With billions of dollars worth of arms supplies to Ukraine and rising tensions in the Taiwan Strait, some Pentagon generals are expressing concern about declining supplies of US weapons … at a time when the cost of replacing them is skyrocketing – we wonder why the Pentagon is finding it difficult to procure needed weapons at a price taxpayers can afford? A six-month investigation by 60 Minutes found that it had less to do with foreign complications than domestic issues — what can only be described as price gouging by U.S. defense contractors.
Shay Asad: The gazing that takes place is undesirable. It is absurd.
Perhaps no one understands the problem better than Shai Assad, now retired after four decades of negotiating arms deals. In the 1990s, he was executive vice president and chief contract negotiator Defense giant Raytheon. Then he switched sides… Assad became the most senior defense and treaty negotiator under Presidents George W. Bush, Barack Obama and Donald Trump. He told us, the Pentagon overpays for almost everything – from radars and missiles … helicopters … planes … submarines … down to the nuts and bolts.
SHA ASSAD: This, Bill, is an oil pressure switch that NASA bought. Well, their oil switch with all cabling costs $328. We paid over $10,000 for this oil switch.
Bill Whittaker: So what accounts for that huge difference?
Shaw Asad: Gogging. What else can be accounted for?
To Assad’s former defense industry allies, he was the “most hated man in the Pentagon” for his tough investigations into their pricing practices.
Shah Asad: Whoever they are, whatever company they are, they have to be held accountable. And right now that accountability system is broken in the Department of Defense.
Bill Whittaker: So does it affect our preparation?
Shay Asad: No doubt about it. You can only buy so much, because you only have so much money. And that’s why I say, is it really different for a Marine not to have enough bullets in his clip? It’s the same thing.
Assad pointed to the Patriot weapons system, a pillar of air defense for the United States, NATO, Ukraine and Taiwan. In 2015, Assad ordered a review and military negotiators discovered Lockheed Martin and its subcontractor, Boeing, were grossly overcharging the Pentagon and US allies by hundreds of millions of dollars for the Patriot’s PAC-3 missiles.
SHA ASSAD: And for seven years these companies just stuck it out.
Bill Whittaker: What level of profit are we talking about?
Shay Asad: Well– if the average profit that is negotiated in a firm fixed price contract is usually between 12% and 15%, then a company can–
BILL WHITAKER: –that’s a good gain.
Shah Asad: Of course.
But Assad has told our Pentagon analysts that the total gain is closer to 40%.
Sha Assad: Based on what they actually built, we would have gotten a whole year’s worth of missiles for free.
Bill Whittaker: A whole year’s worth of missiles.
Shay Asad: We will get them for free.
Boeing declined our request for comment. Lockheed told us: “We negotiate with the government in good faith on all of our programs.” But after a review, the Pentagon awarded the company a new contract, saving $550 million.
Shay Asad: Well that’s how you became the most hated person in the Pentagon. When you say, “No, no, we’re– we’re actually going to focus on this.”
Army negotiators also seized on Assad’s former employer Raytheon for what they called “unacceptable profits” from the Patriot system by dramatically exaggerating costs and hours spent building the radar and ground equipment.
BILL WHITAKER: You called Raytheon on the carpet.
Shay Asad: Yes, I did. You know, of course, I report the information that chained up. But then I went to the Inspector General. And– I also went to– the Defense Criminal Investigative Service. And I said, “I want to see it.”
Raytheon told us it was working to “fairly resolve” the matter, and in 2021 CEO Gregory Hayes told investors the company would set aside $290 million for potential liabilities.
CEO Gregory Hayes (in 2021): “I would say it’s an ongoing investigation by the DOJ… We think these are one-off incidents… shouldn’t have happened, but they did.”
Bill Whittaker: One off?
Shay Asad: No, it’s not single. And it’s not single with a lotta companies.
A Defense Department study released last month found that big contractors flushed billions of Pentagon dollars to hand out to shareholders.
Shay Asad: We need to have a financially sound defense industrial base. We all want it. But what we don’t want to do is take advantage and cheat.
Bill Whittaker: And the United States has nowhere else to go?
Shay Asad: We have nowhere else to go. These weapons are for many Shipping to Ukraine At the moment, there is only one supplier. And companies know it.
It wasn’t always like this. The roots of the problem can be traced back to 1993, when the Pentagon, seeking to cut costs, called for defense agencies to consolidate. Fifty prime contractors unite the five giants.
Shai Asad: The scenario has completely changed. In the 80s, there was intense competition between several companies. And so the government had a choice. They had leverage. We now have limited leverage.
The problem worsened when the Pentagon, in another cost-saving move, cut 130,000 employees whose job it was to negotiate and oversee defense contracts.
Bill Whittaker: Government Surveillance,
Shay Asad: Watchman, Negotiator, Engineer, Program Manager. More than 50% removed.
BILL WHITAKER: It was, you know, the era of downsizing
Shai Asad: Absolutely.
Bill Whittaker: Government, overtaking government… Let business do business
Shay Asad: Let the business do their job, right? It was ultimately a disaster.
