Jump to content
The Wifcon Forums and Blogs

Recommended Posts

The chair of the House Committee on Oversight and Reform is proposing a new law, the "Fair Pricing with Cost Transparency Act."

https://oversight.house.gov/sites/democrats.oversight.house.gov/files/Fair Pricing with Cost Transparency Act.pdf

Here's a link to the DODIG report. Scroll to the bottom for a link to the full text.

https://www.dodig.mil/reports.html/Article/1769041/review-of-parts-purchased-from-transdigm-group-inc-dodig-2019-060/

What do you think? Will a new law and more regulation fix the problem? If not, what would?

Link to comment
Share on other sites

  • Replies 62
  • Created
  • Last Reply

Top Posters In This Topic

12 minutes ago, Vern Edwards said:

What do you think?

Well....

 

13 minutes ago, Vern Edwards said:

Will a new law and more regulation fix the problem?

No

 

13 minutes ago, Vern Edwards said:

If not, what would?

With many years under my belt I am reserved to think nothing will ever totally fix the problem.  I dislike saying it but cheaters cheat.  In such discussioins I always remember a conversation I had with a fellow CO who spent time in retail before coming to the government.  He worked for a big box company.   At first I was surprised but then I guess it made sense when he told me that the company acknowledged that shoplifting would always be a problem and had a line item in the company's books (my simple term) where X amount of product in dollar value was written off each year to such a loss.  When he let me know the amount for the one particular store he worked for in a city I was at the time amazed until I realized how much the store probably did in sales each year.

War story of sorts yes and circling back to the subject it is clear that regulation won't fix the problem.  Constant theme in Forum it would seem.  

To the question - acknowledge that some things will never get fixed, give some credit to the workforce that they do they best they can considering all the circumstances (to much regulation, adequacies of their abilities, adequacies of management, etc.) and deal with the "eaches" and move on.  And turn on a light bulb to Congress that legislation is not always the answer.

Link to comment
Share on other sites

1. I learned long ago that relying on prices previously paid for something - especially in a non competitive acquisition or mod - is not a reliable indicator of fair and reasonableness. The prices relied upon could be inflated. There is often no context to how those prices were determined to be fair and reasonable. 

The IG report mentioned that and I am familiar with such situations from my Stateside assignments . It’s obvious, from being a WIFCON participant since it’s beginning, that many acquisition personnel favor and use this technique in non-competitive situations. It’s fast and relatively easy.

Relying only on prices previously paid in competitive acquisitions can sometimes also be unreliable. In Germany and some other  countries in the late 1980’s (and I expect that nothing has changed), the US Army was not using cost priced negotiated acquisition or estimating methods. In Germany, all US and German government construction contracts used unit priced contracts, based upon standard DIN defined units and estimated quantities. For estimating purposes for new contracts (and mods) The US and German government construction agencies simply collected unit pricing information for estimating and price analysis purposes.

My assistant Resident Engineer in the Kaiserslautern Area Office was German. Her fiancé, worked for a higher German State Construction Office that provided oversight of the various German construction offices in the Southwest States in Germany. He told her that German construction contractors working in the K-Town and nearby areas in the Rhineland Pfalz State were colluding during the initial contract competition to divide up awards. In addition, Kaiserslautern area contractors were paying a 3% kickback to certain high level K-Town Area Bauamt design and construction officials for awards of Indirect Construction contracts (the prevalent acquisition method) for the US Forces. Her fiancé’s office was in the investigative/fact finding stage. I was told not to share that information at the time.

I returned Stateside in the fall of 1989. About a year later,  My German friends who worked for me in K-Town told me that the German Government had indicted and were prosecuting at least the K-Town Bauamt Director and his Design office chief, maybe others and some contractors for corruption.  One of the two Bauamt officials died of a heart attack and the other went to prison.

The USACE Europe Division, who collected pricing information and used it for estimates and award purposes, and the various Army and Air Force  Installations relied upon historical unit pricing for new awards and for pricing mods. I doubt if they knew about any collusion and corruption. In my experience nobody had any expertise in cost based acquisition for sole source acquisition or mods or claims.

The above is only to stress that relying only upon previously paid prices for estimates or pricing purposes, while convenient, comparably simple and faster than also using cost based or other methods or other methods, isn’t always a reliable indicator of fair and reasonable pricing - particularly for sole source pricing. Yep - it’s faster and easier, saves work and provides justification for awarded prices. 

2. I agree with the proposed legislative measure to require contractor to provide cost or pricing data and other than cost or pricing data if necessary.

