Industry groups oppose DOD reform proposals targeting TransDigm

By Tony Bertuca  / May 11, 2020

A group of industry associations says it is "strongly opposed" to several Pentagon proposals to reform the defense contracting process, including provisions intended to counter controversial pricing practices used by TransDigm.

The Acquisition Reform Working Group, composed of the National Defense Industrial Association, the American Council of Engineering Companies, the Computing Technology Industry Association and the Information Technology Industry Council, has sent a letter to the House and Senate Armed Services committees listing its concerns with several DOD legislative proposals.

One proposal would require contracting officers to conduct a commercial item determination for every procurement, even if a determination has previously been made.

The legislative proposal DOD sent to the committees calls the provision a "top acquisition and sustainment efficiency initiative" intended to "prevent excessive pricing practices."

"As illustrated by the TransDigm Group, Inc.'s pricing practices, 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," the DOD proposal states.

TransDigm came under scrutiny last year when the Pentagon inspector general found the company made $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.

But the ARWG writes in its letter to lawmakers that DOD's legislative proposal is "based on an incorrect assertion that TransDigm's pricing issues were due to 'improper commercial item determinations' or conversions to commercial products."

The ARWG argues that fewer than 10% of the TransDigm cases DOD reviewed were for commercial items.

"Furthermore, the underlying cause of TransDigm's excessive pricing is not one of commerciality or a lack of governmental authority to obtain information to determine price reasonableness," the letter states. "The simple fact is that, in recent cases, TransDigm was the sole-source provider of the parts in question and the limit to the price they could charge was whatever the government would be willing to pay for what was deemed an operationally critical part. Assertions that TransDigm's actions were facilitated by an inappropriate reliance on a prior commercial item determination, or insufficient access to pricing data, are misdirected."

The ARWG says the proposal, if enacted, would "add a significant barrier to commercial item acquisition, reduce information sharing, further burden the system, and impede -- rather than enable -- the delivery of capabilities to the warfighter at the 'speed of relevance' -- all with little to no added protection for the government or the taxpayer."

The department referenced TransDigm in another proposal it sent lawmakers. That one would require contractors to submit uncertified cost information for commercial item contracts below the $2 million threshold set by the Truth in Negotiations Act if a contracting officer deems it necessary.

"This proposal is a top acquisition and sustainment efficiency initiative to ensure that the department has insight into the costs of sole-source items, and is in a more favorable position to negotiate with sole-source companies to prevent excessive pricing practices," DOD states in its proposal. "In light of the recent congressional hearings surrounding the TransDigm Group Inc. excessive pricing practices, it is evident that providing the department with the statutory authority to obtain uncertified cost or pricing data to the extent necessary to determine price reasonableness is paramount in ensuring that such excessive pricing practices are curtailed."

But the ARWG argues the department's proposal is again based on the assumption that a sole-source supplier of a key item -- as is often the case with TransDigm -- would reduce its price if the government obtained uncertified data on the contractor's costs.

"When the government knows the price is excessive, gathering supplementary information does nothing to change DOD's negotiating position when only one contractor can provide the part," ARWG says.

"At the same time, the proposal would needlessly add bureaucracy, increase cost, and remove incentives for DOD contracting officers to perform due diligence," according to ARWG. "This proposed change would limit a contracting officer's responsibility to perform market research and review pricing information."

Performance-based payments questioned

The ARWG is also opposed to a DOD proposal that would set a preference for performance-based contract payments, with the industry associations saying the provision "ignores previous policy guidance from Congress to focus on performance outcomes rather than costs."

But DOD said in its proposal to lawmakers that the "fundamental purpose of all contract financing is to assist the contractor in paying costs incurred during the performance of the contract."

"Unless the department contractually agrees that it is in the public interest to provide advance payments . . . a contractor should never be reimbursed more than its actual costs incurred at any point in time," the proposal states. "This would result in negative levels of contractor investment in the contract and provide a disincentive for contractors to complete work on the contract and deliver goods and services in a timely manner, if at all."

Manufacturing data sought

ARWG says another DOD proposal would allow the disclosure of detailed manufacturing or process data "to third parties seeking to compete against the original equipment manufacturer."

DOD says the provision is intended to "enable the release, disclosure or use of operation, maintenance, installation or training data, including [instructions for continued airworthiness] data, that is detailed manufacturing or process data to commercial maintenance, repair, and overhaul firms, seeking to compete for DOD maintenance and repair work, including depot-level maintenance, provided the person to whom the data is released or disclosed is subject to a prohibition on the further release, [disclosure], or use of such data and the owner of the data is notified of such release, disclosure or use."

The proposal, according to ARWG, would "eviscerate longstanding trade secret protections."

"The proposal eliminates the need for DOD to comply with the longstanding requirements . . . to initiate data rights challenge proceedings if it has reasonable validation concerns," ARWG says. "Instead, DOD would only be required to determine that the disclosure of the data is 'necessary' for the identified purposes such as maintenance -- a nebulous and low standard that at least one DOD customer has previously likened to requiring no more than a showing of 'convenience.'"

The ARWG notes it is not opposed to competition, but asserts that "such competition must accommodate appropriate protections for contractor intellectual property."

All of the proposals opposed by the ARWG could potentially be debated during the House and Senate defense authorization bill process, which committee chairmen have said is expected to begin by the end of the month, despite challenges posed by COVID-19.