Feb. 25, 2019 —
We determined whether the DoD purchased parts at fair and reasonable prices from TransDigm Group, Inc. This audit was conducted in response to three letters from Members of Congress to the DoD Office of Inspector General.
TransDigm and its subsidiaries design, produce, and supply specialized parts for aircraft and airframes. According to TransDigm, the defense market accounted for 34 percent of their sales in 2017. We reviewed a sample of 47 parts purchased by the DoD from TransDigm on 113 contracts between January 2015 and January 2017, with a total value of $29.7 million.
We reviewed the price reasonableness determination for 47 of the 113 contracts, one for each part, to determine how DoD contracting officers established a fair and reasonable price and whether DoD contracting officers requested and received certified or uncertified cost data. We also performed cost analysis on the parts and determined what the Defense Logistics Agency (DLA) and the Army could have paid for them had TransDigm provided the uncertified cost data. We applied this cost data to all 113 contracts to determine the amount of excess profit that the DLA and the Army paid to TransDigm between January 2015 and January 2017.
Before awarding a contract, the contracting officer must determine that the proposed price is fair and reasonable. The contracting February 25, 2019 officer determines price reasonableness by comparing competitive quotes or offers; comparing prices to historical prices from previous purchases; estimating methods to identify inconsistencies in price; comparing prices to current price lists, catalogs, or advertisements; comparing prices to an independent Government estimate; comparing prices with prices obtained through market research; or conducting analysis using certified or uncertified cost data.
Certified cost data is cost or pricing data that contractors are required to certify as accurate, complete, and current before submitting it to the contracting officer in accordance with the Federal Acquisition Regulation (FAR). Uncertified cost data is pricing data, cost data, and judgmental information (information required to explain the offeror’s estimating process) necessary for the contracting officer to determine a fair and reasonable price. The FAR prevents contracting officers from awarding a contract above the Truth in Negotiations Act (TINA) threshold without first obtaining certified cost data, unless an exception exists. However, contracting officers are allowed to request uncertified cost data for acquisitions that do not require certified cost data to determine whether prices are fair and reasonable or when an exception to requesting certified cost data exists. All contracts in our sample were firm-fixed price, and 4 out of the 47 parts were commercial items.
Our sample consisted of 32 contracts below the simplified acquisition threshold of $150,000, 13 contracts between $150,000 and the TINA threshold of $750,000, and 2 contracts above $750,000. Contracts below the simplified acquisition threshold are awarded based on simplified acquisition procedures that have less restrictive requirements for determining price reasonableness.
We determined that TransDigm earned excess profit on 46 of 47 parts purchased by the DLA and the Army, even though contracting officers followed the FAR and Defense Acquisition Regulation Supplement (DFARS) allowed procedures when they determined that prices were fair and reasonable for the 47 parts at the time of contract award. When we compared the awarded prices for the 47 parts on 113 contracts to TransDigm’s uncertified cost data, our analysis determined that only one part purchased under one contract was awarded with a reasonable profit of 11 percent. The remaining 112 contracts had profit percentages ranging from 17 to 4,451 percent for 46 parts. We determined profit percentages of 15 percent or below to be reasonable.
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 for the 47 parts. However, 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 DLA.
Performing cost analysis using certified or uncertified cost data is the most reliable way to determine whether a price is fair and reasonable. The one contract in our sample awarded with a reasonable profit was the only contract for which the contracting officer used cost data to determine price reasonableness. Contracting officers are required to obtain certified cost data before awarding contracts above the TINA threshold and can request uncertified costs data for those below it. However, contracting officers are often prevented from obtaining uncertified cost data because of the following reasons.
- The 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 the FAR or DFARS 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.
When contracting officers requested cost data for 16 of the 47 contracts we reviewed, TransDigm denied 15 requests for uncertified cost data and fulfilled only the request for certified cost data for the one contract above the TINA threshold that had no exceptions. Of the 47 parts in our sample, 39 were manufactured only by TransDigm, including 13 of the 15 parts where the contracting officers were denied cost data. Therefore, contracting officers had limited options once TransDigm refused to provide the requested cost data for the 15 parts, either buying the parts without receiving cost data from TransDigm or not buying the parts needed to meet mission requirements. For example, contracting officers determined that eight parts were fair and reasonable based on the “best obtainable price.” Contracting officers justified using this method because they had exhausted other methods of determining price reasonableness and at least five contracting officers stated that the need for the spare part was urgent enough that they had to buy the part at the price offered by TransDigm.