I wonder how much it would widely be used by the acquisition workforce for other than  - maybe - situations similar to Transdigm.

3. Would it fix the problem? Don’t know the context of “the problem”. 

But it would be available for those acquisition officials who need it and would use it and have some cost based acquisition expertise. 

Link to comment
Share on other sites

Here is the substance of the proposed law...

Quote

‘‘If the contracting officer determines that the information on the prices submitted by the offeror or contractor is not adequate for evaluating the reasonableness of the price of the contract, subcontract, or modification of the contract or subcontract, the offeror, contractor, or subcontractor shall be required to submit to the contracting officer uncertified cost information to the extent necessary to determine the reasonableness of such price.’’

(my emphasis)

But here is what the FAR already says...

Quote

 

FAR 15.403-3 Requiring data other than certified cost or pricing data.

      (a)(1) In those acquisitions that do not require certified cost or pricing data, the contracting officer shall

                * * * * *

                (ii) Require submission of data other than certified cost or pricing data, as defined in 2.101, from the offeror to the extent necessary to determine a fair and reasonable price (10 U.S.C.2306a(d)(1) and 41 U.S.C.3505(a)) if the contracting officer determines that adequate data from sources other than the offeror are not available. This includes requiring data from an offeror to support a cost realism analysis;

                * * * * *

(my emphasis)

Is there a difference?

is uncertified cost information different than data other than certified cost or pricing data?

 

Link to comment
Share on other sites

2 minutes ago, ji20874 said:

Here is the substance of the proposed law...

(my emphasis)

But here is what the FAR already says...

(my emphasis)

Is there a difference?

is uncertified cost information different than data other than certified cost or pricing data?

 

I believe that the purpose of the law is to put teeth into FAR 15.403-3 by making it a contractor requirement to provide it not just a KO requirement to “require it”.  The context cited is Trandigm and it’s refusal to provide cost and/or other data to justify sole source pricing of its manufactured parts. 

Link to comment
Share on other sites

In the DODIG summary:

Quote

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 Defense Acquisition Regulation Supplement (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.

Emphasis added.

What is the FAR definition of excess profit?

Link to comment
Share on other sites

1 hour ago, joel hoffman said:

The context cited is Trandigm and it’s refusal to provide cost and/or other data to justify sole source pricing of its manufactured parts. 

Why should TransDigm have to "justify" its pricing? What law requires a prospective contractor to justify its prices?

Link to comment
Share on other sites

Very skeptical about that IG report.  

 

A single manufacturer of specialized parts purchased mostly, perhaps exclusively, by the US Government.  The buyer procures these items in small quantities as needed (so it seems from IG report).

There is a large risk / opportunity cost for the manufacturer here.  Accordingly, a large profit when it pays off. 

Don't like those high prices?  Don't buy in the least cost-effective way possible.    

I doubt cost analysis accounts for the opportunity cost of the manufacturer.    Must be some (likely substantial) cost for the manufacturer to keep making and storing these widgets, just so the (single?) buyer can purchase a few whenever they need them.   

Monopsony - Monopoly pricing is going to be messy and probably sub-optimal for one or both parties.  Econ 101 here.  

   

 

Analogy: A family member has a really nice vintage Porsche.  He needed some rando part for the engine.  From what I gather, this part is exclusively used by a few models of Porsche made in the early 2000s.  This part (forget its name or what it does, not a car guy) is literally a small piece of metal - no moving parts.  Weights a pound or two.   The material costs couldn't have been more than a few dollars.   The Porsche mechanic in our area had one in stock, and charged (approximately, this was a few years ago) $200.    $200 for a $5 part.    $5 for the part.  $195 for having a small retail warehouse of obscure German car parts located within a short driving distance.   This would be excess profit, no?

Edited by General.Zhukov
Added the parable of the Porsche
Link to comment
Share on other sites

9 hours ago, Vern Edwards said:

Why should TransDigm have to "justify" its pricing? What law requires a prospective contractor to justify its prices?

They did not have to, because no law was violated.  That brings us to this:

12 hours ago, Vern Edwards said:

What do you think? Will a new law and more regulation fix the problem? If not, what would?

No, another new law will not fix this specific problem, at least, not without creating more problems than it's worth.  The solution to this problem was already passed in the 2020 NDAA, resulting in a prudent adjustment to current regulation.  That adjustment is already in the process of being promulgated, at DFARS Case 2020-D008 where it addresses 10 U.S.C. 2306a(d).  This statute produced the following changes proposed to DFARS about reporting and tracking contractors in CPARS for failure to make a good faith effort to comply with a reasonable request to submit data other than certified cost or pricing data:

Quote

 215.403-3

Requiring data other than certified cost or pricing data.

