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I wonder if there was a potential solution to the accusation of price gouging available to the original COs that elevated these complaints.  Anything would have been better than relying on Congress to fix it.  Perhaps this:

TransDigm's counterargument to price gouging is, essentially, there is risk to producing its parts that the Government does not recognize during negotiations.  Could the chief pricer of an office that purchases these parts start recognizing this risk as a cost element, instead of profit?  FAR already says "Economic planning costs" are allowable at FAR 31.205-12.  FAR 31.205-38(b)(4) also supports this idea, I think.  Could the office have been persuaded to include a quantification of this risk's costs, indirect as they may be, in with the other cost elements in the proposal?  The pricer may have to disagree with a DCAA auditor and may so much as have to use IPT pricing to arrive at this, but think of the opportunity cost of that effort - it's in the link Vern posted above.  Working with industry, instead, takes absolutely no elevation to Congress, no change to the acquisition system, no change to the regulations - just a tweak to regulatory interpretation and someone with the gusto to put it in written office-level guidance.

I guess it comes down to who do you trust to determine a cost as waste - yourself, or a commander that came up in the ranks without contracting training?  A manager that was promoted for reasons other than knowledge, skill, and ability in cost analysis?  Or worse, an elected official with an agenda.

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You've missed the point of the article. When Congress holds hearings it often engages in "political theater." When that is the case Congress is not interested in facts. It is interested in showing its outrage over what it thinks the public would be upset about. There are no blowhards in the world like members of the U.S. Congress when they're on TV or think they might be.

That's not to say that TransDigm is entirely without fault. But as the article shows, DOD is also very much at fault.

Anyway, none of this is new if you remember the great spare parts pricing scandal of the early 1980s. 

https://www.nytimes.com/1983/09/01/business/high-cost-of-military-parts.html

https://www.oklahoman.com/story/news/1983/07/12/probers-criticize-500-hike-in-prices-for-tinker-parts/62838874007/

https://www.govexec.com/federal-news/1998/12/the-myth-of-the-600-hammer/5271/

https://www.nytimes.com/1984/09/12/us/lists-show-price-problems-persist-in-military-parts.html

https://www.upi.com/Archives/1985/09/27/Credibility-of-contractors-damaged-by-spare-parts-scandal/9490496641600/

 

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20 hours ago, WifWaf said:

I guess it comes down to who do you trust to determine a cost as waste - yourself, or a commander that came up in the ranks without contracting training?  A manager that was promoted for reasons other than knowledge, skill, and ability in cost analysis?  Or worse, an elected official with an agenda.

See FAR 15.405, Price agreement, paragraph (a):

Quote

Taking into consideration the advisory recommendations, reports of contributing specialists, and the current status of the contractor’s purchasing system, the contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement. However, when significant audit or other specialist recommendations are not adopted, the contracting officer should provide rationale that supports the negotiation result in the price negotiation documentation.

Emphasis added.

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Additional background:

"On May 15, 2019, the Committee held a bipartisan hearing examining a DOD OIG report that found TransDigm received $16.1 million in excess profits on 46 of the 47 parts reviewed.   After Committee Members called on the company to refund the money during the hearing, TransDigm repaid the full $16.1 million to DOD."

Price Gouging in Military Contracts: New Inspector General Report Exposes Excess Profit Obtained by TransDigm Group | House Committee on Oversight and Reform

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I thought that part of the originally stated problem was that Transdigm would allegedly acquire competing manufacturers or sellers of the type of parts that the government buys, thus reducing or eliminating alternate sources. Was this correct?  Could that be indicative of *restraint of trade activities? 

Also, I read that very few of the parts are commercial items. Thus the cost or pricing data exemption for commercial items was not applicable for non-commercial item buys.

I believe that another stated problem was that Transdigm would refuse to provide cost or pricing data or other than cost or pricing data when requested.

I do understand that small buys and individual, one-off buys can involve a lot of costs, vs. mass-produced commercial items. And a company can charge whatever supply and demand allow for profit margins. But I learned about the practices of  eliminating competition to create monopolies over 55 years ago in American History classes. 

