Report | Dec. 13, 2021

Audit of the Business Model for TransDigm Group Inc. and Its Impact on Department of Defense Spare Parts Pricing (DODIG-2022-043)

Audit

Publicly Released: December 13, 2021

Objective

The objective of this audit was to determine whether TransDigm Group Inc.’s (TransDigm) business model impacted the DoD’s ability to pay fair and reasonable prices for spare parts.

 

Background

The DoD Office of Inspector General received a congressional letter requesting a comprehensive review of TransDigm’s contracts with the DoD from January 2017 through June 2019 to identify whether TransDigm earned excess profits. Additionally, the letter asked the DoD Office of Inspector General to provide information on TransDigm’s corporate structure, how TransDigm’s contracts with the DoD are structured, the rate of TransDigm’s company acquisitions, and TransDigm’s impact on the Defense market.

TransDigm was established in 1993 and is headquartered in Cleveland, Ohio. TransDigm designs, produces, and supplies specialized spare parts for aircraft and airframes. TransDigm uses the term operating unit for each of its locations, which operate under the operating unit’s own unique brand, product line, and management. TransDigm’s corporate office functions as a parent company that maintains ownership of all its operating units. TransDigm owns legal entities located worldwide that comprise of operating units in 3 business segments. The three business segments are: (1) Power and Control, (2) Airframe, and (3) Non-aviation.

The DoD awards many small quantity, low dollar value contracts to TransDigm. Before awarding a contract, the contracting officer must determine that the proposed price is fair and reasonable. For example, the contracting officer determines price reasonableness by comparing competitive quotes or offers, comparing prices to historical prices from previous purchases, or conducting analysis using data other than certified cost or pricing data.

Certified cost or pricing data is not required for all purchases. Contracting officers are allowed to request data other than certified cost or pricing data for acquisitions that do not require certified cost or pricing data to determine whether prices are fair and reasonable. In addition, data other than certified cost or pricing data can be requested when an exception to requesting certified cost or pricing data exists. Data other than certified cost or pricing data can be identical types of data as certified data but without the certification. The data could include sales data or purchase order history, but it could also include uncertified cost data. However, when contracting officers request uncertified cost data, contracting officers have limited options when contractors refuse to provide the uncertified cost data.

 

Finding

Certified or uncertified cost data are the two most reliable sources of information that a contracting officer can use to ensure that the U.S. Government obtains the best prices when negotiating contracts for goods and services. However, section 2306a, title 10, United States Code (10 U.S.C. § 2306a), the Federal Acquisition Regulation (FAR), and the Defense Federal Acquisition Regulation Supplement (DFARS) do not require contracting officers to request certified or uncertified cost data for contracts under the Truth in Negotiations Act (TINA) threshold, and the FAR and DFARS require the use of other price analysis methods, such as historical price comparisons, for contracting officers when negotiating contracts. TransDigm executes a business model that results in the acquisition of companies that specialize in highly engineered, sole‑source spare parts. The DoD generally purchases spare parts from these TransDigm operating units in small quantities, resulting in lower-dollar-value contracts. Contractors are required to provide certified cost or pricing data only for contracts valued at or above the TINA threshold. From January 2017 to June 2019, more than 95 percent of the contracts that the DoD awarded to TransDigm, valued at $268.2 million, were below the TINA threshold. Contracting officers used price analysis methods authorized by the FAR and DFARS. Price analysis methods can be effective in determining fair and reasonable prices; however, in this sole‑source market-based pricing environment, without competition, the methods were not effective for identifying excessive pricing. This occurred because 10 U.S.C. § 2306a, Federal, and DoD policies do not compel contractors to provide uncertified cost data for contracts below the TINA threshold when requested. For example, Defense Logistics Agency (DLA) contracting officers requested uncertified cost data for 26 of the 107 spare parts on 27 of the 153 contracts in our audit. However, TransDigm operating unit officials provided the requested uncertified cost data for only 2 spare parts on 2 contracts and did not provide uncertified cost data for the remaining 24 spare parts on 25 contracts. Therefore, contracting officers were unable to use cost analysis to determine fair and reasonable prices for sole‑source spare parts that were bought in small quantities at low dollar values and instead used other price analysis methods required by the FAR and DFARS, including historical price comparisons. In addition, 10 U.S.C. § 2306a, Federal, and DoD policies do not require contracting officers to use cost analysis when the DoD is making fair and reasonable price determinations for sole‑source spare part contracts below the TINA threshold. However, we were able to obtain uncertified cost data from TransDigm for 152 out of the 153 contracts in our sample.

