional if it has its own business identifier, has not previously been subject to “cost accounting standards,” and has not previously had a contract or subcontract with the Department.⁹² Traditional contractors can also be exempted from oversight on prototype OTAs if there is at least one nontraditional contractor under this definition that is participating in the project to a “significant extent.” What Congress meant by significant extent, however, remains undefined.⁹³ Other transactions awarded through consortia, including joint ventures, may be another avenue for traditional contractors to benefit from the OTA system.

Intellectual Property Rights: Paying the Costs, Not Reaping the Benefits

When taxpayers fund research and development for goods or weapon systems, most would assume that they would be able to benefit from the return on their investment. The Army, for example, wants to own technical data rights up-front to be able to avoid excessive costs on repairs and upgrades to the systems it buys, so it recently developed a policy to more strategically obtain these rights.⁹⁴ Contractors have claimed that the government wanting these rights was a barrier to doing business with the government.⁹⁵ The Defense Department has offered OTAs as an alternative to allow companies to retain the rights to profit from programs and research that were funded by taxpayers.⁹⁶

Unfortunately, we have seen a number of examples of how the Army’s concerns about paying unnecessary and excessive costs when they don’t own the intellectual property rights have been well-founded. Some weapons manufacturers hide behind intellectual property rights to resist turning over information to the government that might allow cheaper or more efficient operations. By holding onto information like manufacturing or operational data, the company can maintain a profitable monopoly on providing support services for the duration of a weapon system’s lifetime.⁹⁷ In one notorious case, thanks to its failure to secure intellectual property rights, the Air Force was paying $10,000 each for toilet seat covers on its C-5 Galaxy cargo planes.⁹⁸ As Senator Chuck Grassley (R-IA) pointed out, “Any American can tell you that 10,000 dollars for a toilet seat cover is ridiculous.”⁹⁹

The government might have an out to be able to claim intellectual property rights through the Bayh-Dole Act, which gives the government “march-in rights” to allow other companies to produce otherwise patented technologies at a lower price.¹⁰⁰ But under OTAs this becomes significantly more difficult, as they are exempt. As industry lawyer Angela Styles has pointed out, “Enhanced IP [intellectual property] protection is the most significant benefit of OTAs [for industry], so make sure to use it.”¹⁰¹

Rebalancing our Budget to Put the Public before Defense Contractors

The TransDigm case points to many of the problems with the current acquisition system, which exposes the Department of Defense and taxpayer dollars to waste and potentially compromised operations. Most of the transactions the inspector general examined were below the thresholds that would have required the company to provide cost and pricing information. Without that oversight, the inspector general found the Department was repeatedly being ripped off by the company.

POGO supports cutting procurement costs, buying faster, encouraging innovation, and bringing nontraditional companies to the government procurement table. But the overall effect of the so-called acquisition reforms that were purportedly meant to accomplish these goals is that the Department of Defense into is almost defenseless against overcharges. Congress has effectively turned the budget of the Department a near-limitless font for crony capitalism and sole-source contracts where the Defense Department has very little information about what it is buying. To ensure the Department knows what it’s buying, can easily buy truly commercial items while preventing contractors from gaming definitions, and can hold contractors accountable for charging excessive prices, we recommend that Congress do the following:

• Revise the definition of commercial items to apply only to what is sold on the open market to the general public in substantial quantities, as previously proposed by the Department of Defense.¹⁰²
• Direct 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.
• Require the Department of Defense to track which companies refuse to provide 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).
• Restore the simplified acquisition threshold to $100,000.
• Ask the Government Accountability Office to review the programs awarded through OTAs and as commercial item acquisitions, and consider whether those programs should be converted to FAR Part 15 contracts.
• Require the Defense Department to report on how OTs are used and evaluate whether the agreements are increasing innovation.
• Ask the Government Accountability Office to evaluate awards to nontraditional contractors in order to assess whether OTAs are increasing competition.
• Prohibit the Cost Accounting Standards Board (CAS) from rescinding any existing standards, and ensure cost accounting standards apply whenever a sole-source contract is awarded, or whenever flexible pricing arrangements are provided for in a contract.
• Consider recreating the Renegotiation Board to allow for overseeing and capturing excessive profits for companies that receive $10 million or more from the Department of Defense. At the very least, this kind of mechanism to recover waste and overcharges should be implemented for sole-source contracts, as recommended by former Pentagon pricing czar Shay Assad.¹⁰³
• Fund and prioritize pre-award audits of contractor pricing proposals in order to give improved insight into contractor pricing and prevent wasteful spending.
• Examine whether other transactions awarded through consortia are bringing new vendors to the government or shielding traditional contractors from oversight, and consider implementing reforms to limit the use of consortia if they are not serving the purpose of OTAs.
• Revise the definition of nontraditional contractors to prohibit any vendor who has accepted a FAR contract from being eligible.
• Strengthen protections for taxpayers’ rights to intellectual property information paid for through government awards, and make it a presumption that a contracting officer will secure these rights up-front unless a contractor obtains a waiver. Any such waivers should be sent to the appropriate oversight committees and be evaluated by the Government Accountability Office.