Tuesday, June 11, 2019

TransDigm - How Overcharging Was Allowed to Occur

Yesterday we discussed the House Committee on Oversight and Reform's role in securing a $16 million return of excess profits by TransDigm on its DoD contracts. Today we want to take a closer look at the DoD Office of Inspector General's (OIG's) audit report that disclosed the overcharging to see how existing regulations allowed the overcharges to occur. If  you missed yesterday's installment, you can access it here.

The OIG determined that TransDigm earned excess profit on 46 of 47 parts purchased by the Defense Department even though contracting officers followed the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement) when they determined that prices were fair and reasonable. How does that happen? Under what circumstances does FAR allow profit margins up to 4,451 percent (that percentage is not a typo - TransDigm really earned profit of 4,451 percent on one of the purchases. On average, profit on the 46 parts was more than 100 percent.

Contracting officers used FAR and DFARS-allowed pricing methods, including historical price analysis, competition, and cost analysis to determine whether prices were fair and reasonable. The OIG however concluded that historical price analysis and competition were unreliable in identifying when TransDigm was charging excess profit because,

  • 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
  • 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 Government.
 According to the OIG, performing cost analysis using certified or uncertified cost data is the most reliable way to determine whether a price is fair and reasonable. Contracting officers are required to obtain certified cost data before awarding contracts above the TINA threshold and can request uncertified cost data for those below the threshold. However, contracting officers are often prevented from obtaining uncertified cost data because of the following reasons:
  • FAR enables sole-source providers and manufacturers of spare parts to avoid providing uncertified cost data, even when requested, because of the less stringent requirements for awarding small dollar value contracts and commercial item contracts.
  • There is no specific requirement in FAR that requires or compels contractors to provide certified or uncertified cost data to the contracting officer when requested before the contract is awarded
  • Statutory and regulatory requirements discourage contracting officers from asking for uncertified cost data when determining whether a price is fair and reasonable.

In many of the contracts awarded to TransDigm, contracting officers justified the price as 'the best obtainable price' because TransDigm refused to submit cost or pricing data and the contracting officers had exhausted other methods of determining price reasonableness and the need was urgent.

Tomorrow we will look at the OIG's recommendations for preventing future occurrences of price gouging.

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