By using the uncertified cost data, which is one of the most reliable sources of information to perform cost analysis, we found that TransDigm earned excess profit of at least $20.8 million on 105 spare parts on 150 contracts. The DoD will continue to pay higher prices if the DoD is not enabled to use cost analysis to determine price reasonableness for sole‑source spare parts procured using market-based pricing on contracts valued under the TINA threshold.

Multiple audit reports over the past 23 years have highlighted the problem of the DoD paying excess profits on sole‑source contracts where cost analysis was not used to determine fair and reasonable prices and this problem continues to occur. To address the lack of policy compelling contractors to provide uncertified cost data when requested, officials from the Office of the Under Secretary for Defense for Acquisition and Sustainment submitted two legislative proposals in the FY 2021 legislative cycle. The first proposal sought to ensure that the DoD has appropriate authority and flexibility to make commercial item determinations and is able to obtain the necessary cost or pricing data to negotiate fair and reasonable prices. The second proposal sought to include a paragraph amending an existing statute within the United States Code that requires the submission of uncertified cost data from offerors if the pricing data submitted is not sufficient to determine a fair and reasonable price. Neither proposal was included in the FY 2021 National Defense Authorization Act. The DoD is considering the submission of additional legislative proposals to address these issues in the FY 2023 legislative cycle.

Without the necessary legislative changes, the DoD will continue to be unable to perform adequate price reasonableness determinations because contractors are not compelled to provide uncertified cost data under the TINA threshold and the other price analysis methods are not always effective in identifying excessive prices.

However, we are not making additional recommendations to address this policy problem because policy recommendations from the February 2019 DoD Office of Inspector General report that looked at other purchases made from TransDigm remain open. Additionally, the DoD will continue to pay higher prices if the DoD is not enabled to use cost analysis to determine price reasonableness for sole‑source spare parts procured using market-based pricing on contracts valued under the TINA threshold.

 

Recommendations

We recommend that the Defense Pricing and Contracting (DPC) Principal Director review DFARS and DFARS Procedures, Guidance, and Information to determine whether current policy adequately addresses when cost analysis should be required by contracting officials to determine price reasonableness for sole‑source spare parts not subject to TINA. If the Principal Director determines that current policy is not sufficient, the Principal Director should initiate actions to revise and update policy and guidance.

We also recommend that the DPC Principal Director work with the DLA Director to identify alternative contracting strategies for procuring items from companies such as TransDigm more efficiently and at a lower price.

We recommend that the DLA Director direct contracting officers to seek a voluntary refund from TransDigm of at least $20.8 million in excess profit on 150 contracts.

 

Management Comments and Our Response

The DPC Principal Director agreed with the recommendations and stated that the DPC will:

  • review and, if necessary, update DFARS and DFARS Procedures, Guidance, and Information for when cost analysis should be required to determine price reasonableness for sole‑source parts not subject to TINA; and
     
  • work with the DLA to identify alternative contracting strategies for procuring sole‑source parts in small quantities for the DoD more efficiently.

The DLA Acquisition Deputy Director, responding for the DLA Director, agreed with the recommendations and stated that the DLA will:

  • continue to seek alternative contracting strategies to receive a better price for the Government;
     
  • coordinate with DPC to address the pricing challenges and adhere to updated guidance; and
     
  • send voluntary refund letters to TransDigm and its subsidiaries for the amounts of excess profit identified.

Management comments addressed our recommendations; therefore, the recommendations are resolved but remain open. We will close the recommendations once we verify that the agreed-upon actions are complete.

This report is the result of Proj. No. D2019-D000AT-0181.000.