(a)...

(4) In accordance with 10 U.S.C. 2306a(d) and in lieu of the factors for consideration listed in FAR 15.403-3(a)(4), a determination by the head of the contracting activity that it is in the best interest of the Government to make the award to an offeror that does not comply with a requirement to submit data other than certified cost or pricing data shall be based on consideration of pertinent factors, including the following:

(A) The effort to obtain the data.

(B) Availability of other sources of supply of the item or service.

(C) The urgency or criticality of the Government's need for the item or service.

(D) Reasonableness of the price of the contract, subcontract, or modification of the contract or subcontract based on information available to the contracting officer.

(E) Rationale or justification made by the offeror for not providing the requested data.

(F) Risk to the Government if award is not made.

and:

Quote

242.1502

Policy...

(g) Past performance evaluations in the Contractor Performance Assessment Reporting System...

(ii) Shall, unless exempted by the head of the contracting activity, include a notation on contractors that have denied multiple requests for submission of data other than certified cost or pricing data over the preceding 3-year period, but nevertheless received an award (10 U.S.C. 2306a(d)(2)(B)(ii)).

Basically, the Proposed Rule raises the stakes of TransDigm's actions, to, at a minimum, the level of an HCA for review.  It also shines a light on these types of actions by requiring they be addressed in past performance evaluations (which will affect source selections of the prime's management since these parts are sourced from their subs).  That should be enough to dissuade bad faith without creating too many unintended consequences, e.g., dissuading new entrants to the DoD industry pool.  No more involvement of Congress is needed, so the subject bill should not be enacted into law.

I hope a staffer on the Hill looks into this bill for redundancy with 10 U.S.C. 2306a(d).  I hope these Congresspeople talk to each other (how's that for theory?)

Edited by WifWaf
Deleted first paragraph for misremembering 2019 report
Link to comment
Share on other sites

The issue which precipitated this bill is not the lack of C&P data, it seems to be more about whether C&P data should take priority over market conditions.

Just the fact that the IG report keeps using the term 'profit' instead of 'margin' makes me skeptical of the whole thing. I seriously doubt the IG review was sufficient to determine actual profit (margin is typically a percentage; profit is a number)

Quote

"We calculated the excess profit for the 46 parts by using the cost per part that TransDigm provided, adding a 15-percent profit, and subtracting the result from the contract’s price per unit."

Report No. DODIG-2019-060: Review of Parts Purchased From TransDigm Group, Inc. (Redacted) (defense.gov)

Trandigm's response is worth noting:

Quote

"TransDigm also said it believes the report "ignores significant real costs incurred," counting those costs as profit, and failed to adequately compare costs to similar commercial contracts...In truth, much of TransDigm's margin success comes from the commercial side of the business and the desire of airlines to pay a premium for hard-to-find spare parts. At the time the probe was ordered, sales to the U.S. government accounted for less than 10% of total revenue."

TransDigm Cleared for Takeoff After Pentagon Closes Probe Into Pricing | The Motley Fool

If Congress had appropriated sufficient funds back in the 90's to buy the most economic quantity of sea-launched cruise missiles we would have been paying around $500K per copy.  As it was we were paying closer to $1M.  I suspect if this same IG looked at it they would 'find' we overpaid by $500K each.  

Link to comment
Share on other sites

3 hours ago, Vern Edwards said:

Why should TransDigm have to "justify" its pricing? 

Contracting Officers must purchase supplies at fair and reasonable prices. When the KO can’t determine reasonableness from price analysis only when negotiating with a sole source, they would need additional data and perform some type of cost analysis. 

43 of the 47 different parts manufactured by Transdigm or its subsidiaries were NOT commercial items. The DoD IG report addressed those transactions where certified cost or pricing were not required.

“15.403-3 Requiring data other than certified cost or pricing data. 

 (a) (1) In those acquisitions that do not require certified cost or pricing data, the contracting officer shall—

                (i) Obtain whatever data are available from Government or other secondary sources and use that data in determining a fair and reasonable price;

                (ii) Require submission of data other than certified cost or pricing data, as defined in 2.101, from the offeror to the extent necessary to determine a fair and reasonable price (10 U.S.C.2306a(d)(1) and 41 U.S.C.3505(a)) if the contracting officer determines that adequate data from sources other than the offeror are not available.

              (iii) Consider whether cost data are necessary to determine a fair and reasonable price when there is not adequate price competition..”

