DOD cleared TransDigm's prices as fair without ever seeing its costs

When the Pentagon buys spare parts without competition, the law is supposed to require the contractor's certified cost data before the government pays -- unless the part counts as "commercial," or the contract falls under a dollar threshold, in which case contracting officers are told other pricing checks will do.▸ A May 2021 GAO report⧉ found the Defense Logistics Agency (DLA) used that shortcut on 77 of 136 sole-source spare-parts contracts awarded from fiscal years 2015 to 2019, worth $7.9 billion combined. A December 2021 Defense Department Inspector General audit⧉ put that assumption to an actual test on TransDigm, a monopoly aircraft-parts supplier: DLA contracting officers asked TransDigm directly for cost data on 26 spare parts and received it for 2. The Inspector General then asked too, obtained data for nearly its entire 153-contract sample using its own audit authority, and found $20.8 million in excess profit inside pricing the government had already signed off on as fair and reasonable.

Federal law -- the Truthful Cost or Pricing Data statute, often still called TINA after its predecessor, the Truth in Negotiations Act -- requires contractors to submit certified cost or pricing data on sole-source contracts above a dollar threshold, so contracting officers can verify a price is fair before agreeing to pay it.▸ But the same statute carves out an exception for commercial items, on the theory that market forces already discipline commercial prices, and DOD policy lets contracting officers substitute other data -- like historical prices or sales invoices -- when certified data isn't required. GAO found DLA applied the commercial-item exception to 77 of its 136 sole-source spare-parts contracts from fiscal years 2015 to 2019, exempting the contractor from certified cost data entirely. Of the remaining 59, DLA obtained certified data in 57 cases; for 2 more, worth $36.6 million and $1.9 million, DLA's own contracting authority waived the requirement, citing exceptional need for the parts.

The theory behind the commercial-item exception assumes something the sole-source setting itself contradicts: that there's a competitive market disciplining the price.▸ GAO's own case studies from fiscal year 2019 show what happens instead. In a $157.7 million contract for a helicopter engine out of production for 30 years, it took DLA 459 days to get the certified cost data it needed -- and once it did, the price came down 25 percent from the contractor's original ask. In a $4.3 million bomb-rack-parts contract, the Air Force couldn't get an adequate proposal for over 450 days and, facing a grounded aircraft, ultimately paid 5 percent more than the contractor had proposed. Delays factored into 7 of the 10 contracts GAO reviewed as case studies, ranging from 149 to 1,154 days between solicitation and award -- and DOD's own tracking system doesn't count delays at all, only outright refusals, so nobody at the Pentagon has a department-wide count of how often this happens.

TransDigm is the sharpest version of the same setup: a company built by acquiring monopoly suppliers of highly engineered, sole-source aircraft parts, more than 95 percent of whose $268.2 million in DOD contracts from January 2017 to June 2019 fell below the certified-cost-data threshold entirely.▸ When DLA contracting officers asked TransDigm directly for uncertified cost data -- the fallback checking mechanism the law does provide for -- they got it for 2 of the 26 spare parts they asked about. For the other 24, nothing in the law compelled TransDigm to comply, and contracting officers were left to rely on the same historical-price comparisons the commercial-item exception assumes are sufficient.

The Inspector General ran the test DLA couldn't. Using its own audit authority rather than a contracting officer's request, it obtained uncertified cost data from TransDigm for 152 of the 153 contracts in its sample -- and once it had real cost data to compare against actual prices paid, it found TransDigm had earned at least $20.8 million in excess profit across 105 spare parts and 150 contracts.▸ That's money embedded in exactly the kind of below-threshold, commercial-item, price-analysis-only contracts the statute assumes don't need closer scrutiny. The Inspector General recommended DLA seek a voluntary refund of the full $20.8 million and review whether current policy requires enough cost analysis on sole-source parts outside TINA's reach -- but made no new policy recommendation beyond what a February 2019 OIG report on other TransDigm purchases had already proposed, because those recommendations were still open.

Nothing about this is a one-time discovery.▸ The Inspector General's report cites "multiple audit reports over the past 23 years" finding the same pattern -- DOD paying excess profits on sole-source contracts where cost analysis wasn't used. After the 2019 TransDigm findings, the Pentagon's own pricing office proposed two legislative fixes for the 2021 defense authorization bill: one to strengthen commercial-item-determination authority, another to require uncertified cost data when a contractor's price data otherwise falls short. Neither made it into the final law. As of this report, DOD was considering trying again in the fiscal year 2023 legislative cycle. GAO's single recommendation -- that the Pentagon at least start tracking how often and why these delays happen -- is a lower bar than fixing the underlying exemption, and DOD concurred with it without committing to close the gap the exemption itself creates.