Citing the ongoing pricing controversy with Pentagon contractor TransDigm, House Oversight and Reform Committee Chairwoman Carolyn Maloney (D-NY) has drafted a bill based off a Defense Department legislative proposal that would require contractors provide more cost information to the federal government.
“Today, I am releasing a discussion draft that would require companies to provide cost information when necessary to determine if proposed prices are fair and reasonable,” she said.
The bill would, with a one-year phase-in period, require all government contractors to submit uncertified cost information if requested by a federal contracting officer.
Maloney released her bill, the Fair Pricing with Cost Transparency Act, during a hearing with TransDigm executives in which she and other committee Democrats castigated the Cleveland-based company for using a business model that, according to the DOD inspector general, allowed TransDigm to make $20.8 million in “excess profit” on Pentagon contracts for spare aircraft parts.
Company executives, however, argued the recent IG report was based on an “arbitrary” benchmark of 15% to determine “excess profit” that is not codified anywhere in law.
“It’s rife with error,” TransDigm CEO Kevin Stein said of the IG report. “We believe we’re the only company being targeted in this way.”
Stein also said TransDigm offered DOD on average a 25% discount on all the contracts audited by the IG when compared to what the company charged its primary customers -- commercial airlines.
“I repeat -- DOD received a 25% discount,” he said. “It is not price gouging -- it simply is not.”
Still, Democratic lawmakers highlighted products like the company’s linear actuating cap, which is made for $189 but for which DOD was charged $7,495.
Stein pointed out DOD still got a 10% discount on that part when compared to what TransDigm’s commercial customers are charged.
“The question is not how much it costs to produce a part, but whether the government is getting a fair and reasonable price,” he said.
Maloney, meanwhile, said her bill would “empower contracting officers when they are negotiating with greedy contractors like TransDigm.”
The controversy has shed light on challenges DOD contracting officers say they face when trying to obtain cost data from companies.
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 the $2 million 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.
During the hearing, Rep. Jamie Raskin (D-MD) said the current TINA threshold is a “gaping loophole” for contractors who do not wish to disclose cost data to DOD.
John Tenaglia, the acting principal deputy assistant secretary of defense for acquisition and principal director of defense pricing and contracting, said he looked forward to working with lawmakers on the Maloney bill, especially in terms of addressing TINA exemptions.
“It’s never acceptable if we’re paying excessive prices,” he said. “What we really need is a policy that will give our contracting officers a means to establish fair and reasonable pricing when some of the TINA exceptions are in play.”
‘Unsavory’ but not illegal
TransDigm has been investigated in the past for price gouging and in 2019 voluntarily repaid DOD $16.1 million deemed excess profit by the IG.
Today’s hearing featured heated questions from Democrats about Stein’s $20 million annual compensation, the $68 million annual compensation for retired company founder and executive chairman Nicholas Howley, and TransDigm’s decision to lay off 30% of its workforce in 2020 because of reduced demand related to the COVID-19 pandemic.
Rep. Rashida Tlaib (D-MI) called TransDigm the “poster child for corporate greed.”
Republicans called some of the committee’s Democrats “socialists” for attempting to subvert private industry over a matter of $20.8 million at a time when hundreds of billions have been spent on pandemic relief.
“Democrats are going to hold up TransDigm as though they were some sort of trophy,” said Rep. Jody Hice (R-GA), arguing that the committee should instead investigate unemployment insurance fraud.
TransDigm’s actions, he said, may have been “unsavory,” but do not amount to anything illegal.
Hice also said the case with TransDigm is proof that DOD must do a better job “forecasting its needs” for spare parts, so it can procure items in bulk to drive down prices, rather than seek bespoke products in smaller, more expensive numbers from sole-source contractors.
Committee Ranking Member James Comer (R-KY) said the committee’s time would be better spent auditing how much military equipment was left behind in Afghanistan after the U.S. withdrawal.
“I don’t agree with attacking one company that, frankly, followed the law,” he said, but added that he is open to working with Pentagon officials to “see if there's a better way . . . to do business at the Department of Defense.”
Meanwhile, Tenaglia, DOD’s acting pricing chief, said the Pentagon wants TransDigm to repay the $20.8 million deemed excess profit by the IG. TransDigm executives would not commit to repaying the money, but said they want to meet directly with DOD to discuss the matter.
“We do not like an unhappy, antagonized customer,” said Howley, the company’s chairman. “What we want to do is we want to get to the bottom of the facts.”
Tenaglia acknowledged that $20.8 million spent on TransDigm contracts might not seem like much compared to the department’s $740 billion budget, but asserted such expenses, if left unchecked, would become “embedded in the contract prices.”
“The price we pay matters because the more we pay, the less combat capability we can acquire for a ready force,” he said.