TransDigm Faulted at Pentagon for $21 Million in Excess Profits
(Bloomberg) -- TransDigm Group Inc., one of the Pentagon’s largest suppliers of spare parts, was paid at least $20.8 million in excess profits on 105 parts from early 2017 to mid-2019, according to a two-year inquiry into the company’s business model by the Pentagon’s inspector general.
“We determined that 150 out of the 152 contracts” that the inspector general examined “were not obtained at fair and reasonable prices,” and “we found excess profit levels ranged from 2.8% to 3,850.6%” compared with the “maximum profit percentage standard for this audit at 15%,” according to the report released Monday that was first obtained by Bloomberg News.
Roxanne Banks, deputy director of acquisitions for the Defense Logistics Agency, wrote in the report that the agency would seek to recover the excess funds from the company.
“TransDigm is back at it again, holding the federal government hostage by manipulating sole-source contracts to hike prices on taxpayers,” Representative Carolyn Maloney, a New York Democrat and chair of the House Oversight and Reform Committee, said in a statement. “The inspector general found that TransDigm has engaged in rampant price gouging on mission-critical aircraft parts” and the company “must immediately return the $20.8 million.”
But TransDigm said “the report makes clear that there was no wrongdoing by TransDigm, its businesses, or by the DoD.” The Cleveland-based company said in a statement that the report “presents profit percentages in a misleading and provocative manner. This includes computing profit as a percentage of cost rather than as a percentage of revenue -- the internationally recognized method and business standard.”
The Pentagon watchdog announced the review, requested by the House Oversight panel, in July 2019.
TransDigm 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 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.
The underlying reasons for overcharges are 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 previous reports from the inspector general. In those cases, Pentagon contracts officers should use aggressive cost analysis to assess the true cost of a part, the watchdog office has said.
Most of the small-batch parts TransDigm sells the Pentagon fall below a dollar threshold over which companies are legally required to provide certified cost and pricing data, the watchdog agency said in Monday’s report. The Defense Department will continue to pay high prices unless it’s “enabled to use cost analysis to determine price reasonableness” for parts that don’t reach the threshold, it said.
In mid-2019, TransDigm refunded $16 million that the inspector general identified as excessive. At the time, the Defense Department said it created a “cadre of pricing experts” to identify pricing trends for spare parts and suppliers that should be monitored.
But “without the necessary legislative changes, the Defense Department will continue to be unable to perform adequate price reasonableness determinations because contractors are not compelled to provide” the data, the department said. The Pentagon has submitted such legislative proposals and plans another version in the fiscal 2023 defense request, the inspector general said Monday.
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