DOD IG finds TransDigm earned $16 million in excess profit on $26 million in sales of 46 parts

By Marjorie Censer  / February 27, 2019

The Pentagon inspector general, in a new report, finds that TransDigm earned $16.1 million in excess profit for 46 parts sold to the Defense Logistics Agency and the Army for $26.2 million between 2015 and 2017.

The audit, the report states, was conducted in response to three letters from members of Congress. The IG report was first reported by Bloomberg.

In 2017, Rep. Ro Khanna (D-CA) sent a letter to the Pentagon inspector general asking for an investigation into TransDigm, which designs and produces commercial and military aircraft components, "for potential waste, fraud, and abuse in the defense industrial base."

As part of its review, the IG evaluated a sample of 47 parts purchased by the Pentagon on 113 contracts during the two-year period.

"We determined that TransDigm earned excess profit on 46 of 47 parts purchased by the DLA and the Army, even though contracting officers followed the [Federal Acquisition Regulation] and Defense Acquisition Regulation Supplement (DFARS) allowed procedures when they determined that prices were fair and reasonable for the 47 parts at the time of contract award," the IG report reads. "When we compared the awarded prices for the 47 parts on 113 contracts to TransDigm’s uncertified cost data, our analysis determined that only one part purchased under one contract was awarded with a reasonable profit of 11 percent. The remaining 112 contracts had profit percentages ranging from 17 to 4,451 percent for 46 parts."

The IG notes that though contracting officers used historical price analysis and competition to determine whether prices were fair, these tools were unreliable in cases in which part prices had become inflated over time and in which TransDigm was the only manufacturer.

"Performing cost analysis using certified or uncertified cost data is the most reliable way to determine whether a price is fair and reasonable," the report states. "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."

Yet, the IG notes contracting officers are often unable to obtain this information; the document notes TransDigm denied 15 requests for uncertified cost data.

"Of the 47 parts in our sample, 39 were manufactured only by TransDigm, including 13 of the 15 parts where the contracting officers were denied cost data," the document states. "Therefore, contracting officers had limited options once TransDigm refused to provide the requested cost data for the 15 parts, either buying the parts without receiving cost data from TransDigm or not buying the parts needed to meet mission requirements."

The IG recommends the DLA and the Army "consider all available corrective actions with TransDigm, including but not limited to, directing contracting officers to seek a voluntary refund from TransDigm for excess profits identified in this report."

According to the report, the DLA acquisition director agreed with the recommendation and last month sent a request to the company for a voluntary refund.

"[T]hese recommendations are resolved but will remain open until we receive TransDigm’s response to DLA," the IG writes.

The Army Contracting Command deputy to the commanding general also backed the recommendation, but the IG says the recommendation "will remain open until we verify that the Army has issued the refund requests and we receive TransDigm's response."

"The estimated completion date is February 28, 2019," the document adds.

TransDigm did not immediately respond to a request for comment.