The Defense Department inspector general recommends the Pentagon seek at least a $20.8 million refund from TransDigm Inc., stating in a recent report that the company took the money as "excess profit" on 150 contracts.
The report -- released today -- is the result of an audit lawmakers requested the IG conduct of TransDigm’s business model, which has come under fire in the past for alleged price gouging. After a 2019 IG audit, TransDigm repaid DOD $16.1 million deemed excess profit but lawmakers wanted further investigation.
“The objective of this audit was to determine whether TransDigm Group Inc.’s (TransDigm) business model impacted the DOD’s ability to pay fair and reasonable prices for spare parts,” today’s IG report states.
According to the IG, DOD contract officers dealing with TransDigm from January 2017 through June 2019 were unable to “perform adequate price reasonableness determinations because contractors are not compelled to provide uncertified cost data” under current law if the contract is below a certain threshold set by the Truth in Negotiations Act.
The IG says that 95% of the contracts DOD awarded to TransDigm -- about $268 million -- were below the TINA threshold.
“The DOD generally purchases spare parts from these TransDigm operating units in small quantities, resulting in lower-dollar-value contracts,” the IG said. “Contractors are required to provide certified cost or pricing data only for contracts valued at or above the TINA threshold.”
Auditors, however, “using the uncertified cost data, which is one of the most reliable sources of information to perform cost analysis,” say they found TransDigm earned excess profit of at least $20.8 million on 105 spare parts on 150 contracts.
The IG said TransDigm also “executes a business model that results in the acquisition of companies that specialize in highly engineered, sole‑source spare parts,” meaning that DOD cannot seek the parts elsewhere.
To that end, the IG recommends the Defense Logistics Agency “direct contracting officers to seek a voluntary refund from TransDigm of at least $20.8 million in excess profit on 150 contracts.”
Lawmakers promise action
Democrats on the House Oversight and Reform Committee released statements calling on TransDigm to repay the $20.8 million.
“Today’s DOD IG report confirms that TransDigm is back at it again, holding the federal government hostage by manipulating sole-source contracts to hike prices on taxpayers,” said Committee Chairwoman Carolyn Maloney (D-NY). “The Inspector General found that TransDigm has engaged in rampant price gouging on mission-critical aircraft parts. TransDigm must immediately return the $20.8 million it overcharged American taxpayers. If it fails to do so, the Committee will take further action.”
Rep. Stephen Lynch (D-MA), chairman of the panel’s national security subcommittee, said the report “demonstrates that TransDigm continues to gouge the Department of Defense for mission-critical contracts, and I join my colleagues in urging TransDigm to return the more than $20 million in excess profits the company received at the expense of American taxpayers between 2017 and 2019.”
Lynch said the IG report also “makes clear” that DOD contracting officers need to be given new authority to “ensure that prices charged for sole-source contracts are fair and reasonable.”
The IG report notes that DOD sent two legislative proposals to Congress in an unsuccessful attempt to get them included in the Fiscal Year 2021 National Defense Authorization Act.
“The first proposal sought to ensure that the DOD has appropriate authority and flexibility to make commercial item determinations and is able to obtain the necessary cost or pricing data to negotiate fair and reasonable prices,” the IG said. “The second proposal sought to include a paragraph amending an existing statute within the United States Code that requires the submission of uncertified cost data from offerors if the pricing data submitted is not sufficient to determine a fair and reasonable price. Neither proposal was included in the FY 2021 National Defense Authorization Act.”
The IG said DOD is considering the submission of additional legislative proposals for the possible inclusion in the FY-23 defense authorization bill.
Rep. Ro Khanna (D-CA), who has criticized TransDigm in the past and called for the IG audit, said the most recent authorization bill was a “missed opportunity” to address the issue with legislation.
“But we can’t wait another full year to take action,” he said. “Congress needs to work on legislative fixes to close the loopholes being exploited by TransDigm and other defense contractors to pad their profits at the expense of the public.”
TransDigm responds
Meanwhile, TransDigm issued a statement saying its disputes many “implications” in the IG’s report.
“TransDigm disagrees with many of the implications contained in the report, and objects to the use of arbitrary standards and analysis which render many areas of the report inaccurate and misleading,” the company said.
The company said, “the report ignores significant real costs incurred by the business and contrary to law reports these costs as excess profit.”
“The report presents profit percentages in a misleading and provocative manner,” TransDigm added. “This includes computing profit as a percentage of cost rather than as a percentage of revenue -- the internationally recognized method and business standard.”
TransDigm also said that “despite data demonstrating that the DOD paid lower prices compared to the commercial prices for similar parts, the report did not conduct a price analysis and instead implies that the DOD negotiated prices that were too high.”
The company said it provided full cooperation during the audit.
“Through regular engagement with DOD officials, there have been improvements to the procurement process, and the company has received positive feedback from DOD customers,” the company said. “TransDigm and its businesses look forward to continuing these efforts and their support of the DOD."