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Pentagon Contractor’s 9,380% Profit On A Half-Inch Pin — Tip Of Fraud Iceberg

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FORTUNE”

The review found potential excess profits for 98 of 100 parts sampled and concluded the Pentagon may end up paying TransDigm $91 million more in coming years for parts valued at $28 million.

With excess profit per part of 95% to the 9,380%, the Defense Department’s inspector general said in an audit labeled “For Official Use Only” and obtained by Bloomberg News.

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“The Pentagon is weighing legislation that would give contracting officers the power to demand back-up data on spare parts costs after its inspector general said TransDigm Group Inc. could be paid about 9,400% in excess profit for a half-inch metal pin.The Defense Logistics Agency could end up paying TransDigm $4,361 for the “drive pin” in a July contract that should cost $46, according to a Pentagon review endorsed by the inspector general.

As the Pentagon weighs whether to recommend legislation to require more disclosure by contractors, the House Committee on Oversight and Reform will review the audit and TransDigm’s pricing policies in a hearing on Wednesday.

The inspector general’s report “exposes how a company entrusted with supporting our military men and women took advantage of American taxpayers by overcharging the government more than $16 million” in parts sales sold between 2015 and 2017, Oversight Chairman Elijah Cummings said in a statement. The hearing will “investigate whether these pricing issues are more widespread, and demand answers,” he said.

From 2013 through 2015, according to the audit, the contractor increased the price of a valve that opens and closes to change the pressure of fuel moving through an engine to $9,801 from $543. In those years, TransDigm also charged $1,443 each for a “non-vehicular clutch disk” that cost $32 to make.

The Pentagon’s inspector general first raised pricing concerns over TransDigm in a 2006 report, followed by the one this year that was released in redacted form in February.

TransDigm manufactures spare parts for airplanes and helicopters including the AH-64 Apache, C-17 Globemaster III, F-16 Fighting Falcon and the CH-47 Chinook. From April 2012 through January 2017, DOD issued 4,942 contracts valued at $471 million to TransDigm.

Liza Sabol, a spokeswoman for the Cleveland-based company, said in an email “that we are not providing comments on specific questions related to the IG report.”

“TransDigm has been and remains committed to conducting business within the framework of applicable laws and regulations,” she said. “The IG report does not make any assertion of wrongdoing on TransDigm’s part with respect to its pricing.”

The underlying debate is over laws and acquisition regulations that hamstring Pentagon contracting officers from demanding back-up data on parts contracts. Legislation from the Federal Acquisition Streamlining Act of 1994 to recent defense policy bills sought to encourage commercial contractors to conduct business with the military by freeing them from providing information that could be competitively sensitive and onerous to collect, according to the inspector general’s report.

The provisions discourage contracting officers from asking for the data when “determining whether a price is fair and reasonable,” it said. The inspector general “previously identified contracting officers’ limited success in negotiating fair and reasonable prices for sole-source parts dating as far back as 1998,” a spokeswoman said in a statement Tuesday.

In a sample of contracts awarded from 2015 through 2017, TransDigm “refused to provide uncertified cost and pricing data to contracting officers when requested” for 15 of 16 contracts, the audit found. “Contracting officers had limited options once TransDigm refused.” TransDigm earned $2.6 million in excess profits on the parts, the inspector general said.

The watchdog office recommended legislation “to compel companies to provide cost data when required.” The Pentagon responded by issuing a memo in mid-March to jump-start a moribund system requiring contracting officers to report and share the names of recalcitrant companies.

“We are considering potential options for legislation proposals and weighing the ‘pro’s and cons’ of how that could impact the entire industrial base, including our desire to reach more non-traditional defense contractors,” Lieutenant Colonel Michael Andrews, a Pentagon acquisition spokesman, said in an email.

TransDigm shares have climbed more than 36% this year. It drew 34% of its 2017 sales from defense, up from 24% in 2006. In its 2017 annual report, TransDigm estimated 80% of its sales revenue that year came from products for which it’s the sole supplier.

Patrick Mackin, a spokesman for the Pentagon’s Defense Logistics Agency, said the agency is managing the July 2018 contract that was questioned by the review in a way that “limits ordering” due to “the potential overpricing and scrutiny” of TransDigm.

He said the agency can’t “unilaterally change pricing outside of the contractual repricing periods” but will assess the contract at its first chance in 2021. The agency is “currently seeking alternatives to support these items where such alternatives may exist.”

Among the parts of concern in the current contract, according to the review:

  • TransDigm charged $803 for a retainer bearing that should have cost $32.
  • A part described as a “ring” for which TransDigm charged $4,835 apiece should cost $71.
  • *TransDigm charged $67 for a lug used in the auxiliary power unit of an F-15 jet that should have cost $3.
  • *TransDigm charged $8,819 apiece for a valve assembly check oil pump that should cost $369.

The inspector general’s report also outlines the history of a three-inch TransDigm coupling with a “quick disconnect” that illustrates the problem that Pentagon contracting officers confront.

While TransDigm estimated the coupling cost $287 to make, the contractor’s pricing has “contained excess profits” since the Defense Logistics Agency first purchased the part in 2007 for $1,239 apiece, the unredacted report said. The price increased to $7,325 by 2017.”



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