Fresh After Afghanistan, Defense Contractors Try Sneaking In Another Corrupt Provision into Law

Raytheon wants DOD to buy commercial items. What's wrong with that? Everything.

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Former Transdigm Chair W. Nicholas Howley testifies before the House Oversight Committee.

A few years ago, Congressman Ro Khanna led a campaign against a private equity firm named Transdigm, which had discovered a business model designed to exploit a flaw in defense contracting regulations that Bill Clinton inserted. Transdigm is a roll-up of companies that sell after-market monopoly suppliers of aerospace parts needed for old air equipment. Because these firms usually are sole source providers, Transdigm can increase prices radically, as well as cut quality.

How radically? Well, according to the inspector general of the DOD, TransDigm routinely overcharged the Pentagon by as much as 4,000 percent.” The firm earned excessive profits “on nearly every spare part audited, selling a $1,700 cable assembly for $7,800, a $300 connector for $1,100, and a $650 motor rotor for $5,500.” Its gross profits in sales to the U.S. military are 54.5%, an extraordinarily healthy margin for any business.

Transdigm’s model is like Martin Shkreli’s approach to pharmaceuticals; Shkreli would buy a sole source producer of generic medication and jack up prices. When Transdigm was exposed, it was embarrassing. The firm’s CEO was dragged before the House Oversight Committee, and ultimately pledged to return $16 million of overcharges. But it didn’t matter, because the House didn’t follow through. Today, Transdigm continues to buy firms, and its stock price is near a record high.

Though profitable, Transdigm isn’t a particularly powerful firm, but a leech sucking blood from the U.S. taxpayer. So why hasn’t anyone cracked down? The answer is that the flaw Transdigm uses is exploited by far more powerful and connected firms, like Raytheon and Boeing. It’s called the commercial items exception, and to understand it requires explaining how contractors and Bill Clinton corrupted language itself.

During the Cold War, the Defense Department had immense power over suppliers. It could request cost information, as well as place price restrictions on what those firms could charge, where they could produce their products, and cap profits. The Pentagon even had the ability to reverse-engineer key parts and do its own production, and could repair its own equipment.

But in 1994 and then 1996, Bill Clinton’s administration, led by the immensely noxious contracting specialist Steve Kelman, not only encouraged a massive wave of consolidation among contractors, but changed the law so that the Pentagon couldn’t place restrictions on suppliers, as long as whatever they were selling was available on the commercial market. The logic was that perhaps for a nuclear submarine and specialized components, strict contracting rules make sense, but for, say, pencils, the DOD should be able to buy them off the shelf.

Naturally, this logic only made sense if the word ‘commercial item’ actually applied to items for sale to the public. But in fact, commercial meant anything that contractors could sneak by procurement officials, like military aircraft, classified electronics, rockets, or replacement parts by Transdigm. And this definition isn’t just about price, but also technical data rights and the ability to repair equipment. (Remember, the failure to be able to repair its own stuff is one reason the Afghan army fell apart so quickly, and is a routine problem for the U.S. military today in terms of readiness.)

Congress periodically tries to narrow the commercial items definition in the annual defense authorization bills. In 2013, Congress established a group inside the Defense Contract Management Agency to help procurement officers figure out whether an item should be commercial. Though not particularly aggressive, contractors see this group as a threat to their pricing power. The DCMA is sort of like antitrust enforcers a few years ago; not good, but occasionally useful in checking a monopolist.

Naturally, defense contractors are now trying to kill even that modest check on their power. A source passed on this lobbying document with proposed report language for the National Defense Authorization Act of 2022 that would remove weak oversight over sole source contractors - no pricing rules, no right to repair, nothing. The metadata shows the document was created by James Steggall of Collins Aerospace.

This provision punishes the DCMA by giving them a bunch of paperwork to do, hassling them to shut down the effort to curtail price gouging. As the West opens its eyes to what a disaster its military and diplomatic institutions have become, it’s time to reflect on the people who profited from these arrangements. What a capable fighting force looks like, dependence on Transdigm shouldn’t be part of that picture.