BILL WHITAKER: And the government was involved.
Shay Asad: Yes. They were convinced they could count on companies to do what was in the best interests of war fighters and taxpayers.
The Pentagon has given companies unprecedented access to surveillance. Asad said that instead of saving money, the price of almost everything goes up. In the competitive environment before the companies merged, a shoulder-launched Stinger missile cost $25,000 in 1991. Raytheon is now the sole supplier, costing more than $400,000 to replace each missile sent to Ukraine … even accounting for inflation and some upgrades that’s a seven-fold increase.
Chris Bogdan: Industry’s motivations and objectives are different than those of the Department of Defense.
Retired Air Force Lt. Gen. Chris Bogdan spent his career overseeing the procurement of some of the nation’s most important weapons systems.
Chris Bogdan: They’re companies that have to survive, to make a profit. The Department of Defense, on the other hand, wants to have the best weapons system possible as quickly and as cheaply as possible. They are opposite ends of the spectrum.
Bill Whittaker: But in our system, there’s nothing wrong with profit.
Chris Bogdan: No, no. But taking it to extreme industry may not make the best decision in the best interest of the government.
General Bogdan said we are only beginning to feel the full impact. In 2012, he was tapped to take over the reins of the troubled F-35 Joint Strike Fighter program — it was seven years behind schedule and $90 billion over original estimates. But Bogdan told us the biggest costs are yet to come for support and maintenance, which could cost taxpayers $1.3 trillion.
Chris Bogdan: We won’t be buying as many F-35s as we thought. Because it doesn’t make a whole lot of sense to buy airplanes– to buy more airplanes when you can’t afford them.
The Pentagon gave control of the program to Lockheed Martin. The contractor provided the aircraft to the Pentagon to design and build, but under the contract, Lockheed and its suppliers retained control of the design and repair data – proprietary information needed to fix and upgrade the aircraft.
BILL WHITAKER: So you spend billions and billions of dollars building this plane. And it doesn’t actually belong to the Department of Defense?
Chris Bogdan: Belongs to the Weapons Systems Division. But there is no data underlying the design of the aircraft.
Bill Whittaker: Without Lockheed we can’t maintain and sustain planes–
Chris Bogdan: Right. And that’s because– we didn’t– we didn’t either buy up front or negotiate– the technical data we needed so that if a part broke DOD could fix it themselves.
When a part breaks, it’s likely to come from a subcontractor like Transdigm, which has seen its stock rise as it buys companies it relies on for military parts. Founder Nick Hawley has been called before Congress twice over alleged price gouging. Shah Asad’s review team found that the government would pay the company “$119 million” for a portion of “$28 million”.
Representative Robin Kelly (Congressional Hearing): Can you sell these parts to the DOD at a lower price and still make a reasonable profit?
Nick Hawley (Congressional Hearing): I don’t believe that’s a question for us.
Transdigm told us it follows the law and charges market prices. But in 2006, Shah Asad said Apache helicopters were unable to fly without a critical valve. Transdigm took over the manufacturer and raised the price of the valve to $747, about 40%.
Sha Assad: We said, “Look, we need these parts to go on the plane that’s in Iraq.” They simply said, “We won’t send it until you cough.”
Bill Whittaker: On the battlefield?
Shah Asad: That’s right. It was going to the battlefield.
By 2018, the valve will cost around $12,000. A Pentagon report called it “extortion”… The Pentagon announced in March Largest budget: $842 billion – About half will go to defense contractors. While contract costs are rising, Pentagon oversight is shrinking, through cuts and attrition. We caught up with recently retired auditors Julie Smith and Mark Owen, and contracting officer Kathryn Foresman: who are part of the downsizing. They told us with less oversight and now that Shaw Assad is gone, the Pentagon is losing the price-cutting war.
BILL WHITAKER: So– explain to me, why can’t the Department of Defense just walk up to TransDigm and say, “No, we’re not going to give it away?”
Julie Smith: ‘Cause we don’t have another source for a lot of the retail stuff that they offer right now. They are literally the only game in town that can fly a plane. So we are at their mercy.
Bill Whittaker: Does that make sense to any of you?
Catherine Foresman: No. It is very important to me. Contractors see that they can do it, they retain power.
Mark Wayne: So it’s not really a true capitalist market because a– a company is telling you what’s going to happen.
BILL WHITAKER: So if it’s not a capitalist system, what is it?
Kathryn Foresman: It’s exclusive.
Mark Wayne: Monopoly.
Shay Asad: If you’re happy for companies to push you and look you right in the eye and say, “I’m going to keep gauging you because I know you don’t have the guts to do anything about it.” Then I guess we should do what we’re doing.
In reporting this story, the Defense Department allowed 60 Minutes some background interviews with analysts, but ultimately decided not to allow anyone to speak on camera.
Produced by Sam Hornblower. Broadcast Associates, Mabel Kabani and Natalie Breitkopf. Edited by Stephanie Palewski Brumbach.