Without quoting the applicability references in Part 31 (mainly because I accidentally deleted them from my notes and didn’t want to recopy them) let’s cut to the chase:

“31.201-3 Determining reasonableness.

       (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”

Link to comment
Share on other sites

35 minutes ago, joel hoffman said:

Contracting Officers must purchase supplies at fair and reasonable prices. When the KO can’t determine reasonableness from price analysis only when negotiating with a sole source, they would need additional data and perform some type of cost analysis. 

How will additional data help the CO if the seller says, "You can have all the data you want. It won't change the price. No one else stocks the item you want. If you don't want it at that price, we won't stock anymore either"?

Link to comment
Share on other sites

The proposed legislation was intended to require contractors to provide reasonable, information in response to a request. I don’t know the contextual timeframe of the Congresswoman’s  speech .  The DoD IG Report was dated in 2019. The proposed FAR change doesn’t go that far.

There is no FAR definition of excess profits but when price of a part that cost $128 to make is over $7000, it should stand to reason that the profit is excessive. The company refunded some excessive profits, perhaps similar to the days before TINA when GAO would request refunds of excess pricing. 

Link to comment
Share on other sites

11 minutes ago, joel hoffman said:

There is no FAR definition of excess profits but when price of a part that cost $128 to make is over $7000, it should stand to reason that the profit is excessive. 

Another possible explanation is a flawed methodology used to derive the excess profit.  The fact that the IG findings were producing margins of several thousand percent raises many red flags to me.  I've dealt with too many IG auditors to take for granted that they have the slightest clue of what they are doing.  

Quote

"The independent review concluded that the ability of contracting officers to obtain data in a sole-source commercial environment is constrained not only by the regulations, but by whether or not a contractor choses to provide requested information."

More regulation? Double-Secret Probation for all who fail to comply I assume?

Link to comment
Share on other sites

11 minutes ago, joel hoffman said:

There is no FAR definition of excess profits but when price of a part that cost $128 to make is over $7000, it should stand to reason that the profit is excessive.

@joel hoffmanIn your opinion. I do not know of any official definition of "excess profits" that applies to government contracts. Do you? I know that there has been no restriction on profits since expiration of the Renegotiation Act during the 1970s. And I do not know of any law that compels a firm to sell to the government at a price the government likes.

 

Link to comment
Share on other sites

49 minutes ago, joel hoffman said:

43 of the 47 different parts manufactured by Transdigm or its subsidiaries were NOT commercial items. The DoD IG report addressed those transactions where certified cost or pricing were not required.

Ah yes, but in a commercial environment it's easy for the vendor to walk away because of their seller power regardless of how the item is classified.

For the government to try and fix that with C&P data is like going to the Toyota dealer and expecting them to give you the price  you determined to be fair by pricing up all the components they used to build the car in December 2020. In fact, when I took my truck in for service last week the dealer was charging $12K over invoice for a  new 4-Runner.  At first I thought "wow; they are gouging the crap out of people." Then I noticed all the employees sitting around and the grand total of 5 cars on their lot, and wondered how they were getting paid.  So is that "gouging" or "covering your fixed costs as properly allocated to a very low volume of sales"?

Link to comment
Share on other sites

See GAO, Statement of William H. Sheley, Deputy Director of Procurement and Systems Acquisition Division before the Senate Committee on Armed Services, on Profit Limitation Statutes, April 2, 1980:

Quote

The Renegotiation Act died because industry claimed, and the Congress agreed, that (i) excess profits were not consistently and equitably defined and (2) the costs of administration probably exceeded the benefits to the Government. With respect to this latter point, I don't believe it will ever be possible to measure costs vs. benefits of any profit limiting statute because the benefits being sought are largely intangible.

 

Link to comment
Share on other sites

If the Government believes that contractors should not earn "excess profits" on Government contracts, then it would only be consistent to ensure contractors don't suffer "excess losses" on Government contracts. You can't have it both ways.

Also, requiring a contractor to include cost information does not mean the prospective contractor would be required to change its price. 

Link to comment
Share on other sites

5 hours ago, General.Zhukov said:

Analogy: A family member has a really nice vintage Porsche.  He needed some rando part for the engine.  From what I gather, this part is exclusively used by a few models of Porsche made in the early 2000s.  This part (forget its name or what it does, not a car guy) is literally a small piece of metal - no moving parts.  Weights a pound or two.   The material costs couldn't have been more than a few dollars.   The Porsche mechanic in our area had one in stock, and charged (approximately, this was a few years ago) $200.    $200 for a $5 part.    $5 for the part.  $195 for having a small retail warehouse of obscure German car parts located within a short driving distance.   This would be excess profit, no?

