At Hearing, Defense Contractor Agrees with Warren: Legal Loopholes Should Not Lead to Price-Gouging the Military
Warren: “The Pentagon is spending $440 billion this year on contracts. It’s important for us to get better procedures in place to get some eyes on what they’re doing.”
Defense contractor agrees legal loopholes should not lead to price-gouging the military
Washington, D.C. – Today, U.S. Senator Elizabeth Warren (D-Mass.), a member of the Senate Armed Services Committee, questioned Shyam Sankar, Chief Technology Officer and Executive Vice President of Palantir Technologies, about defense contractors exploiting loopholes to price gouge the military.
Senator Warren highlighted an enormous loophole in military acquisition rules that allows defense contractors to market a product as “commercial” even when the product is only made for and sold to our military. As the only customer, the Department of Defense (DoD) has no way to negotiate a fair market price without cost or pricing data, resulting in the department often overpaying for products and services.
In one example, defense contractor Honeywell successfully lobbied Congress to get its engines treated as commercial items and subsequently doubled the price of the engine.
“I completely agree that if you have a fake commercial item that doesn't actually have commercial applicability, if the company is not able to leverage a diversified R&D base that goes beyond the government, that is the promise that should lead to price performance improvements for the government, then you’re not getting the value of the commercial item,” Mr. Shankar said.
Last year, DoD’s Inspector General released a report that found Boeing paid the Air Force 80 times the available commercial price for a soap dispenser and recommended companies be required to alert the government when prices go up 25% or more.
“I’m sure it is not your intent to team up with another organization in order to price gouge the military,” Senator Warren said to Mr. Sankar. As a result, she asked him to commit to the Pentagon watchdog’s recommendation that bid contractors should provide notice when the price of a good or service goes up by 25%. Mr. Sankar refused to commit Palantir to that recommendation but said he would get back to the committee.
Senator Warren’s bipartisan Stop Price Gouging the Military Act would close loopholes in current acquisition laws, tie financial incentives for contractors to performance, and provide the Department of Defense (DoD) the information necessary to prevent future rip-offs.
Transcript: Hearings to examine defense innovation and acquisition reform.
Senate Armed Services Committee
January 28, 2025
Senator Elizabeth Warren: Thank you, Mr. Chairman. And thank you for holding this hearing. So, DoD buys a lot of stuff from defense contractors, and to protect the military and taxpayers, it's long been the law that defense contractors must give DoD contracting officers certified cost and pricing data to help verify that a price that's being charged is fair and reasonable.
One of the big exceptions to this, though, is for, “commercial goods and services,” based on the principle that the market will make sure it's a fair price. If you could buy it on Amazon, that’s a fair price. You don’t have to go into all the background on how you got there. I get that, and I am all for commercial buying. But the fact is, this is turned into a massive loophole where big defense contractors withhold data, even though there’s no market, and DoD, effectively the only customer, doesn’t have this information so that these giant companies can price gouge the military.
I want to give you an example here. For years, the army was buying Chinook helicopter engines from Honeywell, and Honeywell successfully lobbied Congress so its engines would be treated as commercial, and Honeywell wouldn't have to turn over the certified cost and pricing data. Now, Mr. Sankar, you’re the CTO of Palantir, a billion-dollar tech company that contracts with DoD once Honeywell got the engine moved to a commercial engine.
What do you think happened to the price?
Mr. Shyam Sankar, Chief Technology Officer and Executive Vice President, Palantir Technologies: I’m not familiar, Senator.
Senator Warren: Well, it went up, not down, by 100%, and that’s the problem we’ve got here too often. DOD is outgunned when it is negotiating with these giant defense contractors, which is exactly why it needs the cost and pricing data to avoid being ripped off. Now, Mr. Sankar, your company, Palantir, is looking to create a consortium with another defense tech company, Anduril, is that right? Yeah. To jointly bid for something called “other transactions agreements,” or since we have to give everything initial OTAs, where the government also waives taxpayer protections on how to get pricing information. And I’m sure it is not your intent to team up with another organization in order to price gouge the military. This next question should probably be easy here. DoD’s inspector general recommended requiring bid contractors to alert military contracting offices when the price of a good or service goes up by 25%. In other words, move it up so other people know, and can get eyes on it. Mr. Sankar, do you agree with the IGs recommendation?
Mr. Sankar: I do agree. I think the price signal is part of the competitive market and encouraging more entrants and capital to efficiently be allocated to improve things.
Senator Warren: Excellent. And will Palantir agree to do that voluntarily?
Mr. Sankar: I would defer to my team here, but I don’t think we would have any conceptual disagreement with that.
Senator Warren: Okay, so can I treat that as a yes?
Mr. Sankar: I would defer to my team.
Senator Warren: Well, I want to be clear here because the—
Mr. Sankar: As the CTO, I don't speak on the business side.
Senator Warren: Fair enough. Look, we only know about most of these overcharges because of the work that the Department of Defense’s Inspector General has done. This is the person who President Trump just illegally fired on Friday night, along with at least 16 other IGs. I am deeply concerned that this administration is removing exactly the cops on the beat that we need to identify waste and to prevent these kinds of increases.
So, Mr. Sankar, do you think it helps or hurts national security to have Senate-confirmed watchdogs, who can be there on pricing questions, like this, to call balls and strikes?
Mr. Sankar: As a technologist, what I can speak to is, when you look at Intel in the late 60s, 96% of the market for integrated circuits was the Apollo program and the DOD. But Bob Noyce, says, the co-founder of Intel, the CO inventor the transistor, always envisioned a bigger commercial market, our ability to deliver a salt breaker and ultimately have an asymmetric threat against the Soviets—
Senator Warren: Can you relate that to the question?
Mr. Sankar: Yeah. I promise it will get there. Ability to deliver a salt breaker was because, actually he could, he could create integrated circuits that were 1000s of times cheaper than when we were building Apollo. That was only possible because he had an eye towards the commercial market. So I completely agree that if you have a fake commercial item that doesn’t actually have commercial applicability, if the company is not able to leverage a diversified R&D base that goes beyond the government, that is the promise that should lead to price performance improvements for the government, then you’re not getting the value of the commercial item. But when we look at space, for example, I grew up in the shadow of the Space Coast, the cost to get a kilogram into orbit for the shuttle, was $50,000 a kilogram, the cost with starship heavy reuse will be 10 bucks.
Senator Warren: Mr. Sankar, I very much appreciate that you’re trying to push here on cost. I am too. The question I had asked you is whether or not we need IGs—who are the whistleblowers who say people are cheating on the cost, for example, on the definition of commercial—or somebody who can help us bring these costs down. The Pentagon is spending $440 billion this year on contracts. It's important for us to get better procedures in place to get some eyes on what they’re doing. And IGs help us do that. Thank you.
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