IG Report Has Implications for Contractors.

AuthorBurnette, Ryan
PositionGovernment Contracting Insights

On Feb. 25, the Defense Department's Office of Inspector General issued an audit report analyzing the prices of spare aviation parts purchased by the government from TransDigm Group Inc. The report has important implications for contractors doing business with the Pentagon.

The audit was conducted in response to letters from members of Congress, who had inquired whether the items were sold at fair and reasonable prices and in compliance with the Truthful Cost or Pricing Data Act.

The auditors reviewed the price reasonableness of 47 spare aircraft parts the Pentagon procured from TransDigm between January 2015 and January 2017. The probe confirmed that the company fully complied with the act. However, using uncertified cost or pricing data that was collected during the audit, the inspector general concluded that the contractor realized "unreasonable" profits--defined in this report as profits of greater than 15 percent--on all but one of the parts. The OIG then calculated that the company earned $16.1 million in "excess profit" for the parts at issue.

One of the reasons cited for these supposedly "excessive" profits was that TransDigm was the only manufacturer for most of the spare parts at issue, which arguably allowed the contractor to set the market price for these parts. According to the OIG, this dominant market position prevented contracting officers from relying on historical price analysis or competition to ensure price reasonableness because the price of some parts "appeared to be" excessive at the time the part was first sold to the government, and because other competitors had to buy their parts from TransDigm before re-selling to the government.

In response to its findings, the OIG took the highly unusual step of requesting that contracting officials pursue a "voluntary refund" from TransDigm for the supposedly excess profits --an amount totaling approximately $16 million--despite the absence of wrongdoing by the company.

The inspector general's office also announced several recommendations directed towards defense pricing and contracting officials, including reviewing the U.S. Code, the Federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement to determine changes needed in the acquisition process for sole-sourced parts to ensure that contracting officers obtain uncertified cost data when requested.

It also recommended expanding existing requirements to mandate reporting of all contracts for parts...

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