Industry finally succeeded in locking the Department into past prices paid as part of the fiscal year 2016 National Defense Authorization Act. At the time the House Armed Services Committee put the proposal forward, POGO told the authorizing committees:

Using recent prices paid by the government in the determination of price reasonableness will harm the government and severely limit the government’s ability to access any cost or pricing information from contractors selling commercial goods or services. Historic pricing data is insufficient to determine fair and reasonable prices and will result in new bad deals being made based on old bad deals. DoD could be locked in to such a designation despite subsequent changes to the item or military unique requirements that alter the item from its commercial nature. Any continuation of commercial item designations could require DoD to buy commercial items that no longer have a commercial market, and thereby pay excessive costs or prices or settle on timeworn products. Moreover, we are concerned that these provisions, which alter the process for determining commercial items, will only exacerbate overpayment problems identified by the GAO [Government Accountability Office] and DoD IG.

The latest inspector general report on TransDigm confirmed that relying on historical price analysis was unreliable. “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.” As a result, TransDigm “earned excess profit up to 4,436 percent on 34 parts it sold to the DLA and the Army.” While it is easy to blame TransDigm, Congress created the problem, and agencies are placed in the undesirable position of relying on outdated, and often outrageous, prices.

Outsourcing Agency Acquisition Authority?

Generally, the government should be determining its own needs and how best to procure services or goods to meet those needs in an affordable way. The Federal Acquisition Streamlining Act created a preference for purchasing commercial items. Recently, the U.S. Court of Appeals for the Federal Circuit ruled for the first time that this requirement meant the government could be punished for inadequately considering commercial items that may not meet the government’s requirements. In that case specifically, the Court found the Army acted in violation of the Federal Acquisition Streamlining Act when it created its own intelligence analysis software system without sufficiently considering a commercial system offered by Palantir, a contractor that wanted to sell its technology to the Army. As a result of that action, Palantir recently won the Army contract, which could be worth more than $800 million.

The system developed by the Army was troubled; more than a decade in, it had spent more than $3 billion developing its own software. But the Court’s decision was not based on performance, and could make it even more difficult for program officers to feel confident they can resist powerful companies trying to sell the Department wares it doesn’t want. As will be described in further detail, that problem will become even more pernicious as the Department expands its use of Other Transaction Authority.