Weapons Contractors Hitting Pentagon
With Inflated Prices for Planes, Subs, Missiles
Bill Whittaker / 60 Minutes
TRANSCRIPT
(May 21, 2023) — 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.
Shay Assad: 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… 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.
Shay Assad: This, Bill, is an oil pressure switch that NASA used to buy. Well, their oil switch cost with all of the cabling cost $328. This oil switch we paid over $10,000 for it.
Bill Whitaker: So what accounts for that huge difference?
Shay Assad: Gouging. What– 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.
Shay Assad: 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.
Bill Whitaker: So does that affect our readiness?
Shay Assad: There’s no doubt about it. You just can only buy so much, ’cause 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 his clip? It’s the same thing.
Assad points to the Patriot weapons 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.
Shay Assad: And over a seven-year period these companies just keep rakin’ it in.
Shay Assad 60 MINUTES
Bill Whitaker: What level of profit are we talking about?
Shay Assad: 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–
Bill Whitaker: –that’s a good profit.
Shay Assad: Sure.
But Shay Assad told us Pentagon analysts found total profits approached 40%.
Shay Assad: Based on what they actually made, we would’ve received an entire year’s worth of missiles for free.
Bill Whitaker: An entire year worth of missiles.
Shay Assad: We woulda got ’em 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.
Shay Assad: Well that’s how you become the most hated man in the Pentagon. When you say, “No, no, we’re– we’re actually gonna 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.
Bill Whitaker: You called Raytheon on the carpet.
Shay Assad: Yes, I did. You know, 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.
CEO Gregory Hayes (in 2021): “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.”
Bill Whitaker: One-offs?
Shay Assad: No, it’s not one-off. And it’s not one-off with a lotta 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.
Shay Assad: We have to have a financially healthy defense industrial base. We all want that. But what we don’t wanna do is get taken advantage of and hoodwinked.
Bill Whitaker: And the US has nowhere else to go?
Shay Assad: 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. Fifty one major contractors consolidated to five giants.
Shay Assad: 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.
Bill Whitaker: The watchdogs in the government,
Shay Assad: The watchdogs, the negotiators, the engineers, the program managers. Over 50% was removed.
Bill Whitaker: It was the era of, you know, downsizing–
Shay Assad: Absolutely.
Bill Whitaker: The government, getting government outta… let business-
Shay Assad: Let business do their thing, right? It was ultimately a disaster.
Bill Whitaker: And the government was complicit.
Shay Assad: Yes. They were convinced that they could rely on the companies to do what was in the best interests 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 seven-fold increase.
Chris Bogdan: Industry’s motivations and objectives are different than the Department of Defense’s.
Retired Air Force Lieutenant General Chris Bogdan
Retired Air Force Lieutenant General Chris Bogdan spent his career overseeing the purchase of some of the country’s most critical weapons systems.
Chris Bogdan: They are companies that have to– to– 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.
Bill Whitaker: But in our system, there’s nothing wrong with profit.
Chris Bogdan: No, there isn’t. But taken to an extreme industry may not make the best decisions in the best interests of the government.
General Bogdan says we’ve only begun to feel the full impact. 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.
Chris Bogdan: 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 air– 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 retained control of design and repair data — the proprietary information needed to fix and upgrade the plane.
Bill Whitaker: So you spend billions and billions of dollars to get this plane built. And it doesn’t actually belong to the Department of Defense?
Chris Bogdan: The weapon system belongs to the department. But the data underlying the design of the airplane does not.
Bill Whitaker: We can’t maintain and sustain the planes without Lockheed’s-
Chris Bogdan: Correct. And that’s because– that’s because we didn’t– we didn’t up front either buy or negotiate getting the– the technical data we needed so that when a part breaks, the DOD can fix it themselves.
F-35 on a runway
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 gouging. Shay Assad’s review team found the government “will pay” the company “$119 million” for parts that “should cost $28 million.”
Rep. Robin Kelly (during a congressional hearing): Could you sell to the DOD these parts at a lower price and still make a reasonable profit?
Nick Howley (during a congressional hearing): I don’t believe that’s the question for us.
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%.
Shay Assad: We said, “Look, we need these parts to go on aircraft that are in Iraq.” They simply said, “We’re not gonna ship it until you cough up.”
Bill Whitaker: To the battlefield?
Shay Assad: That’s correct. This was going to the battlefield.
Mark Owen, Kathryn Foresman and Julie Smith 60 MINUTES
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 Kathryn Foresman: 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.
Bill Whitaker: So– explain to me, why can’t the Department of Defense just step up to TransDigm and say, “No, we’re not gonna pay that?”
Julie Smith: ‘Cause 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.
Bill Whitaker: Does that make sense to any of you?
Kathryn Foresman: No. It is very concerning to me. Contractors see that they can do this, they are the ones that hold the power.
Mark Owen: So it’s not really a true capitalistic market because one– one company is telling you what’s gonna happen.
Bill Whitaker: So if it’s not a capitalistic system, what is it?
Kathryn Foresman: It’s a monopoly.
Mark Owen: Monopoly.
Shay Assad: If you’re happy with companies gouging you and just looking you right in the eye and say, “I’m gonna 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 any one to speak on camera.
Produced by Sam Hornblower. Broadcast associates, Mabel Kabani and Natalie Breitkopf. Edited by Stephanie Palewski Brumbach.
Posted in accordance with Title 17, Section 107, US Code, for noncommercial, educational purposes.
