Early in my engineering career, the fluid-power company where I was employed received a request from the U.S. Navy for seven hydraulic fittings made of the superalloy Inconel.
Fulfilling the order would be a major headache. Purchasing a single bar of the exotic material, much of which would go unused, would be incredibly expensive. Add in the costs associated with pulling a machine tool out of regular production and setting it up for the tough-to-machine material, as well as the specialty tooling, and it wasn’t worth the time and effort. Nonetheless, we wanted to stay on the military’s preferred supplier list. So we did offer a bid, but an outrageously high one – nearly $2,500 per fitting in today’s dollars – and expected that would be the end of it.
Unfortunately, all of our competitors had the same thoughts and bid even higher, and we were stuck with the job. We weren’t out to fleece the government and, honestly, we probably broke even at best.
That’s why I have mixed feelings about the recent goings on surrounding TransDigm, a Cleveland-based conglomerate that, among other things, makes an array of electrohydraulic actuators, pumps and controls for the aerospace and defense industry.
At a recent Congressional hearing, Members of the House Committee on Oversight and Reform lambasted TransDigm executives for gouging the Pentagon. The allegations are based on a DoD Inspector General report that said the company earned “excess profits” on spare parts contracts totaling $268.2 million over two and a half years. The report claimed TransDigm made up to 3,851% in excess profits on these contracts, as the government considers any profit over 15% as excessive, and said the company should repay the government for nearly $21 million in overcharges.
The problem, however, is that when the value of a contract is less than $2 million, companies aren’t required to provide cost and pricing data that government contracting officers need to determine whether pricing is fair. And 95% of those deals slid below the threshold. It might be impossible to negotiate a fair price if a company won’t divulge its costs or profits, and might contribute to overpayments, but the practice falls in line with current law.
TransDigm asserted the report “makes clear that there was no wrongdoing” by the company and questioned the methods used in calculating overcharges. CEO Kevin Stein said the inspector general’s audit relied on arbitrary standards for acceptable profit levels and ignored costs incurred by the company. He added at the hearing that “if we find that TransDigm made a mistake in any of our contracting, then we will pay the money back.”
However, it’s not the first time TransDigm has been on the hot seat. In 2019, the company agreed to repay the Pentagon $16 million to compensate for similar alleged overcharges.
Government critics point out that many of these TransDigm contracts are low quantity, some with multiple orders for the same part in one year. This is inefficient and leads to higher prices. And military contractors in general face overly burdensome specifications and excessive paperwork that add to costs.
To be clear, TransDigm isn’t alone in taking advantage of the system, other top contractors do much the same. “None of these companies broke the law, but the law is broken,” said Scott Amey, general counsel for the Project On Government Oversight, an independent government watchdog. He said to start, Congress should lower the disclosure threshold from $2 million to $500,000, so contracting officers get the data they need to assess whether pricing is fair and reasonable.
The inspector general recommended policy changes so that lower-cost contracts can be analyzed with more scrutiny and foster transparent pricing. Otherwise, the Defense Department would continue to pay unfair prices, and profiteering and waste will continue.
Government specs probably are more onerous than necessary, while contractors often look not for the most economical and best solutions, but ones that maximize profit. In the end, to put it in fluid power terms, the taxpayer gets hosed.
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