We determined that for 112 contracts, TransDigm earned $16.1 million in excess profit for 46 parts it sold to the DLA and the Army for $26.2 million between January 2015 and January 2017. In addition, the DoD could continue paying excess profits on parts purchased from sole-source manufacturers and providers of spare parts if statutory and regulatory requirements continue to discourage contracting officers from requesting uncertified cost data and allow contractors to avoid providing uncertified cost data when requested.
We recommend that the DLA and the Army consider all available corrective actions with TransDigm, including but not limited to, directing contracting officers to seek a voluntary refund from TransDigm for excess profits identified in this report. We recommend that the Defense Pricing and Contracting Principal Director:
- examine the United States Code, FAR, DFARS, and DFARS Procedures, Guidance, and Information, to determine changes needed in the acquisition process of parts produced or provided from a sole‑source to ensure that contracting officers obtain uncertified cost data when requested and that the DoD receives full and fair value in return for its expenditures;
- immediately revise and update the November 7, 2007, policy reform memorandum on “Access to Records with Exclusive Distributors/Dealers” to expand the reporting requirements to all contractor denial of cost data for acquisitions of parts produced by one manufacturer, as well as for other sole-source acquisitions, regardless of whether the requirement is urgent;
- establish a framework in the revised memorandum for the quarterly reporting and validation of consolidated information by the DoD Components to the Defense Pricing and Contracting Principal Director based on the expanded requirements of the revised memorandum;
- incorporate the requirements in the revised memorandum into the DFARS and the DFARS Procedures, Guidance, and Information; and
- establish a team of functional experts to analyze data reported as a result of the revised and updated memorandum. The team of functional experts should assess parts and contractors deemed to be at high risk for unreasonable pricing and identify trends and perform price analysis and cost analysis of high-risk parts to identify lower cost alternatives or fair and reasonable pricing for future procurements.
Management Comments and Our Response
The DLA Acquisition Director, responding for the DLA Director, agreed with the recommendations to seek a voluntary refund from TransDigm for excess profits identified in this report and provided the January 2019 requests to TransDigm for a voluntary refund; therefore, these recommendations are resolved but will remain open until we receive TransDigm’s response to DLA.
The Army Contracting Command Deputy to the Commanding General, responding for the Army Contracting Command–Redstone Executive Director and Army Contracting Command–Aberdeen Proving Ground Executive Director, agreed with the recommendations to seek a voluntary refund from TransDigm for excess profits identified in this report. Therefore, the recommendations are resolved, but will remain open until we verify that the Army has issued the refund requests and we receive TransDigm’s response. The estimated completion date is February 28, 2019.
The Acting Principal Director for Defense Pricing and Contracting agreed to:
- examine the United States Code, FAR, DFARS, and DFARS Procedures, Guidance, and Information, to determine whether changes are needed; and
- establish a framework for the quarterly reporting and validation of consolidated information on the denial of cost data for acquisitions of parts produced by one manufacturer, as well as for other sole-source acquisitions, by the DoD Components.
However, the Acting Principal Director’s comments did not address the specifics of when and how the recommendations would be implemented; therefore, the recommendations are unresolved.
The Acting Principal Director for Defense Pricing and Contracting agreed to:
- update the November 7, 2007, policy reform memorandum on “Access to Records with Exclusive Distributors/Dealers;”
- amend the DFARS as appropriate to reflect the revised memorandum; and
- recommend that the Under Secretary of Defense for Acquisition and Sustainment request a group of experts from the Military Departments, DLA, and the Defense Contract Management Agency to identify and share information regarding contractors found to be high risk for unreasonable pricing and perform price and cost analysis on high-risk parts.
Therefore, the recommendations are resolved but will remain open. We will close the recommendations once we verify that the Acting Principal Director has updated the policy memorandum; updated the DFARS; and identified high-risk contractors for unreasonable pricing and perform price and cost analysis on high-risk parts.
This report is a result of Project No. D2017-D000AH-0162.000