DOD taking steps to fight price gouging after contractor reaps 'excessive' profits

By Marjorie Censer, Tony Bertuca / May 15, 2019

A senior Pentagon acquisition official told Congress today the "sickening business practices" of contractor TransDigm Group have led the Defense Department to take new steps to mitigate alleged price gouging, including creating a watchlist of companies that refuse to provide cost data.

"This gets under my skin and makes me sick," Kevin Fahey, assistant secretary of defense for acquisition, told the House Oversight and Government Reform Committee.

Today's hearing follows a Defense Department inspector general investigation that found TransDigm, in some cases, earned profits of more than 4,000% on sole-source contracts for military aircraft parts.

Additionally, the IG found that TransDigm did not provide cost data requested by Pentagon contracting officers because the company is not required to do so by law.

"I would say that we ought to look at the legislative structure to require companies to provide cost information when asked for by contracting officers," acting IG Glenn Fine told the committee.

The company says it did nothing illegal by declining to provide cost data to DOD. Fine argued, however, it should be illegal because it puts DOD contracting officers "over a barrel" in sole-source situations.

"TransDigm keeps saying, 'We weren't required to do it,'" he said. "The law didn't require them to do it. But that's the problem. There ought to be requirements."

In the meantime, Fahey told lawmakers he has directed the heads of all DOD contracting activities to report contractors who refuse to provide cost and pricing information.

"This will provide the department holistic insight into such denials of requests for cost or pricing data," he said in written testimony.

Fahey has also appointed a group of experts to review the contractors who routinely refuse to provide cost information and prioritize ones "that bear watching."

"Additionally, to improve our negotiating position with these contractors, [the] Defense Contracting Management Agency's Commercial Item Group will be engaged to perform should-cost analyses for these high-priority parts," he said in written testimony.

Fahey said DOD is also advocating that Congress draft new regulatory legislation to require original equipment manufacturers give the department the "right of first refusal" if they want to license parts for a weapon system on an exclusive basis.

"You should never be paying 'excessive pricing,'" he said.

Rep. Ro Khanna (D-CA) called TransDigm "war profiteers."

"TransDigm’s basic business model consists of identifying relatively small companies that make spare parts for the military -- especially parts that no other companies make," he said. "TransDigm then buys up these small companies, purchases the rights to produce their products and then jacks up the prices. The Pentagon has to pay, knowing that they have a monopoly."

A heated hearing

Meanwhile, committee members pressured TransDigm to return the $16.1 million in excess profit the IG said it earned for 46 parts sold between 2015 and 2017.

Rep. Mark Meadows (R-NC) told company executives they "better pay the money and start giving us the cost" data.

"Once you raise an issue in a bipartisan way like this, it makes us look for other things," he said. "My encouragement to you is to do those things."

Meadows suggested the company "chalk it up to marketing expense and pay the American taxpayer back directly" and told Pentagon officials that he doesn't know why the government would "continue to do business . . . with a company that won't pay it back."

Rep. Rashida Tlaib (D-MI) called the excess profit "stealing in some sort of way."

"You may not label it that way . . . but it is stealing when you charge people like this," she added.

Rep. Jody Hice (R-GA) told company executives "this is looking really bad for you guys."

"The American people hate to be ripped off," he added. "This is one of those issues that is inexcusable and why the money is not paid back to the American people is beyond me."

But TransDigm executives insisted the company has not taken any illegal actions and argued its profit estimates were overstated.

Nicholas Howley, TransDigm's founder and chairman, said he is still evaluating whether the company should pay back the money.

"The DOD's a good customer and we value the relationship, but we also have other constituencies we have to think about," he told the panel. "We're concerned about implying that we've done something wrong here or something illegal. The money is not the issue here. We're trying to balance those sorts of conflicting demands."

Kevin Stein, TransDigm's chief executive, stressed that the company "is not a traditional defense contractor -- it's primarily a commercial company."

He said estimates of its profits are overstated and do not include many general and administrative costs, from taxes to litigation to patent costs.

TransDigm’s dealings with DOD are garnering attention in the Senate as well. 

Senate Finance Committee Chairman Chuck Grassley (R-IA) sent a letter to acting Defense Secretary Pat Shanahan today requesting DOD provide him additional information on the department’s efforts to halt “price-gouging practices.” 

“The department should also determine whether any individuals had knowledge these prices were inappropriate and overlooked or approved them anyway, and why,” Grassley wrote. “Responsible officials who knew about it but did nothing to stop it should be held accountable.” 

Grassley’s letter also urges Shanahan to “resolve the matter before it undermines support for higher DOD budgets.”