A review of a sample of parts TransDigm Group sold the military revealed the company made excess profit ranging from 17% to 4,451% on 46 of 47 part purchases examined. A former TransDigm sales director told the House Oversight and Reform Committee the company saw dealing with the Pentagon like “taking candy from a baby.”
“TransDigm’s basic business model consists of identifying relatively small companies that make spare parts for the military — especially parts that no other companies make,” California Democrat Ro Khanna said Wednesday at the committee’s hearing. “TransDigm then buys up these small companies, purchases the rights to produce their products, and then jacks up the prices. The Pentagon has to pay, knowing that they have a monopoly.”…
The inspector general also accused TransDigm officials of concealing cost data from Pentagon contracting officers. The former sales director told the committee, “We were coached not to provide cost data.”
“Is what TransDigm is doing illegal? No,” Kevin Fahey, assistant secretary of defense for acquisition, said during the hearing.
That was from the Washington Examiner. I suppose all the contract orders were under $2 million, the new threshold for supplying certified cost and pricing data under the Truth in Negotiations Act. Its not clear to me how often certified cost and pricing data are submitted on routine sole-source purchases. Rickover claimed TINA was a “dead letter” back in 1968; the contractors refused to submit the data even at the government’s expense, and the government agencies often refused to enforce it. In some cases, big contract orders were split into hundreds of small ones to make it under the TINA threshold.
Even if certified cost and pricing data were submitted, it is not clear that the problems would go away — just perhaps our acknowledgement. Accounting rules are pretty loose and it can take a team of auditors, contract officers, and technical people to reconstruct books in a standard way. The Cost Accounting Standards Board only solved major loopholes, like double charging and unreasonable capital depreciation methods. But there is no real way to force industry into a truly standard accounting system, and if they did, that would cause an accelerated flight out of the defense market.
This case shows, however, that DOD officials basically have no clue about the relevant worth of the items they buy. If the contractor were demanding, say, $10,000 for a widget that only cost $100 a few years ago — or they only value it at $100 because they have ample experience in the technology and market — then what’s stopping them from utilizing some of the authorities under the Defense Production Act? After all, this company has been basically sweeping up all competitors to create a monopoly, the government is within its rights to nationalize it and break it back up, or at least threaten to do so unless prices were brought back within reasonable levels.
But again, that’s the problem: the officials simply don’t know the value of the things they buy. In fact, we only know a laptop costs a few hundred and not many thousand because there are competing suppliers and other consumers who reveal their willingness to pay. The government refuses to pay more than 15% profit (who wants to enter that when it takes many years to get in the game), then when its left with a monopoly, it says, “well, the value of these items is just the cost of production… show me the accounting data!”
That’s just simply wrong. I could spend $1 million writing some crappy software code and get $150K profit, or spend $100 writing the same code and just get $15 in profit. In one case at the Pentagon, an IT consultant told me when she was new, she did an operation for the government client in the two days it would take any novice. Her team yelled at her, “No! This takes 6 months! That’s what we’ve been doing and that’s what they expect.” Eventually, this reliance on accounting data — which reveals nothing about specific choices and opportunity costs — leads to monopoly, bloat, and cost disease.
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