A recent congressional hearing looking into a defense contractor supposedly overcharging taxpayers turned out to be mostly political theater as lawmakers accused the contractor of greed when the real problem is the Pentagon’s flawed contracting practices.
The House Oversight and Reform Committee convened a hearing to consider the actions of defense contractor TransDigm Group after the Defense Department’s Office of the Inspector General claimed that TransDigm had overcharged the government for certain aircraft components, making $20.8 million in “excess profit” between 2017 and 2019.
The inspector general recommended that the Pentagon “seek a voluntary refund” from TransDigm and that Congress enact legislation requiring contractors like TransDigm to provide certified cost or pricing data so that contracting officers could determine “price reasonableness.”
Committee Chairwoman Rep. Carolyn Maloney, D-N.Y., and other Democratic members of the committee demanded that “greedy” TransDigm return over $20.8 million to the Pentagon and proposed new legislation requiring companies to provide cost information to contracting officers.
However, the demands to give back money are unenforceable because TransDigm did not break any laws. A law that limits “excess” profits by government contractors does not exist.
Additionally, companies are already required to provide certified cost or pricing data to contracting officers by the Truth in Negotiations Act. More legislation would just be redundant.
The trouble is, lawmakers don’t seem to realize that the problem is not TransDigm’s supposed greed. The problem also isn’t a lack of pricing data. The problem is the Defense Department’s own contracting processes.
TransDigm was able to charge such high prices for the parts it supplied because it was the only company able to manufacture those parts to military specifications. Sole-source suppliers (cases where only one company is able to manufacture a given component) are now a common situation in the defense industrial base. The number of vendors in key defense industrial base areas like missile and space systems, ammunition, and weapons has declined sharply over the last 10 years, according to a 2018 federal interagency task force report.
The report points out that the Pentagon’s current business practices—with complex procurement processes, long contract timelines, and costly certification requirements—“strain the industrial base and reduce incentives to supply to DoD.”
One of these detrimental business practices is the Pentagon’s unpredictability as a customer. TransDigm is a perfect example: the DOD has typically awarded small quantity, low-dollar value defense contracts to TransDigm. When the government only orders a few parts at a time, the company has no clear demand signal from which to make business decisions, like whether to maintain its certifications and design capabilities, or how much labor to bring on. This uncertainty creates business risk for the firm, which drives up costs.
When a company like TransDigm supplies to the Defense Department, the final price of the item must not only cover the costs of materials and labor, but also the overhead costs of meeting military specifications and certifications. So, rather than blame suppliers, the federal government (and Congress) need to look in the mirror.
First, the DOD needs to solve the problem of conducting business with sole-source suppliers like TransDigm. It needs to breed more competition if it does not want to face high prices from contractors with monopolies on defense parts.
The Pentagon has a responsibility to push its prime contractors to have a viable supply chain with multiple qualified sources so there is competition for parts, which can lower the final cost of defense purchases. Streamlining some of the Pentagon’s onerous regulations could help encourage new entrants to the defense market and increase competition in every tier of the supply chain.
Second, the Defense Department must be smarter about how it buys multiple and spare parts. It only bought one item at a time from TransDigm.
TransDigm President and CEO Kevin Stein mentioned in the hearing that in five years, the department ordered less than 40 units of a particular part from his company. These small and irregular purchases inevitably lead to higher prices.
The Pentagon must learn to strategize and plan ahead. Parts should be bought in bulk, or at least in orders of more than one part at a time, foreseeing future needs.
Rather than helping, this House hearing—by demonizing businesses for being profitable—makes the Defense Department’s problems worse by further discouraging businesses from working with it. House members also made it clear that acquisition reform was not their priority when they suggested diverting TransDigm’s supposed excess profit to address “environmental racism” instead of spending it on defense.
Instead of taking cheap shots, Congress and the Pentagon should look to the Defense Department’s own practices in order to better utilize taxpayer dollars, especially when it comes to something as critical as our national defense.
This piece originally appeared in The Daily Signal