A Jan. 19 congressional hearing aimed at taking a military contractor to task over price gouging became heated when Republicans criticized the use of committee resources to single out a law-abiding company.
The House Committee on Oversight and Reform hearing on price gouging in military contracts followed a Department of Defense (DOD) Inspector General audit, which found that aerospace manufacturing firm TransDigm Group made “excessive profits” from its business with the military.
According to the DOD audit, TransDigm made nearly $21 million in excess profit on 105 spare parts it sold to the DOD between January 2017 and June 2019—between 2.8 and 3,850 percent excess profit on each part. The inspector general defined “excessive profit” as more than 15 percent over cost.
TransDigm’s conduct is perfectly legal, but the inspector general found that the company exploited loopholes in the procurement system to charge a higher price. TransDigm’s business strategy included acquiring companies that have sole-source contracts with the government—allowing it to become the sole-source provider of 94 of the parts it sold to the DOD.
“TransDigm also practices what it calls ‘market-based pricing’ … a strategy in which the company sets prices of items that it sells, based on what commercial or government entities are willing to pay, as opposed to basing prices on the cost to make spare parts,” DOD Deputy Inspector General Theresa Hull said at the Jan. 19 hearing.
“This means that if the DOD has only one source for the part, and if that part is needed to operate a weapon system, such as an aircraft, then the value of that part to the DOD is very high, even if the cost to manufacture the part could be very low.”
Roughly 95 percent of TransDigm’s contracts were less than a $750,000 threshold. For contracts more than that threshold, the company would have had to provide the DOD with certified cost or pricing data, according to the inspector general. Staying below this threshold made it difficult for public officials to ascertain whether TransDigm’s prices were fair, the audit found.
The inspector general also said that TransDigm declined to provide cost information for 24 of the 26 parts requests.
The December 2021 inspector general audit wasn’t the first time that the DOD has accused TransDigm of overcharging for spare parts. A previous report from May 2019 found that the company overcharged on 46 of 47 parts reviewed from 2015 to 2017—resulting in TransDigm refunding $16 million.
At the Jan. 19 hearing, Chairwoman Carolyn Maloney (D-N.Y.) asked TransDigm to also return its nearly $21 million in profit highlighted in the audit.
“TransDigm paid back the money [in 2019], but TransDigm did not change its behavior. TransDigm is back at it again,” Maloney said. “Our message to TransDigm today is simple: Pay back the money.”
However, TransDigm executives disagreed with the inspector general’s conclusions.
“The IG report created these arbitrary standards and then determined that anything over 15 percent was ‘excess profit’—not for all companies, but only for TransDigm,” company Chief Executive Kevin Stein said.
When it comes to charging a 1,000 percent-plus markup on some parts, Stein said TransDigm is a commercial manufacturer that must interrupt its normal business to make a specific part for the military.
“The ‘quick disconnect coupling’—you only bought 13 of those over five years. Thirteen pieces. Imagine interrupting a manufacturing company to make a part once in a great while, and then expect them to understand their costs. We’re a commercial company,” Stein said.
Stein said that most of the parts sold to the military are at a discount from typical commercial rates, noting that about 90 percent of TransDigm’s business comes from the private sector.
“Even with that part you’re referring to [the quick disconnect coupling], you’re still receiving a 2 percent discount from commercial [prices]. You’re still getting a discount,” Stein told Maloney. “It costs us much more to do business with the DOD than it does to do business with commercial companies.”
For their part, Republicans didn’t disagree that TransDigm made excess profits from its military contracts. But they did question why the committee was spending resources on what they deemed to be a relatively minor issue compared with inflation, COVID-19, and other pressing matters—especially since the same committee held a similar hearing on the matter in May 2019.
“Committee Democrats are here today, holding this hearing presumably to present themselves as being tough on waste. But I find that extremely difficult for anyone with a reasonable mindset to believe,” said James Comer (R-Ky.), ranking member of the committee. “Democrats are going to hold up TransDigm like they were some sort of trophy to be exhibited when literally trillions of dollars have gone out the door from the Biden administration—much of it for dubious, so-called COVID-relief measures.”
The nonprofit Project on Government Oversight (POGO) also criticized Congress for taking a “whack-a-mole” approach in trying to claw back profits, instead of simply reforming the DOD procurement system.
“Hearing about the long history of this problem, one might think that Congress would step in and help its co-equal branch of government. But instead, it recently made the system even more opaque,” wrote Mandy Smithberger, POGO’s director of the center for defense information. “In the fiscal year 2018 National Defense Authorization Act, Congress increased the Truth in Negotiations Act threshold to $2 million.”
In written testimony to the committee, Smithberger said Congress should lower the threshold for price reporting to $500,000 and track companies that refuse to provide such data and hold them accountable.
“Congress passed the laws that made all of this possible,” she wrote. “It is now time to reverse the legalization of contractor overpricing.”