60 Minutes: Defense Contractors Overcharge Pentagon Transcript

With the US supplying billions of dollars of munitions to Ukraine and growing tensions in the Taiwan Strait, some Pentagon generals are sounding alarms about the dwindling supply of US weapons at a time when the cost of replacing them is skyrocketing. We wondered why the Pentagon is finding it hard to procure weapons it needs at a price taxpayers can afford. A six-month investigation by 60 Minutes found it has less to do with foreign entanglements than domestic ones, what can only be described as price gouging by US defense contractors.

The story will continue in a moment.

The gouging that takes place is unconscionable. It’s unconscionable.

Perhaps no one understands the problem better than Shay Assad, now retired after four decades negotiating weapons deals. In the 1990s, he was executive vice president and chief contract negotiator for defense giant Raytheon. Then he switched sides.

What we will ensure [inaudible 00:01:13].

Under Presidents George W. Bush, Barack Obama, and Donald Trump, Assad rose to be the Defense Department’s most senior and awarded contract negotiator. The Pentagon, he told us, overpays for almost everything, for radar and missiles, helicopters, planes, submarines, down to the nuts and bolts.

This, Bill, is an oil presser switch that NASA used to buy. Well, their oil switch with all of the cabling costs $328. This oil switch, we paid over $10,000 for it.

So what accounts for that huge difference?

Gouging. What else can account for it?

To Assad’s former defense industry associates, he was the most hated man in the Pentagon for his dogged scrutiny of their pricing practices.

No matter who they are, no matter what company it is, they need to be held accountable. And right now, that accountability system is broken in the Department of Defense.

So does that affect our readiness?

There’s no doubt about it. You just can only buy so much because you only have so much money. And that’s why I say, is it really any different than not giving a marine enough bullets to put in this clip? It’s the same thing.

Assad points to the Patriot weapon system, a pillar of air defenses for the US, NATO, Ukraine, and Taiwan. In 2015, Assad ordered a review and Army 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

And over a seven-year period, these companies just keep raking it in.

What level of profit are we talking about?

Well, if the average profitability that was negotiated in a firm fixed price contract was typically between 12 and 15%, so a company could make 12 to-

That’s a good profit.

Sure.

But Shay Assad told us Pentagon analysts found total profits approached 40%.

Based on what they actually made, we would’ve received an entire year’s worth of missiles for free.

An entire year worth of missiles?

We would’ve gotten for free.

Boeing declined our request for comment. Lockheed told us, “We negotiate with the government in good faith on all our programs.” But after the review, the Pentagon negotiated a new contract with the company saving $550 million.

Well, that’s how you become the most hated man in the Pentagon when you say, “No, no, no, we’re we’re actually going to pay attention to this.”

Army negotiators also caught Assad’s former employer, Raytheon, making what they called unacceptable profits from the Patriot system by dramatically exaggerating the cost and hours it took to build the radar and ground equipment.

(04:26)
You called Raytheon on the carpet?

Yes, I did. Of course I reported that information up the chain. But then I went to the Inspector General and I also went to the Defense Criminal Investigative Service and I said, “I want this looked into.”

Raytheon told us it is working to equitably resolve the matter. And in 2021 CEO, Gregory Hayes informed investors, the company would set aside $290 million for probable liability.

I will say this is an ongoing investigation by DOJ. We think these were one-off events that occurred, should not have occurred, but they did.

One-offs?

No, it’s not one-off. And it’s not one-off with a lot of companies.

A Department of Defense study released last month found major contractors flush with tens of billions of Pentagon dollars to hand out to shareholders.

We have to have a financially healthy defense industrial base. We all want that. But what we don’t want to do is get taken advantage of and hoodwinked.

And the US has nowhere else to go?

We have nowhere else to go. For many of these weapons that are being sent over to Ukraine right now, there’s only one supplier and the companies know it.

It wasn’t always like this. The roots of the problem can be traced to 1993 when the Pentagon, looking to cut costs, urged defense companies to merge. 51 major contractors consolidated to five giants.

The landscape has totally changed. In the ’80s, there was intense competition amongst a number of companies. And so the government had choices, they had leverage. We have limited leverage now.

The problem was compounded when the Pentagon, in another cost saving move, cut 130,000 employees whose jobs were to negotiate and oversee defense contracts.

(06:34)
The watchdogs in the government-

The watchdogs, the negotiators, the engineers, the program managers, over 50% was removed.