*Edit: replaced the word “anti-trust” with “restraint of trade”. 

Edited by joel hoffman
replaced the word “anti-trust” with “restraint of trade”. 
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@joel hoffmanThe CO's tool for preventing the Taxpayer funding any illegal monopolization is FAR 31.205-27, Organization Costs (as supplemented by DFARS 231.205-70 External restructuring costs).  The CO would have to write a pre-negotiation objective memorandum providing the basis for the inclusion of some of the costs under the -12 and -38(b) principles, and the basis for disallowance of some of the costs under the -27 principle.  Once included, the costs can then be examined in the PNOM for reasonableness.  See Raytheon Company; ASBCA Nos. 57743, 57798, 58280; April 17, 2017 (pp. 55-57).

Granted, without cost data I have no idea how the CO would explain allocability in the PNOM.  Congress certainly won't clear that up for us, though.

20 hours ago, joel hoffman said:

I believe that another stated problem was that Transdigm would refuse to provide cost or pricing data or other than cost or pricing data when requested.

I propose IPT pricing to resolve this.

Edited by WifWaf
Provided example case law
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12 hours ago, Constricting Officer said:

I propose the COs do their jobs. Making a fair and reasonable determination, with the best information available at the time, is not rocket science. 

I believe that this discussion is about trying to find the best information available and whether or not a sole source supplier should make it available.

For sole source, small quantity or one-off purchases of an item or items required to be manufactured, what is the “best information available”?

I’m assuming that the purchases here are for items not otherwise available on the open market and most are not “commercial items” with catalog prices or other sales price history available.

If they are commercial items, then the supplier should provide that info to justify commercial item pricing - and should be able to justify adjustments/differences for individual or small quantity pricing,  as described in the cited critiques . Did anyone ask? Did TransDigm explain?

There is some valid criticism about DoD buying sole source.  However, some of the complaints about TransDigm are that it appears to seek out other possible sources and then acquire them to reduce or eliminate competition. If DoD would foster competition, then one firm buys out the competition, it negates those efforts, doesn’t it? 

I don’t know how many parts are involved. However, if 16.1 million dollars of “excess profits” were claimed (and it seems that Transdigm voluntarily refunded that amount), there must be a whole lot of one of a kind or small quantity purchases.

 

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19 minutes ago, joel hoffman said:

I’m assuming that the purchases here are for items not otherwise available on the open market and most are not “commercial items” with catalog prices or other sales price history available.

If they are commercial items, then the supplier should provide that info to justify commercial item pricing - and should be able to justify adjustments/differences for individual or small quantity pricing,  as described in the cited critiques . Did anyone ask? Did TransDigm explain?

According to the DODIG:

Quote

According to TransDigm officials, TransDigm considers most spare parts sold to the DoD as commercial. However, of the 153 DLA contracts that procured the 107 spare parts, only 4 of 153 contracts for 4 spare parts were classified as commercial by the DLA.

DODIG-2022-043, Dec. 13,2021. https://media.defense.gov/2021/Dec/27/2002914678/-1/-1/1/DODIG-2022-043 508.PDF

So TransDigm had one opinion and DLA had another. Then what?

DLA bought the parts. Did the CO(s) think the prices were not fair and reasonable? If so, did they comply with FAR 15.405(d)? If so, what happened?

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51 minutes ago, Vern Edwards said:

According to the DODIG:

DODIG-2022-043, Dec. 13,2021. https://media.defense.gov/2021/Dec/27/2002914678/-1/-1/1/DODIG-2022-043 508.PDF

So TransDigm had one opinion and DLA had another. Then what?

Good question. The IG report didn’t elaborate on whether TransDigm substantiated that they were commercial items.

TransDigm only provided data other than cost or pricing data on 2 items. The KO apparently relied on historical prices (limited price analysis).

