TransDigm: New OIG Audit Could Reveal Excessive Profits and Uncover Practices That Have Already Drawn Congressional and DOD Scrutiny

Published on Jul 15, 2019

The Department of Defense Office of Inspector General’s new audit of TransDigm (TDG) could find that the company earned excessive profits and uncover contracting practices that have previously drawn scrutiny and the ire of both members of Congress and the Department of Defense, according to a Capitol Forum analysis of government contracting data.

Unlike previous audits of the company, members of Congress have asked the OIG to review a specific selection of TransDigm contracts, allowing The Capitol Forum to search for these contracts in government databases and forecast what the OIG may uncover in its audit of the company. The Capitol Forum’s analysis found that TransDigm might have earned excessive profits of $17.3 million on parts sold to the government for $33.6 million.

These findings include contracts that may have been split up to avoid additional disclosures by the company required by federal contracting guidelines as well as overcharges for seemingly simple parts, such as $450 for a one-inch metal washer.

New audit. Last week, the DOD Inspector General announced that it would be conducting an audit of TransDigm as requested by members of the House Oversight Committee. A spokesperson for the DOD IG confirmed that the audit would be conducted using the parameters in the Congressional request but added that the IG would expand the scope of the audit as it saw fit.

Members of the Committee on Oversight and Reform asked the IG to review “price reasonableness determinations for all contracts awarded to TransDigm by DoD from January 1, 2017, to the present, with a contract value between $200,000 and $250,000 and between $600,000 and $750,000” and to “provide information about whether the contracting officer requested price data, whether TransDigm provided data when requested, and whether TransDigm received excess profit on the contract to the Committee.”

Findings in line with prior DOD OIG Report. The Capitol Forum conducted an analysis of the contracts that would be included in the scope of the congressional request. The methodology for that audit can be found at the end of this article.

Capitol Forum’s analysis of these contracts found that TransDigm would have earned an excess profit of 119.5 percent, or $17.13 million, from a total contract value of $33.63 million:

The recent OIG report on TransDigm found even higher ratios of profit versus cost, finding that the company had earned excess profits of $16.1 million on contracts valuing $26.2 million, for an excess profit of 183 percent.

Responding to congressional pressure, TransDigm agreed to refund the $16.1 million in excess profits found in the recent OIG report. TransDigm did not respond to a request for comment about whether it would return any excess profits the DOD IG found in the new audit.

Contracts possibly split up. The scope of the committee’s request indicates an interest in the ways in which TransDigm may skirt federal regulations that require the disclosure of cost data, a topic that came up several times during a May hearing to discuss the OIG’s recent report on the company.

Emails obtained by the Oversight Committee in preparation of that hearing reveal that DLA contracting officers and TransDigm employees worked to split up contracts to avoid disclosure requirements, with one TransDigm employee stating, “I can offer $8,313/each for 36 units on two separate orders of 18 pcs. That should still keep you under the SAT [Simplified Acquisition Threshold] of 150K per order.” The price of $8,313 was more than double what TransDigm sold the part for in 2005.

The new request asks for contracts with values just under the old Truth in Negotiations Act (TINA) and the new Simplified Acquisition Thresholds (SAT) of $750,000 and $250,000, respectively. In early 2018, the TINA and SAT thresholds were raised from $750,000 to $2,000,000 and $150,000 to $250,000, respectively, with the enactment of the 2018 National Defense Authorization Act.

Contracts over the SAT require a contracting officer to conduct market research in order to justify an award, and contracts over the TINA threshold require companies to submit certified cost and pricing information for award.

The scope of contracts that will be evaluated by the OIG include contracts that appear to have been split up in a similar fashion. For example, the Defense Logistics Agency awarded two contracts (Contracts SPE4A619P4602 and SPE4A719P3416) to the TransDigm subsidiary Arkwin in December of 2018 in order to procure a total of ten linear actuating cylinders. These contracts were awarded two days apart.

TransDigm raised the price of the part from $969.80 earlier in the year to $29,888.60. The larger contract was for eight of the cylinders, totaling $239,108.80, just under the new SAT. The other contract was for the remaining two parts at the same price, totaling $59,777.20. Had the two contracts been awarded as one, the price requested by TransDigm per part would have pushed the total above the SAT and required the contracting officer to justify the price increase and conduct market research.

Audit findings could find significant markups on simple parts. Members of Congress were particularly outraged by high prices for seemingly simple parts, such a half-inch drive pin that the company sold for a profit of 9,400 percent.

A review of the parts sold in the contracts requested by the congressional members finds similarly simple parts being sold for steep prices. For example, the TransDigm subsidiary Aerocontrolex, which also sold the pin, sold the Defense Logistics Agency 446 one-inch round metal washers (National Stock Number 3120-00-340-9507) for $450.00 each.

Other companies had regularly sold the washer to the DOD for less than $20 per part. It is not clear why the DLA did not continue to contract with those companies, but Aerocontrolex is registered as the sole approved manufacturer of the part in the Federal Logistics Information Service (FLIS) database.

No cost data obtained. The provision of cost data by TransDigm has been a concern of both members of Congress and the Pentagon. Last month, Pentagon Director of Defense Pricing Kim Herrington issued a memorandum to all contracting officers requiring them to obtain cost data from TransDigm before awarding any additional contracts.

According to the Federal Procurement Database System (FPDS), the government did not receive cost data for any of the contracts reviewed in this sample. However, FPDS contains no information about whether the contracting officer asked for the data and it was denied or the whether the contracting officer simply did not ask for the data.

Capitol Forum Analysis Methodology

Using the Federal Procurement Database System and Govgistics, a service that compiles pricing history for individual aerospace parts sold to the government, The Capitol Forum searched all available direct contracts between the DOD and all of TransDigm’s subsidiaries. This search did not include any sales through distributors or contracts for which TransDigm was a subcontractor, which make up the bulk of TransDigm’s sales to the government, as they were not mentioned in the congressional request.

From that pool, The Capitol Forum isolated all contracts with a total value between $200,000 and $250,000 and $600,000 and $750,000 that were awarded between January 1, 2017 and June 6, 2019, the date of the Congressional request, resulting in 103 contracts for 80 distinct parts.

The Capitol Forum then downloaded the pricing history for all parts and adjusted all prices using the Producer Price Index – Total Manufacturing Industries so that they were expressed in constant dollars as of June 2019, giving an inflation-adjusted sale price for each part. For each part, The Capitol Forum looked at the part’s contracting history back to January 2000 and found the lowest inflation-adjusted sale price, whether the part was sold by TransDigm, a distributor, or a manufacturer that had exited the market or been acquired by TransDigm.

In the recent OIG report on TransDigm, the Inspector General stated that any profit above 15 percent would be considered “excessive.” Given that The Capitol Forum does not have access to TransDigm’s production cost data, we assumed that the lowest inflation-adjusted price was sold for a profit that the IG would consider reasonable, i.e. 15 percent. The Capitol Forum removed a 15 percent profit from the lowest inflation-adjusted sale price for each part, giving a baseline estimate of the production cost for each part and allowing us to calculate both a reasonable (15 percent) profit and excessive profits.