Published on Feb 05, 2021
Several upcoming federal reports and investigations into aerospace parts supplier TransDigm (TDG) as well as investigations into government contracting practices more broadly could increase focus on the company as Congress sits down to negotiate the FY 2022 National Defense Authorization Act.
Currently, there are four ongoing investigations into TransDigm itself and contracting practices associated with the company: A Department of Defense Office of Inspector General audit of TransDigm contracts, a Government Accountability Office report on DoD to determine price reasonableness from contractors, a report by the Office of the Secretary of Defense on contractor denials for cost information, and a follow-on investigation into TransDigm’s excess profits by committee staff of the House Oversight and Government Reform Committee.
Some of these investigations are currently scheduled to wrap up in the upcoming months. The last time a federal agency, the DoD OIG, investigated TransDigm in 2019, the findings led to bipartisan scorn on Capitol Hill and at the Pentagon. In private emails, Shay Assad, the then Director of Defense Pricing and Contracting, said of the report that “the term to be used synonymous with TransDigm is ‘unconscionable greed.’”
During a House Oversight and Government Reform Committee hearing on the inspector general’s report, Republican and Democratic representatives berated company management for gouging the Department of Defense on spare parts for which the company was the sole producer.
That hearing ultimately led to the company refunding all of the excess profits identified in the report after initially refusing to do so, resulting in a return of over $16 million to taxpayers.
According to a senior Democratic aide on the committee, these upcoming reports could spur similar reactions from committee members.
“The Committee has been in contact with the DOD IG about the broader review since it was requested. We expect the IG’s report in the next few months, which might lead to another hearing this Congress,” the aide told The Capitol Forum.
TransDigm did not respond to a request for comment for this article.
DoD OIG report due early spring. The DoD OIG is wrapping up its current audit of TransDigm’s business model that began in July of 2019 at the request of several members of Congress. According to a spokesperson for the Department of Defense Office of Inspector General, the report is expected to be released in early Spring.
The current audit follows the February 2019 OIG report on TransDigm, which found that the company had found excessive profits on 99% of all contracts it had reviewed, with some parts sold to the government at a profit of over 4450%.
In addition to the Oversight hearing and subsequent refund, that report also led Representatives Jackie Speier (D-CA) and Ro Khanna (D-CA) to seek amendments to the FY 2020 NDAA that would curb some practices identified in the report.
Unlike the February 2019 report, which reviewed a representative sample of TransDigm contracts at several different dollar amounts, the Congressional request asked the OIG to review price reasonableness for all contracts with a “value between $200,000 and $250,000 and between $600,000 and $750,000” signed since January 1, 2017.
These price ranges are important because they are just below the current Simplified Acquisition Threshold (SAT) and the Truth in Negotiations Act Threshold (TINA), respectively. Both the SAT and TINA thresholds denote different levels of information that contractors have to give to contracting officers, including providing data on the cost of manufacturing a part.
Changes in the 2018 NDAA have revised those thresholds since the start of the Congressional request. Effective July 1, 2018, the TINA threshold was raised to apply only to contracts over $2 million from $750,000, and the SAT threshold was raised to its current level of $250,000 from $150,000.
By specifically requesting contracts in those ranges, Congress and the DoD OIG appear to be focused on attempts by TransDigm to avoid disclosing cost information by engineering contracts to remain below those thresholds.
Several former employees of TransDigm have told The Capitol Forum that the company held extensive training sessions on how to avoid triggering requirements to turn over cost data, including splitting large contracts into multiple smaller contracts.
According to one former employee, TransDigm taught employees to “look for those opportunities to sell below the TINA threshold and find ways to justify it. For example, if the government comes to me for 2.1 million in spares, that’s auditable right? Because it’s above the 750,000 threshold, so it’s going to limit my profitability. But if I’m working out of a North American distributor, a European distributor, and an Asian distributor, that 2.1 million now will only be 700,000 out of each one… And now I’ve avoided the TINA threshold, which means I get more profit.”
GAO report due in May. As part of the changes requested by representatives in the FY 2020 NDAA after the 2019 TransDigm report, Congress requested that the Government Accountability
Office submit to relevant committees “a report on the efforts of the Secretary of Defense to secure data relating to the price reasonableness of offers from offerors.”