The IG obtained access to the data and likely assumes that they aren’t commercial items. From the data, the IG concluded that TransDigm earned substantial excess profits over what might have been paid had the government used cost analysis, rather than having to rely upon historical prices.

”U) By using the uncertified cost data, which is one of the most reliable sources of information to perform cost analysis, we found that TransDigm earned excess profit of at least $20.8 million on 105 spare parts on 150 contracts. The DoD will continue to pay higher prices if the DoD is not enabled to use cost analysis to determine price reasonableness for sole-source spare parts procured using market-based pricing.” 

 

 

 

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1 hour ago, Vern Edwards said:

DLA bought the parts. Did the CO(s) think the prices were not fair and reasonable? If so, did they comply with FAR 15.405(d)? If so, what happened?

I believe that the IG is saying that the FAR limits the KO’s ability to go beyond limited price analysis for sole sourced parts to determine fair and reasonable prices.

[Edit: Even when relying on price analysis, one should consider the context of similarities and differences between the earlier and current purchases]. 

I asked constricting officer what the “best information available” is for small quantity sole source items to be manufactured…

Edited by joel hoffman
Added note concerning the context of price comparisons
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42 minutes ago, Vern Edwards said:

DLA bought the parts. Did the CO(s) think the prices were not fair and reasonable? If so, did they comply with FAR 15.405(d)? If so, what happened?

Quote

(d) If, however, the contractor insists on a price or demands a profit or fee that the contracting officer considers unreasonable, and the contracting officer has taken all authorized actions (including determining the feasibility of developing an alternative source) without success, the contracting officer shall refer the contract action to a level above the contracting officer. Disposition of the action should be documented.

FAR 15.405(d)'s statement about documentation must be read in conjunction with FAR 15.406-3 and any supplementing text.

Quote

15.406-3 Documenting the negotiation.

(a) The contracting officer shall document in the contract file the principal elements of the negotiated agreement. The documentation (e.g., price negotiation memorandum (PNM)) shall include the following:

...

(10) The basis for the profit or fee prenegotiation objective and the profit or fee negotiated.

(11) Documentation of fair and reasonable pricing.

Quote

DFARS PGI 215.406-3 Documenting the negotiation.

...

(10) The documentation—

(A) Shall address significant deviations from the prenegotiation profit objective;

(B) Should include the DD Form 1547, Record of Weighted Guidelines Application (see DFARS 215.404-70), if used, with supporting rationale;

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40 minutes ago, joel hoffman said:

The IG report didn’t elaborate on whether TransDigm substantiated that they were commercial items.

What law or regulation requires TransDigm to substantiate its assertion that a product or service is commercial? Who job is it to determine commerciality and apply appropriate policies?

40 minutes ago, joel hoffman said:

By using the uncertified cost data, which is one of the most reliable sources of information to perform cost analysis...

If it's so reliable, why do we ever need certified cost or pricing data?

33 minutes ago, joel hoffman said:

I believe that the IG is saying that the FAR limits the KO’s ability to go beyond limited price analysis for sole sourced parts to determine fair and reasonable prices.

If a CO feels that they cannot determine the reasonableness of a price, what should they do? Did TransDigm put a gun to the CO's head or did DOD shoot itself in the foot?

What if, during negotiations and without a scrap of cost or pricing data, the CO had simply asked, pen hovering over paper and making eye contact with the company representative: "What does it cost TransDigm to make that part Mr or Ms Jones?"

And what if the answer, whatever it was, including "I don't know," turned out to be false?

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TransDigm is a publicly traded company and thus the SEC reviews all its shareholder disclosures.  Is the general public rushing to buy stock in this extremely profitable enterprise?  If TransDigm is not reporting to the SEC (i.e., the Government) profit margins commensurate with what the DODIG reported, then we still have work to do to be able to factually document the negotiation.

