Posted on June 12 2019
TransDigm Group et al
Fleecing the Government for YEARS
laughing all the way to the bank
Federal Contracts can be incredibly complicated. My hope is to distill the complexity down to easily understand data points. Part of Federal Contract Awards typically means it gives the Government the best or close to best for Cost of Services. Moreover Open Competitive Bidding process allows the Agency and Contracting Shop can “obtain the best value for Tax-payer dollars the Government is spending” - where things become “not in the best interest of the Government, ergo using tax payer funds” is a process known as Sole Source Contracts (SSC). Meaning that there is only one company that can or considered to provide that “services” or “goods”.
What a lot of DC insiders (which includes the Agency, Contracting Shop and Government Contractor) will rarely tell you is: when a SSC is awarded, the awardee has typically written the Sole Source Justification (SSJ) or Statement/Scope of Work, prior to award for the Agency and Contracting Shop. In this all too familiar scenario, when an awardee writes the SOW or SSJ - thusly eliminating any competition from said contract. Just to be clear DC Contracting Shops are not the Wild Wild West - statutorily speaking This is the known dirty open secret in DC. That’s not my opinion that is actual fact. When a Contractor “writes” the Sole Source Justification and/or Statement of Work (SOW)
TransDigm Group Inc
I should note that being the exclusive provider for various services and goods to our Government isn’t inherently nefarious, at all. What I can tell you is when your “goods” and/or “services” exceed the 8-15% markup or profitability of the “acceptable and reasonable” threshold. You need to understand that’s like literally screaming for a DCAA Investigation and/or a DOD-OIG audit post haste. What makes TransDigm special - simple: Greed, pure unrepentant brazen Greed, Evolution of their Business Model to maximize profits above all else, intentionally obfuscating reasonable requests for certified and uncertified pricing, and pure arrogance. That’s what makes TranaDigm an actual case study in the trappings of exclusivity and Sole Source Justification.
TransDigm manufactures spare parts for aircraft used by the Air Force and Army, including the AH-64 Apache, C-17 Globemaster III, the FF-16 Fighting Falcon, and the CH-47 Chinook. According to the IG, from April 2012 through January 2017, DOD issued 4,942 contracts valued at $471 million to TransDigm. Their aggressive acquisition and mergers has in fact created a supply & distribution vacuum that results in a monopolistic and onerous business model.
Although if I’m going to be the slightly neurotic researcher you’ve become accustomed to, the “private equity” announcement on their website is slightly unnerving. When I see the moniker of “private equity-like” my red lights begin to blink. My innate curiosity gets the better of me. Which means it’s a pretty decent assumption to think I’ve probably spent a hour or 40+ reading their financials. Furthermore I’ve probably already read the CEO’s Harvard Debate and then proceeded to get lost at the corner of “class action shareholder lawsuit and deposition-ville. I lurves to read, especially when I’m manically shoving bon-bons in my calorie, Apologies for the slight deviation. When you see private equity-like this typically means none of us have any idea of who’s really funding Transdigm. Perhaps I’m alone in my assertion that this could be hugely problematic, Especially in the context that we know our various adversaries have become increasingly aggressive. And as of late they appear to be tag-teaming against our Country - since Trump pretty much idolizes murderous authoritarian “strong men” - so while I might be off the mark
The one major important thread in that 1500+ page NDAA 2017 is it permenately granted the GAO jurisdiction for “protest” of DoD Task and Delivery Order, but increased the threshold to $25 million. In a weird yet ironic way these two recent “protest”
Analytic Strategies, LLC, B-413758.2, November 28, 2016 - at the time the GAO made the determination that they did not have jurisdiction. Although one could and should factor in such limitations can be, largely dependent on which contract vehicle was used. Given various contacts have their own protest procedures for bidders to lodge an official protest of a task order. The DoD opted to use the GSA-OASIS contract vehicle to award Analytic Strategies. Which has it own set of “protest” procedures.
Yet just a few days later the GAP held in HP Enterprise Services, LLC, B-413382.2 , November 30, 2016 that the DoD issued an award under the GSA ALLIANT IDIQ contract vehicle, and the GAO did not have jurisdiction to adjudicate an “official protest”...again and not to belabor the point Contract Vehicle. The GSA ALLIANT is a Governmentwide Acquisition Contract, colloquially known as a GWAC. Alliant was replaced by Alliant-2 effective May 1, 2019
The Alliant GWAC contract ordering period ended on April 30, 2019.
