WASHINGTON — The U.S. Army and Defense Logistics Agency will both seek reimbursement on millions of dollars from contractor TransDigm, following a report by the Defense Department Office of Inspector General into the company’s contracts with the Pentagon.
TransDigm, which produces specialized parts for aircraft such as pumps, valves and batteries, earned “excess profit” for 112 of 113 contracts reviewed by the IG’s office, per a report released Wednesday. The IG found the company received $16.1 million in excess profit between January 2015 and January 2017, with a cost that could go up due to the need for spare parts in the future.
The 112 contracts, signed with the Army or DLA, had profit margins ranging from 17 to a whopping 4,451 percent; the IG’s office considers profit percentages of 15 percent or below to be “reasonable.”
As a result, the IG recommended the two Pentagon agencies request voluntary refunds from the contractor, a move that both offices agreed to.
In a statement, TransDigm’s director of investor relations, Liza Sabol, said the company “has been and remains committed to conducting business within the framework of applicable laws and regulations. The OIG report does not make any assertion of wrongdoing on TransDigm’s part with respect to its pricing. The request for refund is voluntary and we have not determined yet whether we will make a refund.”
“We value our business with the U.S. government and look forward to working with the DoD and other government agencies to satisfy the government’s requirements and to continue to provide good value by supplying reliable, high quality products and technical solutions delivered on time to support the U.S. military as it further advances its critical missions,” Sabol added.
By Pentagon standards, $16.1 million isn’t a lot of cash. But the investigation is symbolic in many ways of the attempts, both internal to the department and external from Congress, to clean up the famously messy acquisition system. It also comes just months after the department’s first-ever audit identified major challenges with the inventory system for parts.
The IG report was requested by Democrats Sen. Elizabeth Warren of Massachusetts, Rep. Ro Khanna of California and Rep. Tim Ryan of Ohio, who issued a joint statement saying “the audit’s findings clearly show that egregiously excessive profit was the norm on virtually all of TransDigm’s contracts and parts."
“We also look forward to the completion of the GAO report on monopolistic practices in the military spare parts market that we requested in the FY18 NDAA [National Defense Authorization Act] to see if there are more TransDigms out there,” the lawmakers added.
Notably, investigators stressed that the overcharging was not the fault of department workers, who followed the pricing guidelines as written. However, those guidelines were not applicable as planned for the company TransDigm for two reasons.
First, the IG found that “prices for parts had become inflated over time, and some parts appeared to be inflated at the time the Government first purchased the part further compounding the excess profits.”
And second, TransDigm was “the only manufacturer at the time for the majority of the parts competitively awarded, giving TransDigm the opportunity to set the market price for those parts because the other competitors planned to buy the parts from TransDigm before selling them to the DLA.”
At times, the contractor also refused to turn over cost data that would have helped the contracting officers, the IG found.
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.