Let's not take the IG's percentages as factual, and instead let's work with the contractor via fact-finding.  Their SEC filings can be a starting point for this.  The 10-K (annual report to shareholders) discloses that the past two years' gross profits have hovered slightly above 50% for TransDigm Group.  See ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for TransDigm Group Incorporated, filed November 16, 2021 (pp. 27).  Not quite 3000 or 4000 percent, to quote the IG.  It should be the CO's job to read up on this existing resource, and then to work with the contractor to clarify what in the instant proposal rolls up in the 10-K as cost and what rolls up as profit.  He/she can then request cost data on a limited selection of the portion determined costs, so that he/she can perform a cost analysis technique on them, e.g. FAR 15.404-1(c)(2)(iv), "Verification that the offeror's cost submissions are in accordance with the contract cost principles and procedures in part 31."

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1 hour ago, Vern Edwards said:

What law or regulation requires TransDigm to substantiate its assertion that a product or service is commercial? Who job is it to determine commerciality and apply appropriate policies?

The contracting officer makes the determination or relies upon a previous determination.

Without researching case law, it would seem logical that, If the contracting officer cannot determine that a product is a commercial item, and if the contractor wants to maintain that it is a commercial item, then the contractor needs to substantiate why it is a commercial item

Without a government determination, I believe  it’s not a commercial item for purposes of that acquisition.  There are likely are appeal rights and procedures.

That should also partly answer your earlier “what then” question. I don’t know if the KO ultimately agreed with TransDigm but assume not because the IG Audit Report didn’t elaborate after noting the governments position.  

I remember Aircraft manufacturers trying to assert that the C-17 and (I think) C-130 were commercial items to no avail.

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WifWaf, your approach involves obtaining information from the contractor/proposer and working through it together.

Transdigm only provided data other than certified cost or pricing data for 2 parts on 2 contracts included in the DoD-IG audit. Most requests were apparently refused.

*Edit-add: [Thus, one of the points raised by the DoD-IG, ‘Should a proposer be required to comply with a KO request for info other than certified cost or pricing data?’ ]

Signing off for now. I’ve got other things to do today, 🤠

Edited by joel hoffman
*added a comment concerning the DoD-IG point raised
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Bottom line:

Legislative Branch (Congress) - "Here is $X,XXX,XXX.XX in funding. You can spend it on these things."

Offeror - "I have a pencil, without an eraser installed, and they cost a $100 a piece.

Executive Branch (CO) - "That sounds like a perfectly fair and reasonable price. I'll take 27 of them. Here is you FFP contract."

Not saying it's smart or prudent, but it ain't illegal if the steps above are followed. 

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On 2/23/2022 at 11:33 AM, joel hoffman said:

WifWaf, your approach involves obtaining information from the contractor/proposer and working through it together.

Joel, I know you’re speaking in context, but out of context my mind goes: “Oh, what a novel idea!” 🙄

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16 hours ago, WifWaf said:

Joel, I know you’re speaking in context, but out of context my mind goes: “Oh, what a novel idea!” 🙄

Not sure what you mean. “Within context” here, the sole source contractor only furnished data in response to government requests in 2 instances. One can’t “work through anything together” (negotiate or ask questions) with a contractor if it won’t provide any information. That’s one of the points of the IG report or IG audits of the transactions.

And as I mentioned earlier,  “Even when relying on price analysis, one should consider the context of similarities and differences between the earlier and current purchases”, which often benefits from communications between a buyer and seller.

The seller can discuss all the points raised in this thread and in the critiques about why a part is expensive. 

.  

 

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1 hour ago, joel hoffman said:

The seller can discuss all the points raised in this thread and in the critiques about why a part is expensive. 

Speaking from the contractor's viewpoint, many contracting officers are ill-prepared to engage in such discussions. Many (not all!) don't have the critical analysis skills to understand things like carrying cost, imputed interest, inventory valuations, and the like. 

Frequently, when a contractor attempts to raise those points, the response is not a reasoned analysis; the response is: "No. Because I said so."

It can be disheartening to spend the time & effort to prepare an in-depth analysis in support of proposed pricing, only to be told "no" in such a way that one can be sure the other party didn't bother to think about what had been presented.

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