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How the Pentagon suffered price gouging by military contractors

Military contractors overcharge the Pentagon on nearly everything the Defense Department buys each year, experts told 60 Minutes during a six-month investigation into price gouging.

In March, Deputy Defense Secretary Kathleen Hicks announced the Pentagon’s largest budget ever: $842 billion. About half will go to defense contractors.

Retired Air Force Lt. Gen. Chris Bogdan, who spent his career overseeing the purchase of some of the nation’s most important weapons systems, said there is an inherent conflict between the Pentagon and defense contractors.

“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’re the opposite end of the spectrum.”

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Retired Air Force Lt. Gen. Chris Bogdan

60 minutes

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. He then switched sides and became the Defense Department’s most senior and respected contract negotiator. He placed his former colleagues in the defense industry under intense scrutiny.

“They need to be held accountable,” he said. “Whoever they are, whatever company they are, they have to be held accountable. And right now that accountability system is broken at the Department of Defense.”

It wasn’t always like this, he said. The roots of the problem can be traced back to 1993, when the Pentagon called for consolidation of defense agencies to cut costs, and 51 major contractors merged into five giants.

“The landscape has completely changed,” Assad said. “In the ’80s, there was fierce competition between several companies. And so the government had choices. They had leverage. We now have limited leverage.”

The problem was compounded in the early 2000s when the Pentagon, in another cost-saving move, cut 130,000 employees whose job it was to negotiate and oversee defense contracts.

“They were convinced that they could count on companies to do what was in the best interest of warfighters and taxpayers,” Assad said.

The Pentagon has given companies unprecedented access to surveillance. Asad said that instead of saving money, prices of almost everything started increasing.

In the competitive environment before the companies merged, a shoulder-launched Stinger missile cost $25,000 in 1991. Raytheon, Assad’s former employer, is now the sole supplier, spending more than $400,000 to replace each missile sent to Ukraine. Even accounting for inflation and some improvements, that’s a sevenfold increase.

“This weapon is for many that Shipping to Ukraine At the moment, there is only one supplier. And companies know it,” Asad said.

Army negotiators also caught Raytheon making “unacceptable profits” from the Patriot missile defense system that dramatically overstated the cost and hours to build the radar and ground equipment.

The company told 60 Minutes it is working to “fairly resolve” the matter. In 2021, CEO Gregory Hayes told investors the company would set aside $290 million for potential liabilities.

A Pentagon study released last month found that major contractors are flush with “cash beyond their needs for operations or investment.” They have billions in extra cash from Pentagon businesses to hand out to shareholders.

“We have to have a financially healthy defense industrial base. We all want that,” Assad said. “But what we don’t want to do is take advantage and cheat.”

In 2015, Assad ordered a review and military negotiators discovered that Lockheed Martin and its subcontractor, Boeing, were grossly overcharging the Pentagon and US allies by hundreds of millions of dollars for Patriot’s PAC-3 missiles.

Pentagon analysts put the total gain at closer to 40%.

Boeing declined to comment, but Lockheed said: “We negotiate in good faith with the government on all of our programs.”

After the review, the Pentagon negotiated a new contract with Lockheed, saving American taxpayers $550 million.

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F-35 on a runway

60 minutes

Bogdan points to another Lockheed Martin deal with problems. In 2012, he was tapped to take the reins of the troubled F-35 Joint Strike Fighter program; It was seven years behind schedule and $90 billion more than the original estimate. Bogdan said the biggest costs are yet to come for support and maintenance, which could cost taxpayers $1.3 trillion.

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.

“The weapon system belongs to the department, but the underlying data of the aircraft design does not,” Bogdan said.

When a part breaks, the Defense Department itself cannot fix or replace it. This would likely come from a subcontractor, such as Transdigm, a fast-growing company led by Nick Hawley. He made a fortune by taking over companies that made spare parts for the army.

Last year, Hawley was called before Congress for the second time on allegations of price gouging. Assad’s review team found that the government would pay Transdigom $119 million for parts worth $28 million.

Transdigm told 60 Minutes that the company follows the law and charges market prices.

While contract costs are rising, Pentagon oversight is shrinking and due to cuts. Recently retired auditors Julie Smith and Mark Owen and contracting officer Kathryn Foresman were part of the oversight agencies that suffered downsizing. They say with less oversight and with Assad gone, the Pentagon is losing the price-cutting battle.

“We don’t have any other source for many of the spares they supply right now,” Smith said when asked about Transdigm. “They’re literally the only game in town to fly a plane. So we’re at their mercy.”

They say it is not a true capitalist market, but a monopolistic market. That’s troubling to Foresman, who said military contractors are the ones holding the power.

The Defense Department declined to speak on camera about the price hike.

“If you’re happy with companies looking at you and just looking you in the eye and saying, ‘I’m going to keep gauging you because I know you don’t have the guts to do anything about it,’ then I think we should be doing what we’re doing.” Asad said.

This story was reported by: Bill Whittaker, Sam Whittaker and Mabel Kabani.

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