The February 2019 OIG report on TransDigm found that TransDigm had denied cost and pricing information to contracting officers trying to establish a reasonable price 15 out of 16 times. The sole exception was for a contract that was over the TINA threshold, where cost and pricing information is legally required. That contract was also the only one reviewed by the OIG that had a reasonable level of pricing, indicating that government knowledge of cost information can be crucial in reducing excessive contractor profit.
Denying cost information to the government at every possible turn was almost a mantra at TransDigm, former employees told The Capitol Forum. Because TransDigm was usually the only manufacturer of a spare part, employees said that the government would eventually have to purchase a part regardless of the price or their intransigence during the contracting process.
“The government’s going to ask for everything, they’re going to tell you I need to see your cost basis. And if it’s under 750,000 my answer is no. And if he says, well I can’t buy it if you don’t do it, I say fine well, you can’t buy it any other place anyway. Here, buy it from my distributor instead of me. My distributor, he’s going to show his cost basis, it’s the invoice he gets from me. When you’re sole-source and the only IP, they’re going to have to come to you eventually,” a former employee told The Capitol Forum.
The GAO report, due March 31, 2021, requested that the GAO focus on sole source contracts for spare parts and how often contractors denied requests for cost data from contracting officers.
However, GAO historically has not tried to duplicate work performed by other federal investigators, and with the DoD OIG focusing exclusively on TransDigm, a GAO spokesperson said that office was not reviewing any specific TransDigm contracts. Instead, the office is trying “to determine how frequently did contracting officers at DLA and military departments encounter similar difficulties and report them to higher level officials,” the spokesperson said.
According to the GAO spokesperson, the report should be publicly released in May, with a briefing on its initial findings for congressional staff in March that should satisfy the report deadline.
OSD report delayed, but oversight ongoing. While GAO is not focusing on TransDigm’s denials for cost information, the Defense Pricing and Contracting (DPC) office within the Office of the Secretary of Defense (OSD) is gathering information on TransDigm’s refusals to provide cost information.
In April of 2019, the acting director of DPC issued a memorandum requiring regular reporting of all denials for cost information after reviewing the February TransDigm report. Soon after that, the acting director issued another memorandum requiring all TransDigm subsidiaries to submit uncertified cost and pricing information.
A report compiled from these findings was due to Congress in December 2020. However, that report is still in the works, according to a spokesperson for OSD, with the team responsible continuing to gather information.
According to the OSD spokesperson, over the last two years “senior officials from TransDigm and Defense Pricing and Contracting have held a series of working group meetings to ensure understanding of policy and discuss issues raised by both parties.”
OSD’s focus on TransDigm appears to have had some effect, according to Ellen Lord, the former Under Secretary of Defense for Acquisition and Sustainment.
In a letter to Senator Chuck Grassley (R-IA), a critic of TransDigm’s contracting practices, Lord said that representatives for the DoD met with TransDigm on October 10, 2019, where “TransDigm specifically stated that going forward, its corporate policy is that TransDigm and its affiliated companies will always provide information requested in support of determinations of commerciality, and cost or pricing data in support of price reasonableness determinations.”
Oversight investigation. The staff of the House Oversight and Government Reform Committee, which held the hearing with TransDigm management that resulted in a $16 million refund to the government, has been conducting its own investigation into TransDigm’s contracting practices.
That investigation appears to be more fluid than the other investigations at federal agencies. A source told The Capitol Forum that committee staff and resources had been diverted for coronavirus oversight related work over the past year.
However, as previously mentioned, staff have been in contact with the DoD OIG over the course of its investigation into TransDigm, and a spokesperson for committee told The Capitol Forum that it has continued to focus on cost overruns for DoD programs, including holding a hearing last July on the F-35 program.
Representative Ro Khanna, who sits on the Oversight committee and chaired the hearing on TransDigm, said last year that he intended to continue Congressional scrutiny of the company.
“It was a huge win for the taxpayers when TransDigm reimbursed the government $16 million,” Khanna said at the time.