As lawmakers prepare to craft the annual defense authorization bill, two senior Democrats from the House and Senate have authored legislation they say would stop defense contractors from “price gouging” the military by strengthening existing acquisition regulations by, among other things, requiring contractors to provide new cost and pricing data.
The bicameral proposal, authored by Rep. John Garamendi (D-CA) and Sen. Elizabeth Warren (D-MA) seeks to strengthen the Truth In Negotiations Act to require contractors to “provide the federal government cost or pricing information if there isn’t adequate price competition that results in at least two responsive and responsible offers.”
“Numerous inspector general reports have found defense contractors regularly charge the military excessive prices, including $71 for a pin that should have cost less than a nickel and $80 for a drain pipe segment that should have cost $1.41,” according to a statement from Warren’s office.
“Loopholes in current acquisition laws make it nearly impossible for the Department of Defense to obtain the data necessary to prevent price gouging,” the statement reads. “This legislation seeks to close those loopholes, tie financial incentives for contractors to performance, and provide the DOD with the information necessary to prevent future rip-offs.”
For example, the Pentagon inspector issued a report last year that found TransDigm Inc. had reaped “excess profit” on dozens of defense contracts partly because of TINA limitations.
The IG said 95% of the contracts DOD awarded to TransDigm -- about $268 million -- were below the TINA threshold that required pricing data.
“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.”
TransDigm executives have said they do not support the IG’s findings.
Meanwhile, the bill from Garamendi and Warren would also revise the definition of the term “commercial item” by adopting a Pentagon proposal “to tie commercial item determinations to whether a good or service is actually sold to other customers,” Warren’s office said.
Additionally, the bill would create a pilot program to “tie payments to performance by lowering advanced payments for companies to 50% while providing contractors the opportunity to receive payments up to 95% if they meet certain conditions.”
Under the current progress payment system, large companies have been paid as much as 90% of incurred costs, up from the traditional 80% paid as progress goals are met, while for small businesses the figure is 95%, up from 90%. Defense industry advocates have pushed to keep the new structure in place.
Further, the bill would require large defense contractors to annually share with the under secretary of defense for acquisition and sustainment “changes in the volume of goods or services sold, changes in the average price, and gross margins,” according to Warren’s office.
The reports would be publicly posted a year later “to enhance public oversight while protecting proprietary information that could undercut competition,” Warren’s office said.
The bill would also institute penalties for contractors who failed to disclose required information, including being reported to “contractor responsibility databases” that contracting officers review when making awards. Other penalties include imprisonment, civil fines of up to $200,000 or being temporarily or permanently suspended from receiving future contracts.
Representatives from the leading defense contractor associations did not immediately respond to a request for comment.
Warren, a member of the Senate Armed Services Committee, called for “basic rules of the road to prevent military contractors from price gouging.”
"For far too long, military contractors have been price gouging the Pentagon to make fatter profits, and American taxpayers shouldn't have to foot the bill,” she said in the statement.
Garamendi, chairman of the House Armed Services readiness subcommittee, said the reforms are “just common sense.”
“We know that taxpayers and service members are routinely overcharged by defense contractors due to loopholes in current regulations,” he said in the statement. “We cannot allow taxpayer money to be wasted to inflate the bottom lines of giant defense contractors. Our servicemembers need the tools to properly negotiate prices.”