It was the era of downsizing government.

Absolutely.

Getting government out, let business-

Let business do their thing. And it was ultimately a disaster.

And the government was complicit.

Yes, they were convinced that they could rely on the companies to do what was in the best interest of the war fighters and the taxpayers.

The Pentagon granted companies unprecedented leeway to monitor themselves. Instead of saving money, Assad told us the price of almost everything began to rise. In the competitive environment before the companies consolidated, a shoulder fired Stinger missile cost $25,000 in 1991. With Raytheon now the sole supplier, it costs more than $400,000 to replace each missile sent to Ukraine. Even accounting for inflation and some improvements, that’s a sevenfold increase.

Industry’s motivations and objectives are different than the Department of Defense’s.

Retired Air Force Lieutenant General Chris Bogdan spent his career overseeing the purchase of some of the country’s most critical weapons systems.

They are companies that have to survive, make profit. The Department of Defense, on the other hand, wants the best weapon systems it can have as quickly as possible and as inexpensively as possible. Those are opposite ends of the spectrum.

But in our system there’s nothing wrong with profit?

No there isn’t. But taken to an extreme, industry may not make the best decisions in the best interest of the government.

General Bogdan says we’ve only begun to feel the full impact.

Good morning.

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 over the original estimate. But Bogdan told us the biggest costs are yet to come for support and maintenance, which could end up costing taxpayers $1.3 trillion.

We won’t be able to buy as many F-35s as we thought because it doesn’t make a whole lot of sense to buy more airplanes when you can’t afford the ones you have.

The Pentagon had ceded control of the program to Lockheed Martin. The contractor is delivering the aircraft the Pentagon paid to design and build. But under the contract, Lockheed and its suppliers retain control of design and repair data, the proprietary information needed to fix and upgrade the plane. So you spend billions and billions of dollars to get this plane built and it doesn’t actually belong to the Department of Defense.

The weapon system belongs to the department. But the data underlying the design of the airplane does not.

We can’t maintain and sustain the planes without Lockheed?

Correct. And that’s because we didn’t upfront either buy or negotiate getting the technical data we needed so that when a part breaks, the DOD can fix it themselves.

When a part breaks, it’s likely to come from a subcontractor like TransDigm, which has seen its stock soar as it buys up companies the military depends on for spare parts. Founder Nick Howley has twice been called before Congress over accusations of price. Shay Assad’s review team found the government will pay the company $119 million for parts that should cost $28 million.

Could you sell to the DOD these parts at a lower price and still make a reasonable profit?

I don’t believe that’s the question for us. The question is [inaudible 00:10:45].

TransDigm told us it follows the law and charges market prices. But in 2006, Shay Assad says Apache helicopters were unable to fly without a crucial valve. TransDigm had taken over the manufacturer and hiked the price of the valve by $747, up almost 40%.

We said, “Look, we need these parts to go on aircraft that are in Iraq.” They simply said, “We’re not going to ship it until you cough up.”

To the battlefield?

That’s correct. This was going to the battlefield.

By 2018, the valve would grow to cost almost $12,000. A Pentagon report called it extortion. In March, the Pentagon announced its largest budget ever, $842 billion. Almost half will go to defense contractors. While contract spending is going up, pentagon oversight is going down through cuts and attrition. We met with recently retired auditors, Julie Smith and Mark Owen and contracting officer Catherine Forsman who are part of the downsizing. They told us with less oversight and Shay Assad now gone, the Pentagon is losing the battle to hold down prices.

(12:05)
So explain to me, why can’t the Department of Defense just step up to TransDigm and say, “No, we’re not going to pay that.”

Because we don’t have another source for a lot of the spares that they provide right now. They are the literally only game in town in order to make an aircraft fly. So we’re at their mercy.

Does that make sense to any of you?

No, it is very concerning to me. Contractors see that they can do this. They are the ones that hold the power.

So it’s not really a true capitalistic market because one company is telling you what’s going to happen.

So if it’s not a capitalistic system, what is it?

It’s a monopoly.

Monopoly.

If you’re happy with companies gouging you and just looking you right in the eye and say, “I’m going to keep gouging you because I know you don’t have the guts to do anything about it.” Then I guess we should just keep doing what we’re doing.

In reporting this story, the Defense Department allowed 60 Minutes some background interviews with analysts, but ultimately decided not to provide anyone to speak on camera.