DOD-OIG audit history of Transdigm
Oddly nearly 13 years to the date the DOD-OIG issued their 2006 audit concerning Transdigm “excessive pricing”. In fact in February 23, 2006 the DOD-OIG issued the following:
MEMORANDUM FOR DIRECTOR, DEFENSE LOGISTICS AGENCY
SUBJECT: Report on Spare Parts Procurements From TransDigm, Inc.
We calculated that DLA paid about $5.3 million or 2 percent more than the fair and reasonable priced for 77 parts that cost about $2 million ___ if problems are not addressed, DLA will pay about $31.8 million more than fair and reasonable prices for the same items over the next 6 years. DLA also needs to seek a voluntary refund of about $2.6 million for overpriced parts identified in the report where contracting officers made a reasonable attempt to obtain cost data but were denied the information (emphasis added)
Two years later the DOD-OIG issued the following report Procuring Noncompetitive Spare Parts Through an Exclusive Distributor, February 6, 2008 Report No: D-2008-048 which itemized how the DoD “paid about $3.0 million (75%) more than the fair and reasonable prices for 33 parts that cost about $ 6.9 million from Dutch Valley Supply....contract was awarded, totaling $345,012. The price negotiated was still 93.1% more than the previous contract price”
May of 2011 the DOD-OIG issued Report D-2011-061 Excess Inventory and Contract Pricing Problems Jeopardize the Army Contract with Boeing to Support Corpus Christi Army Depot (Redacted)
March 2017 Congress sounds the alarm
In March of 2017 Representative Ro Khanna, sent a written request to the DoD-OIG review the prices for a sample of 47 parts purchased from TransDigm under contracts awarded by the Defense Logistics Agency (DLA) and the Army. The purpose of the various letters from Congress to the DOD-OIG is Congress based on information and belief had serious concerns about “TransDigm’s business model, the value of contracts awarded to TransDigm, the status of DoD policy reforms from prior DoD OIG reports, contract oversight, and measures that the DoD can implement to lower the costs of overpriced parts”
“[F]ederal regulations protect the taxpayer against sole source contractors like TransDigm. When a vendor is understood to be a monopoly supplier, that supplier is required to in turn offer cost information about the product to the government or otherwise the government must conduct a thorough review of the likely cost of the product. In addition, vendors must tell procurement officers if they belong to a holding company to allow the government access to transparency in pricing across a defense contractor’s entire business. TransDigm appears to use a range of methods to evade these protections.”
You can read Rep Khanna’s full Letter here. And I would encourage you read his letter, it’s pretty clear and Rep Khanna makes several strong arguments. When you as a Defense Contractor (TransDigm Group) intentionality hide your brazen monopolistic scheme from the Pentagon and then attempt to blame the Contracting Office - that’s not exactly advisable, at all.
On June 27, 2017 the DOD-OIG sent the following letter to Senator Warren. In the DOD-OIG letter, they confirmed that they had opened an audit - largely based on previous communiques from several members of Congress regarding what “appears” to be TransDigm’s engaging in some serious allegations. The IG also confirmed that part of their audit would include TransDigm’s subsidiaries and distribution/supply chain. For the record as a creature of DC you never ever want to see your Company’s name in a DOD-OIG letter that includes “audit”.
In mid-May 2019 the House OverSight Committee held a Hearing - concerning TransDigm Group’s astronomical profit margins - below is a pretty brutal Q & A with committee members and TrnasDigm Group. It was beyond awkward, as you’ll read further down the DOD-OIG issued a comprehensive and scathing report.
The DOD-OIG TransDigm Project No. D2017-D000AH-0162.000 - official notice. Also you need to remember that Project No...why? Well TransDigm Group is a publicly traded company, meaning their file quarterly SEC reports, moreover there’s a certified class action complaint against TransDigm which explicitly references that project number. For now put a pin in that, I’ll come back it the litigation matter.