@General.ZhukovI think this analogy is apt. What constitutes excess profit? One could argue that if adequate market research is conducted - whether by a consumer or the USG - then caveat emptor. If I buy a premium product like a Porsche, part of the "bargain" is that I'll need to pay premium prices for replacement parts. What's $200 to someone who probably paid >$100K for a Porsche? 

I hate resorting to worn phrases, but context is important.  

44 minutes ago, REA'n Maker said:

Ah yes, but in a commercial environment it's easy for the vendor to walk away because of their seller power regardless of how the item is classified.

For the government to try and fix that with C&P data is like going to the Toyota dealer and expecting them to give you the price  you determined to be fair by pricing up all the components they used to build the car in December 2020. In fact, when I took my truck in for service last week the dealer was charging $12K over invoice for a  new 4-Runner.  At first I thought "wow; they are gouging the crap out of people." Then I noticed all the employees sitting around and the grand total of 5 cars on their lot, and wondered how they were getting paid.  So is that "gouging" or "covering your fixed costs as properly allocated to a very low volume of sales"?

And this. 

Scarcity is a huge driver of cost. 

If I was in the start-up business, I'd take a deep dive into what companies like Transdigm are producing and try to offer a competing product. Sell the heck out of it to whomever in the acquisition office will listen, and angle for a competitive procurement. 

Then again, if I were in the start-up business, I'd probably run as far and as fast away from an industry as heavily-regulated as Federal contracting. #sadbuttrue

Link to comment
Share on other sites

IMO the real question is, if the KO found the price to be reasonable, on what grounds did the auditor make their decision and what information did the auditors have that the KOs didn’t.  I read the IG report but not reading the BCM or P/NM it’s hard to really see how the price was determined reasonable other than yeah this is what we paid last time and it’s in line, a little more, or a little less now than it was then…
 

Yes, we all know we have an issue with Professionalism in the series and the training is less that stellar and many KOs just want to satisfy the PM and the incentive for the PM is to spend the money to get it off their books, which in itself is a perverse incentive. Until the goal is to not bankrupt yourself at the end of every FY and KOs take the approach that they are spending their own money rather than meet my milestone, award the thing and get the PM off my back,  whatever congress passes won’t change the outcome.

I guess congress could pass a law that gives them the ability to clawback money that someone determines, within a reasonable period, they overpaid for the items. But then again, who would do business with the Govt with such a clawback in the contract and who would determine whether or not the overpayment exists? Clearly the KO or the KO’s next level thought the price was fair because often the alternative is to get nothing, and in the SS environment the KTR has you over a barrel,  but that exists in any environment, until new competitors enter the market and drive prices lower. 

Link to comment
Share on other sites

Last month, I saw another DoD-IG report on TransDigm Group and I thought I ignored it.  I didn't and it is on the Home Page.

That report is Audit of the Business Model for TransDigm Group Inc. and Its Impact on Department of Defense Spare Parts Pricing (DODIG-2021-043) It went public on 12/13/21.  The DoD-IG report that Vern posted was from 2/25/2019 and appears to be part 1 of this effort.  

I decided to see what TransDigm Group had to say about the latest DoD-IG report and it is:  TransDigm Comments on DOD IG Report. dated 12/13/2021.

The draft bill that Vern posted is labeled the Second Session of the current Congress.  In short, if that bill is/has been introduced it will be in 2022.  If it goes nowhere over the next 6 or 7 months watch the next House version of the NDAA for 2023.  

Link to comment
Share on other sites

If the government wants better prices, it must do better requirements planning, market analysis, and strategizing, and it must educate and train a cadre of first rate price negotiators.

New "cost data" laws will accomplish nothing. But Congress's only power is legislation, so laws are the only solutions it understands. And the top people in agencies, the political appointees, are afraid to say that, and are unable to propose a better alternative.

It will do no good to give more cost data to people who lack market savvy, a long-term strategy, and negotiation table know-how. It will only overwhelm and confuse them.

As William Munny told Little Bill, "Deserve's got nothin' to do with it."

Link to comment
Share on other sites

3 hours ago, Vern Edwards said:

How will additional data help the CO if the seller says, You can have all the data you want. It won't change the price. If you don't want it at that price, we won't stock anymore.

The proposed legislation appears to be targeted toward a specific contractor. 

Link to comment
Share on other sites

3 hours ago, Don Mansfield said:

…requiring a contractor to include cost information does not mean the prospective contractor would be required to change its price. 

I agree.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

 Share


×
×
  • Create New...