Defense Abuses Like 9,400% Markup on Parts Targeted in New Bill

(Bloomberg) -- Defense contracting abuses the Pentagon says are “gouging” U.S. taxpayers are being targeted in proposed amendments to the $733 billion defense bill working its way through Congress.

The amendments, sponsored by Representatives Ro Khanna and Jackie Speier of California, would give military and civilian contracting officers more authority to demand disclosure of pricing data from sole-source parts providers. That would help them determine if markups are reasonable or inflated. The amendments will be introduced by the two Democrats during consideration starting Wednesday of the House Armed Services committee’s fiscal 2020 defense policy bill.

The move comes in response to markups of as much as 4,451% for 46 parts sold from 2015 through 2017 by Cleveland-based TransDigm Group Inc. and disclosed in a February report by the Pentagon’s inspector general. That report and a subsequent congressional hearing highlighted that the Pentagon could end up paying TransDigm $91 million in coming years for parts valued at $28 million.

“Getting contracting officers more discretion to get certified costs” and putting “a cap on some percentage” of allowable price increases are key principles of the amendments, Khanna said in an interview.

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Kevin Fahey, assistant defense secretary for acquisition, described TransDigm’s policies as “gouging” and “immoral and unconscionable” in a statement last month to the the House Committee on Oversight and Reform. He said a lack of historical cost data left contracting officers with little to go on in determining whether the Pentagon was being fairly charged.

Liza Sabol, a spokeswoman for TransDigm, said last month that the company “has been and remains committed to conducting business within the framework of applicable laws and regulations.”

The company emerged in recent years as a key sole-source provider of spare parts for airplanes and helicopters, including the AH-64 Apache, F-16 Fighting Falcon and the CH-47 Chinook. From Oct. 1, 2014 through April 11, 2019, the Pentagon executed 4,697 contract actions with TransDigm and its subsidiaries valued at $634.7 million.

After a congressional uproar over the pricing revelations, TransDigm management agreed May 24 to provide a $16 million refund for overcharges linked to 2015-2017 purchases. Pentagon officials say they are increasing oversight on a current $59 million contract that has the potential for more overcharges, including payments of $4,361 for a half-inch “drive pin” that should cost $46, or a markup of about 9,400%.

Requirement Lacking

Khanna’s amendment targets a shortfall identified in the Pentagon inspector general’s report. It found that “statutory and regulatory requirements discourage contracting officers from asking for uncertified cost and pricing data.” When a contractor refuses to provide more information, “there is no specific requirement” to compel disclosure of the data, according to the report.

Khanna said Deputy Defense Secretary David Norquist “encouraged giving contracting officers more flexibility” as a means of countering abuses.

“This amendment does so by empowering contracting officers to obtain information needed to ensure the Defense Department is paying a fair price,’ Speier said in a statement.

Another proposed amendment to the defense bill would reduce the threshold for requiring cost and pricing data to $750,000 from the current $2 million threshold established in the fiscal 2018 defense bill raised the threshold to $2 million.

Representative Mac Thornberry, the top Republican on the House panel, told reporters Tuesday that he would review any TransDigm-related amendments without committing to support them.

“In general the IG did a pretty good job of looking at this and in making recommendations, but it’s also true that contracting officers have the authority now to get that contract and pricing data,” he said, referring to the inspector general’s report. He said he was wary of proposing a fix that addresses one “bad actor” but then results in “a new law, a new regulation that puts additional requirements on everybody.”

“That’s part of what’s gummed up the acquisition process and made it harder to have competition,” Thornberry said. “The key is you need the tools to go after those bad actors without punishing everybody and making it harder for people to do business with the Department of Defense.”

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net, Larry Liebert

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