March 2019 Federal News Radio Interview
This is the Federal New Radio Interview back in March of 2019 - for those of us in the Beltway this is one radio station we pay very close attention - you should listen to the DOD-OIG Interview with Ms Hull:
As previously mentioned the DoD-OIG released a comprehensive report in late February 2019. Congress wanted to know if the DOD had purchased parts from TransDigm at “a fair and reasonable cost” as statutorily required by Federal Acquisition Regulation (FAR) - FAR requires Contractors to:
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
Truth In Negotiations Act - TINA is no joke it’s purpose is to ensure contractors are not fleecing an Agency thereby fleecing the tax payers who fund said Agency. Those who know Federal Contracts know why TINA is not to be trifled with. But it is abundantly clear that TransDigm operates in a pretty unscrupulous manner. And when questioned about their “business model” by Members of Congress this is how Transdigm CEO responded (again not my opinion this is an exact quote)
Doug Hillman, the former CEO of a TransDigm subsidiary, told Committee staff: “You’re punishing your customers instead of working with them to secure long term relationships, reasonable profitability, and growth.”
The Report Found: that TransDigm had excessively increased cost for parts. The DOD-OIG Report leaves a pretty clear impression - TransDigm’s Executives and Sales Channel Manager’s knew the Contract Office’s limitations pursuant to FAR & TINA. But more galling is lawmakers and DOD-OIG Investigators have documentary and in three cases oral testimony from various whistleblowers, that confirmed the “gaming” the FedGov contracts and purposefully placed orders as to not trigger the Simplified Acquisition Threshold (SAT) -
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.
Congressional Question 1: TransDigm’s Business Model and its Impact on the DoD’s Aerospace Portfolio?
To address congressional question one on TransDigm’s business operations with the DoD and how its cost structure affected part prices, we reviewed TransDigm’s business model and identified all contracts the DoD issued to TransDigm.From April 2012 through January 2017, the DoD issued 4,942 contracts valued at $471 million to TransDigm.
We selected a sample of 47 parts purchased from TransDigm and:
• reviewed the price reasonable determination of 47 contracts, one for each of the 47 parts;
• compared the uncertified cost data received from TransDigm to prices that the DLA and the Army paid for the 47 parts on 113 contracts between January 2015 and January 2017;
One could actually craft a well founded argument that TransDigm purposefully exploited various threshold requirements in both FAR and TINA - meaning they as the awardee knew the Ts & Cs of “certified pricing” and they knew the various restrictions that constrained DOD Contracting Officers as it relates to inquiring about their prices.
In order to be fair and objective the DOD-OIG found an average of 13.9% profit was reasonable but based on volume - it appears the DoD-OIG rounded up to 15% as “reasonable’. In terms of fairness the IG was beyond fair. However what the DoD-OIG uncovered is just mind blowing. Only one part was sold to the DOD at <11% profit.
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 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.
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. (emphasis added)
Again it appears that TransDigm knew the certified vs uncertified loophole and they exploited it. The 47 identified “spare parts” the audit concluded that TransDigm only “exclusively” manufactured 39 parts - meaning 8 of the 47 parts should have been tagged as a “pass through” and reasonable mark up is far less than the 15%.
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 missing requirements.
Of the 118 pages of the DOD-OIG Report - DODIG-2019-060.PDF it’s this page that literally encapsulates what the heart of the matter is. For the record it is never a good thing when the DOD-OIG recites your Company’s Annual Report, at all. Should you be inclined this Transdigm Investors Link will take you to their SEC filings. Put a pin in the SEC hat - because Transdigm is in the midst of a protracted litigation by Shareholders who alleged the company has willfully defrauded investors.
The IG also enumerated just how much TransDigm Group fleeced the DOD of which we, the taxpayers funded. This largesse is absolutely obscene
“TransDigm earned $16.1 million in excess profit on 46 of the 47 parts it sold to the DLA and the Army for $26.2 million between January 2015 and January 2017,”
Specifically some of the parts TransDigm overcharged the DLA and US Army include:
Quick Disconnect Coupling Half:
Which are used in the Freedom Fighter F-5 and the T-38 Talon aircraft, cost TransDigm only $173 to produce, but the company charged DOD $6,986, resulting in 3,930% excess profit for TransDigm.
Nonvehicular Clutch Disk
Per the contract the DOD paid $1,443 for a nonvehicular clutch disk used in the
Stratolifter C-135 transport aircraft that cost TransDigm was a mere $32 to produce, resulting inTransDigm 4,436% in excess profit.
