Contractor’s ‘excess’ profits reignite debate on Pentagon oversight

Democrats want more information from defense contractors on their pricing, while Republicans say fraud is worse elsewhere

Contractor TransDigm has provided spare parts for Apache helicopters, among other military aircraft. (Paul Marotta/Getty Images)
Contractor TransDigm has provided spare parts for Apache helicopters, among other military aircraft. (Paul Marotta/Getty Images)
Posted January 19, 2022 at 3:10pm

An aerospace contractor’s alleged overcharging of millions of dollars for military spare parts is triggering the latest partisan debate over where to draw the line between too much oversight of Pentagon contractors and not enough. 

The Defense Department inspector general reported last month that Cleveland-based TransDigm Group had about $21 million in “excess profit” on 150 contracts for aircraft parts in recent years.

The Pentagon is now seeking repayment of the $21 million. The company faced a similar charge from auditors about two years ago and agreed to repay the government $16 million. 

Some say a provision in the fiscal 2018 National Defense Authorization Act that was meant to reduce contractors’ paperwork in order to streamline acquisitions has made it easier for contractors to charge too much for parts. That law effectively freed up an untold number of contractors from a requirement to provide the Pentagon certain detailed data about the justification for their prices. 

Now the debate is over whether to enact a new law that would force companies to divulge such information upon the government’s request.

New York Democrat Carolyn B. Maloney, the chair of the House Oversight and Reform Committee, has written draft legislation that would do just that, she announced Wednesday. The Pentagon supports such a bill and has previously proposed a similar solution.

“We have to take steps to ensure this abuse does not continue,” Maloney said at a Wednesday committee hearing. She revealed examples of substantial markups for TransDigm spare parts purchased, including one that had a profit margin of nearly 4,000 percent. 

GOP pushback

But several Republicans at the hearing resisted the idea of new laws or regulations to address the problem, and some of them changed the subject to insist that non-defense spending get more scrutiny.    

“What we should not discuss today is placing more burdens on businesses, especially American businesses,” said James R. Comer of Kentucky, the panel’s top Republican. 

North Carolina Republican Virginia Foxx agreed. 

“I don't think we should be picking on any one company, particularly an American-owned company here,” Foxx said.

Likewise, Georgia Republican Jody B. Hice said TransDigm’s pricing was “unsavory but not illegal."

Hice accused Democrats of using the TransDigm case as a “trophy” to show they are tough on wasteful spending while ignoring, he argued, massive waste outside the Pentagon.

“Unemployment insurance fraud, by itself, could run into hundreds of billions of dollars,” Hice contended. “What is this committee doing to address those kinds of concerns?”

To that, Virginia Democrat Gerald E. Connolly replied: “I do find it amazing that my friends on the other side of the aisle all of a sudden have become apologists for price gouging and, by anyone’s standards, excess profits.” 

Streamlining vs. oversight

The inspector general’s report said TransDigm has a pattern of buying companies that are sole manufacturers of a given part and then selling that part for higher prices, all while keeping individual contracts below the value that would require the company to provide more detailed information to the government. 

The fiscal 2018 NDAA raised the threshold below which detailed cost reporting is not mandatory from $750,000 to $2 million, said Theresa Hull, a deputy inspector general at the Pentagon, in testimony to the House panel on Wednesday. 

“Although the intent of raising the threshold was to streamline the acquisition process, the increase in the threshold resulted in contracting officers having less information to use during their negotiations with contractors,” Hull said. “This had a particularly large impact on negotiations for sole-source items.”

Company calls report ‘arbitrary’

Most of TransDigm’s business is in the commercial aerospace sector. But the company also builds — or subcontracts the manufacture of — parts for military aircraft such as F-16 fighter jets and Apache helicopters.

TransDigm executives who testified on Wednesday defended their pricing for Pentagon products as legal and justifiable. They complained that the inspector general’s definition of excess profits — those greater than 15 percent — is arbitrary.

Kevin Stein, TransDigm’s CEO, said the company will discuss with Defense Department officials their request that the company's units repay the $21 million.

“Once we receive all of the requests from the DOD, we will evaluate that. We look forward to working with DOD to come to a resolution on this and to establish a plan for going forward,” Stein said. “However, we remain deeply concerned with the arbitrary standards used in this report.”

‘Rip off’

As Wednesday’s hearing began, the Oversight panel made public internal TransDigm documents and testimony from former executives of TransDigm subsidiaries. The documents purported to show the company knew that it was overcharging the government for aircraft parts. 

TransDigm’s tactics included limiting competition, concealing cost data, negotiating contract terms that mandated less transparency, and avoiding long-term agreements that would lock in prices, the committee said. 

“The documents and information obtained by the Committee reveal TransDigm’s unscrupulous tactics to rip off taxpayers,” Maloney said in a statement. “TransDigm must immediately return the $20.8 million it overcharged American taxpayers. These outrageous abuses demand swift action from Congress to prevent this behavior in the future.”