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On May 15, the House of Representatives Committee on Oversight and Reform held a hearing about contract pricing practices of Transdigm, a sole source supplier of parts to the Pentagon. The Department of Defense (DOD) Inspector General (IG) found that Transdigm overcharged the government by as much as 4,451 percent for items purchased. The hearing produced what passed for bipartisan outrage, and Transdigm eventually agreed to refund $16 million to DOD.
Left unstated was that Transdigm violated no laws, regulations or DOD policies. Transdigm simply got overly aggressive at the wrong time, and was singled out for criticism when the prices DOD paid became public. But what about all the companies that engage in the same type of perfectly legal pricing practices as Transdigm, but are more subtle about it? This includes every major defense contractor, since virtually all of them are using the same type of pricing transparency disclosure exemptions employed by Transdigm.
Over the past two decades, government contractors, primarily those that supply to DOD have used their political clout to have traditional pricing laws changed – sort of the government contracting equivalent of repeal of the Glass-Steagall Act. Instead of supplying cost or pricing data to the government for negotiation of contract prices, Congress has largely exempted contractors from these long standing pricing transparency requirements by a form of legal jiu-jitsu that labels goods and services as “commercial.” But, what does “commercial” mean under this new paradigm? For decades, it was goods and services sold to the general public at market prices. Sounds reasonable. But that was not good enough for contractors who want to claim that everything the government buys, including specialized goods and services for military use on a sole source basis are “commercial” (and thus not have to justify their prices).
Contractors pushed through a willing Congress a government contracting definition that literally qualifies anything imaginable as “commercial” provided it is “of a type” relating to something that exists in the commercial world. Under this Orwellian definition, military aircraft, combat vehicles, specialized electronics, even rockets, and virtually every other product or service potentially qualifies as “commercial” and contractors are relieved of the necessity to submit cost or pricing data to justify their prices – even in sole source situations.
For contractors, not submitting cost data makes perfect sense. No one wants to empower a buyer with information that could make them drive a harder bargain. For the buyer, the government in this instance, not getting the cost data has been a disaster, leading DOD and other agencies to pay inflated, but perfectly legal prices. Transdigm is just the tip of the defense pricing iceberg.
Even when DOD does not recognize an item or service as “commercial,” other statutory changes made by Congress have effectively neutered much of the law that used to provide for pricing transparency, the “Truth in Negotiations Act.” The effect is that government contract pricing has become a “Wild West” with much less meaningful disclosure to ensure that prices paid using taxpayer dollars are fair and reasonable.
Meanwhile, the Cost Accounting Standards (CAS) Board, a part of the Office of Management and Budget that sets accounting rules for cost-reimbursement contracts, and other contracts awarded without competition, is quietly, but actively trying to “deregulate,” i.e., allow contractors to use whatever accounting principles they feel like when pricing contracts and seeking payment. The CAS Board, the brainchild of the legendary Admiral Hyman Rickover, father of the nuclear Navy, has been estimated to save the government from 5–10% on all contracts to which it is applied. That’s a 5–10% margin that contractors would like to see pad their bottom line.
The situation has gotten so bad that the recently departed Director of the DOD Pricing and Contracting Office wrote to the DoD IG in late 2018 stating, “The reality is that the only true defense against companies that exhibit unconscionable greed is to avoid doing business with those companies whenever possible through competitive means, ensure that there are statutory provisions that address ‘war profiteering’ and price gouging, and ensure the existence of a legislative provision that compels companies to provide cost data …” He added that current defense contractor “value based pricing” concepts “… are no more than an industrial code word for unfettered price gouging.”
Shortly after the Transdigm hearing, Congressmen Ryan and Cole, on a bipartisan basis, submitted an amendment to the proposed House version of the National Defense Authorization Act for fiscal year 2020, changing the definition of a “commercial” product back to what it had been before Congress opened the Treasury to contractor greed. The amendment was blocked on procedural grounds. So much for seriously addressing Transdigm and all the other contractors who have been feasting at the public fisc.