And yes the Pentagon has in the past made some questionable purchases but u need to be clear here - the DOD did not do anything wrong - this unjust enrichment is solely on TransDigm. Not the Contracting Office, Not the DOD this is 100% on this Defense Contractor and they should be precluded from any further awards absent strict price controls in place. Why? Because this isn’t.
I will admit that I haven’t paid a lot of attention to Representative Khanna but had it not been for his eagle eye and his 2017 letter I am not certain, we the tax payers would have fully known the onerous business practices of TransDigm. You really should watch Rep Khanna’s Statement - he explains this rather complex situation in terms that even I can understand. Moreover he wasn’t gregarious or braggadocios in his statement. He simply did what I wished more members of Congress would do - he stated the facts in a concise manner and then was unrelenting in holding TransDigm accountable. All of which is highly respectable.
And by “accountable” Rep Khanna point blank told TransDigm that they should return their profits, this was on May 15, 2019 on May 23, 2019 TransDigm remitted a refund check in the amount of $11,521,375.00 to the Finance and Accounting Office, OFAS-CO - also see the May 2019 Memo (10 pages) the arrogance and grotesque audacity of TransDigm is - incomprehensible, particularly the communications between their CEO to Members of Congress.
Last Thursday, June 6, 2019 the following two page letter was sent from the respective chairs of various House Committees instructing the DOD-OIG to Conduct a deeper and wider audit of DOD contracts awarded to TransDigm.
Lawmakers in their letter to the DOD-OIG go on to enumerate how many contracts and a cumulative total contract value:
TransDigm has a huge number of contracts with the Defense Department worth hundreds of millions of dollars. Based on information provided by TransDigm, the company received $782,121,815 in revenue from 7,931 contracts with DOD between January 1, 2015, and April 23, 2019. (emphasis added)
To reaffirm a previous assertion that the DOD-OIG and Congress have been aware of Transdigm’s predatory business practices during the May 15, 2019 Hearing, Glenn A. Fine, Principal Deputy Inspector General, Performing the Duties of the Inspector General andTheresa S. Hull, Assistant Inspector General for Audit Acquisition, Contracting, and Sustainment - submitted the following written testimony. Remember what I’ve continued to state about footnotes? See page 2 - that’s how many DOD-OIG reports have been created concerning Sole Source Justifications and Transdigm.
In the written testimony there’s a common current that emanates throughout the DOD-OIG Statements - the DOD has been aware of the exorbitant pricing and obfuscation when Contracting Officers pressed Transdigm et al - but implementing cost controls appears to have taken a back seat because Transdigm monopolistic business model, essentially holds the DOD captive for spare parts.
The DOD-OIG went on to confirm that their finding, dating back to 2006 to present appears to be ubiquitous across the whole of our Armed Forces. I suppose one could analogize this to Transdigm has held our DOD captive concerning critical spare parts for various Military Equipment, such as fighter jets, helicopters, engine parts - and Transdigm is comfortable holding these parts ransom thus forcing the DOD to pay excessive cost - all while Transdigm Executives laugh all the way to the bank. This kind of irresponsible fleecing of our tax dollars - frankly it’s offensive and Congress in concert with the DOD need to address the various loopholes regarding Sole Source Justification, FAR & TINA thresholds, moreover it would be reasonable for Congress and the DOD to add a contract modification applicable to any and all Contracts awarded to Transdigm & it’s affiliates.
Inarguably Transdigm has and will continue to engage in a predatory business model - so when a predator decides the Terms and Conditions it is incumbent upon law makers, Contracting shops and the Agency who’s buying said goods to starve said predator. That is one potential avenue to remedy this grotesque profiteering. Until then Greed is only good when all parties have all the relevant facts (certified pricing and/or uncertified pricing) unless of course Transdigm’s goal is to face criminal charges for Fraud, lying to a Federal Agency and/or be permanently black listed by all Federal Contracting Shops. Because Transdigm abhorrent behavior has only escalated and accelerated since 2006.
In PART II - My objective is to address the massive litigation matters and the various Transdigm subsidiaries, of which the company was moderately successful in obscuring their ownership. When obfuscation is your primary defense, understand this - you’re hiding something and eventually that skeleton can’t remain in the preverbal closet in perpetuity... -SpicyFiles
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