GSA Violated Procurement Regulations in Awarding Contracts

McKinsey and Company offers management consulting services to improve performance issues related to strategy, organization, operations, and business technology under a GSA Multiple Award Contract. Between 2006 and 2019, McKinsey collected almost $1 billion dollars under the contract.

When it came time to negotiate prices for option year pricing in 2016, McKinsey refused to provide auditors the records required to complete the preaward audit. Therefore, the audit report advised the contracting officer to obtain the necessary information or cancel the contract. However, instead of addressing the contractor's lack of cooperation during the preaward audit, a Federal Acquisition Service (FAS) division director removed the contracting officer from the contract negotiations and awarded the contract pricing with rates that were at least ten percent higher than those originally proposed.

GSA's Office of Inspector General (OIG) became aware of the situation and had concerns about how the contract pricing was awarded and how pricing was determined to be fair and reasonable. So it conducted an audit to determine whether FAS administered the contract in accordance with applicable laws.

The OIG found that FAS did not administer the contract in accordance with applicable laws, regulations, and policies. The OIG determined that the Division Director used invalid price comparisons, relied on unsupported information, and performed insufficient analyses to justify the awarded contract pricing. The OIG also found that the Division Director violated standards of conduct by advocating for McKinsey to other procurement officials. Finally, the Division Director impeded the audit by failing to take appropriate action as required by the FAR to obtain required data to complete the preaward audit.

According to the OIG, the Division Director's action to justify and award this pricing action violated federal regulations and the trust placed in him as a Government employee with fiscal responsibilities to the federal government and taxpayers. As a result of these actions, the OIG estimated that GSA customers could pay an addition $69 million per year over the five-year option period.

The OIG made a number of recommendations including one to cancel McKinsey's contracts. Other recommendations including a variety of improvements to internal controls, ethical training, and steps to ensure that independence is maintained at all times between contracting officials and contractors.

GSA concurred with most of the recommendations however instead of cancelling the contract with McKinsey, the GSA is attempting to renegotiate prices. No word on whether that will work.

The full OIG report can be accessed here.

Recent article on the GSA OIG report and recommendations.

Who is Transdigm?

Transdigm is DoD's current bad boy. Yesterday we reported that DoD will not allow its contracting officers to use commercial item or sole source purchase mechanisms to buy from Transdigm or its 150 subsidiaries. All future purchases must be supported with cost or pricing data (either certified or non-certified, depending on whether a threshold is met). See DoD Scales Back on Sole Source Purchase Justifications from One Particular Supplier. This all came about after Congress asked DoD's Office of Inspector General (OIG) to audit contracts awarded to Transdigm. The OIG found that Transdigm made significant profits on sales to the Government, essentially by refusing to provide any support for their pricing, employing a 'take it or leave it' pricing strategy.

Who is Transdigm? Transdigm is a company that most people - even within the Government procurement community - have not heard of. However, some of the company's 150 plus subsidiaries might be more familiar. Esterline, who Transdigm acquired recently, is certainly a familiar name up here in the Pacific Northwest. The company was formed in 1993 and 10 years later, was acquired by a private equity fund in a leveraged buyout (a leveraged buyout usually means there is a significant amount of borrowed money). The company went public with an IPO (initial public offering) in 2006 and its stock is now traded on the NYSE.

Transdigm sales have grown from $435 million in 2006, the year the company went public to $3.8 billion in 2018. This rapid growth has been primarily through acquisitions. Transdigm has acquired more than 60 companies since its inception. Along the way it has also acquired a lot of debt. Its long term debt sits at $12.5 billion and more than half of the company's cash provided by operating activities goes toward payments on that debt. At the end of 2018, the company employed about 10,000 people.

The company is and has been profitable. The companies that Transdigm acquires are those where competition is slight and high profit margins can be maintained. Consider the following quotes form Transdigm's on-line presence.

• Private equity-like capital structure and culture - our longstanding goal is to give our shareholders over time, private equity like returns with the liquidity of a public market. We are focused on both the details of value creation as well as careful management of our balance sheet.
• Aligned with shareholders - we view our capital structure and allocation as a key part of our efforts to create shareholder value and allocate capital and structure our balance sheet to have the best chance to maximize returns to the shareholders. Everyone at Transdigm thinks and acts like an owner.
• Proven strategy. Proven performance A unique and consistent business model in the aerospace industry that has consistently created intrinsic shareholder value through all phases of the cycle.
• A proven value base operating strategy - a simple, well proven value-based operating strategy, based around our three value-driver concepts - profitable new business, productivity and cost improvements and value-based pricing
• Focused and disciplined acquisition strategy - we acquire proprietary aerospace businesses with significant aftermarket where we see a clear path to private equity like returns. Since our formation in 1993,  we have acquired over 60 businesses
• Propriety aerospace products with significant aftermarket - TransDigm Group Inc. is a leading global producer, designer and supplier of highly engineered aerospace components, systems and subsystems for use on nearly all commercial and military aircraft in service today.

Congress has already seen to it that Transdigm paid back $16 million to the Defense Department as a result of its business practices and if Congress gets its way, an additional $350 million.

Congress Calls for Comprehensive Audit of Contractor's Sales to Defense Department

Background. Last February, the Defense Department's Office of Inspector General (OIG) issued a report on its audit of purchases from TransDigm Group. The audit was conducted in response to several letters from Congress to determine whether purchases were made at fair and reasonable prices.

The OIG reviewed a small sample of 47 parts totaling $29.7 million purchased by DoD from TransDigm between January 2015 and January 2017. Specifically, the OIG set out to determine how contracting officers established fair and reasonable prices for the required parts.

As a result of the audit, the OIG concluded that TransDigm had overcharged the Government by $16.1 million beyond a reasonable profit. That works out to a figure greater than 100 percent profit.
How does a contracting officer determine that prices were fair and reasonable when at those exorbitant rates? There were a number of factors that left contracting officers hamstrung in the process, the most prevalent being denial of access to cost or pricing data. The Defense Department needed critical parts and TransDigm pretty much gave the Defense Department a 'take it or leave it' offer. In fact, of the 47 contracts audited by the OIG, 46 were overpriced and TransDigm denied the Government access to cost or pricing data. The only one of the 47 contracts not overpriced was one in which TransDigm was required to furnish cost or pricing data because the value exceeded the threshold for cost or pricing data requirement. The OIG report has many more details concerning problems that contracting officers faced.

New Development. Late last month (May 24th), the House Committee on Oversight and Reform announced that TransDigm had agreed to refund the $16 million in overcharges.

Today's decision by TransDigm to refund millions of dollars in blatant overcharges would not have happened without the hearing in the Oversight Committee last week. This is solid, bread-and-butter oversight that helps our troops and the American taxpayers. We saved more money today for th American people than our Committee's entire budget for the year. ... While this is a good first step, we must do even more in the future to prevent unscrupulous contractors from holding us hostage through abusive monopoly contracts.

TransDigm's problems did not end with the $16 million repayment. The House Committee on Oversight and Reform has now requested the OIG to perform a comprehensive audit of all TransDigm's contracts from January 2015. These contracts totaled $782 million and if overstated by the same percentage that the OIG's found in its initial sample, would return an additional $350 million to the Treasury.