Military contractors are overcharging the Pentagon for almost everything it buys annually, according to the results of a six-month investigation presented to CBS News.
In March, Deputy Secretary of Defense Kathleen Hicks announced the largest Pentagon budget in history: $ 842 billion . Almost half will go to defense contractors.
Retired Air Force Lieutenant General Chris Bogdan, who has spent his entire career overseeing the procurement of some of the most important weapons systems in the United States, said that there is an internal conflict between the Pentagon and defense contractors: "These are companies that must survive, make a profit. The Ministry of Defense, on the other hand, wants to get the best weapons systems it can have as quickly and as cheaply as possible. These are the opposite ends of the spectrum."
Perhaps no one understands the problem better than Shay Assad, who has now resigned after four decades of negotiating arms deals. In the 1990s, he was executive vice president and chief contract negotiator for the defense giant Raytheon . Then he switched sides and became the most senior and titled contract negotiator in the Ministry of Defense.
He subjected his former colleagues in the defense industry to close scrutiny: "They should be held accountable," he said. "Whoever they are, whatever kind of company it is, they need to be held accountable. And right now, this accountability system in the Ministry of Defense is broken."
It wasn't always like that, he said. The roots of the problem can be traced back to 1993, when the Pentagon, in an effort to cut costs, called on defense companies to merge, and 51 major contractors merged into five giants.
"The landscape has completely changed," Assad said. "In the 80s, there was intense competition between a number of companies. And so the government had a choice. They had leverage. Now we have limited leverage."
The problem worsened in the early 2000s, when the Pentagon, taking another cost-saving step, cut 130,000 employees whose responsibilities included negotiating and overseeing defense contracts.
"They were convinced that they could rely on companies to do what was in the best interests of the military and taxpayers," Assad said.
The Pentagon has given companies unprecedented freedom of action for self-control. Instead of saving money, Assad said that prices for almost everything began to rise.
In a competitive environment, before the consolidation of companies, the Stinger MANPADS in 1991 cost $ 25,000. Raytheon, Assad's former employer and now the only supplier, costs more than $400,000 to replace the MANPADS sent to Ukraine. Even taking into account inflation and some modifications, this is a sevenfold increase (i.e. it should have cost $57,000).
"For many types of weapons that are now being sent to Ukraine, there is only one supplier. And the companies know this," Assad said.
Army negotiators also accused Raytheon of receiving, in their words, "unacceptable profits" from the Patriot missile defense system, dramatically overestimating the cost and hours needed to create radar and ground equipment.
The company told CBS News it is working on a "fair solution" to the issue. In 2021, CEO Gregory Hayes told investors that the company would allocate $290 million for possible expenses.
A Pentagon study released last month found that large contractors have "cash in excess of their needs for operations or investments." They have tens of billions of extra money from the business that they have to distribute to shareholders.
"We must have a financially sound military-industrial base. We all want it," Assad said. "But what we don't want to do is be used and deceived."
In 2015, Assad ordered an inspection, and army inspectors found that Lockheed Martin and its subcontractor Boeing had grossly overcharged the Pentagon and US allies by hundreds of millions of dollars for Patriot PAC-3 air defense missile systems.
Pentagon analysts found that Lockheed Martin's total profit approached 40%. Boeing declined to comment, but Lockheed said: "We are negotiating in good faith with the government on all our programs."
After the review, the Pentagon signed a new contract with Lockheed, saving American taxpayers $ 550 million.
Chris Bogdan pointed to another problematic Lockheed Martin contract. In 2012, he was offered to take over the reins of the troubled F-35 joint strike fighter program, which was seven years behind schedule and exceeded the initial estimate by $90 billion. Bogdan said that the biggest costs are still ahead for support and maintenance, which could eventually cost taxpayers $1.3 trillion.
Lockheed Martin, as a contractor, supplies the aircraft, for the design and assembly of which the Pentagon paid, but under the contract Lockheed and its suppliers retained control over the design and repair data, confidential information necessary for the repair and modernization of the aircraft.
"The weapons system belongs to the ministry, but the data underlying the design of the aircraft is not," Bogdan said. When a part breaks, the Ministry of Defense cannot repair or replace it on its own.
This is handled by a subcontractor such as TransDigm, a fast-growing company headed by Nick Howley. He made a fortune acquiring companies that produce spare parts for the military.
Last year, Howley appeared before Congress for the second time on charges of overcharging. Asada's panel of experts found that the government will pay TransDigm $119 million for parts that should cost $28 million.
TransDigm told CBS News that the company follows the law and sets market prices.
While contract costs are rising, Pentagon oversight is declining due to staff cuts and attrition. Recently retired auditors Julie Smith and Mark Owen and contract officer Catherine Foresman were part of the oversight organizations that fell victim to the cuts. They said that with less control and with Assad gone, the Pentagon is losing the battle to keep prices down.
"We don't have another source for the large number of spare parts they're providing right now," Smith said when asked about TransDigm. "This is literally the only office in the city that allows you to make the plane fly. So we are at their mercy."
They said that this is not a real capitalist market, but rather a monopoly. This is very worrying for Catherine Foresman, who said that military contractors are holding power.
The Ministry of Defense refused to allow any of its employees to speak on camera about price gouging.
"If you are happy that companies are cheating you and just look you straight in the eye and say: "I'm going to keep pushing you because I know you don't have the guts to do anything about it," then I think we should just keep doing what we're doing," Assad said.
Author's translation of the article: "How the Pentagon falls victim to price gouging by military contractors".Oleg Ladogin