Martin de Bourmont and Sharon Weinberger Authors,Yahoo News
In December 2016, just a few weeks before moving into the White House, President-elect Donald Trump tweeted that once he was in office, “billions of dollars can and will be saved on military (and other) purchases.”
Presidential candidates often campaign for or against defense spending, but Trump was perhaps the first to promise that his business acumen — an image bolstered by his bestselling book “The Art of the Deal” — would enable him to shave billions of dollars off costly weapons, like the F-35 Joint Strike Fighter, estimated to top $1 trillion.
While Trump’s critics were questioning whether he was actually capable of achieving big savings in the military budget, over at the Pentagon the man whose job it was to negotiate those weapons deals welcomed the president’s attention to the issue.
“When you get somebody who is the president of the United States who understands precisely what you do for a living and understands how it’s actually done, it becomes a pretty rewarding thing to do, especially when someone at the top is world-class himself in terms of negotiating,” Shay Assad, the Pentagon’s pricing director, told attendees at a conference held by McAleese and Credit Suisse in March 2017, just two months after Trump’s inauguration.
Assad had already built a reputation as the Department of Defense’s toughest contract negotiator, having spent more than a decade battling defense companies on behalf of taxpayers, trying to get the prices down on skyrocketing weapons costs. Over the course of his career, he has been decorated with a panoply of awards from the Pentagon for his work, and praised for saving the government billions of dollars. A 2016 Politico profile described Assad, known for his dogged campaigns to force defense industry companies to justify their costs, as “the most hated man in the Pentagon.”
Assad’s aggressive approach to contract negotiations, however, paid off. The Pentagon credited the career civil servant with bringing down the costs of the Apache helicopter, the C-17 transport plane and the F/A-18 fighter, saving taxpayers more than half a billion dollars. And that wasn’t all: A former senior Pentagon official said Assad had over the span of his career “saved the Department of Defense many billions of dollars.”
Trump’s interest in negotiating better prices for the government made it seem like Assad’s work would get White House attention.
Yet within two years of Trump’s entrance into the White House, Assad would find himself removed from his job, and his efforts to save money and recover hundreds of millions of dollars in potentially fraudulent spending tabled.
His treatment, he contends, was the direct result of his attempts to save the Pentagon money and identify potential contract fraud, which brought him into conflict with the Pentagon’s top weapons buyer. It was a conflict that ended dramatically, he says, when shortly after he emailed senior Pentagon officials about potential fraud, details about his travel records and his demotion were published in the press.
Assad, who is now retired, says the issues he brought up involved potentially billions of dollars in waste and fraud, and still aren’t being addressed. It’s a claim that’s backed up by multiple interviews conducted by Yahoo News with Assad and those who worked with him at the Pentagon, as well as by documents obtained through the Freedom of Information Act.
The Pentagon’s senior leadership, many of whom came directly from the senior leadership of defense companies, are only making the problem worse, Assad argues. “There’s a lot of inappropriate pricing going on by major companies dealing with the Department of Defense, and there is an inherent conflict of interest when you have people coming in from industry,” he said.
While the Pentagon, in response to detailed questions, objected broadly to the notion of any ethics violations, it declined to comment on Assad or his specific allegations, other than to argue over the scale of the potential contract fraud. Documents obtained by Yahoo News showed that the amount of overcharges identified to date by Pentagon auditors, who reviewed a relatively small sampling of contracts, is close to $900 million.
Assad isn’t alone in his concerns. Before his death, John McCain, the Republican senator from Arizona, railed against the defense industry’s influence on the Pentagon and expressed concerns about the appointment of Patrick Shanahan, a Boeing executive, to the No. 2 spot in the Defense Department. More recently, Sen. Elizabeth Warren, a contender for the Democratic presidential nomination, expressed similar concerns when Mark Esper, a former Raytheon lobbyist, was nominated to the top job in the Pentagon.
Assad has his own description of what’s taking place inside the Defense Department. “It’s kind of like the fox is in the chicken coop,” he said.
By the time Donald Trump entered the White House in January 2017 with promises of dramatic savings in military contracts, Shay Assad had already spent more than a decade in government negotiating exactly that. He started his career working on contracts at Raytheon and moved to the Pentagon in 2004, where he quickly rose through the ranks, earning a reputation as one of the government’s most hard-nosed negotiators.
He initially welcomed the Trump administration’s stated commitment to cost savings, and in those early days the Pentagon appeared to be one of the more stable institutions in an administration buffeted by chaos. Retired Marine Gen. James Mattis was appointed as defense secretary, and Ellen Lord, previously the CEO of defense contractor Textron Systems, was brought in as the undersecretary of defense for acquisition and sustainment.
When Lord joined the Pentagon in the summer of 2017 as the top weapons buyer, she appeared enthusiastic about Assad, who commuted between his home in Boston and his office in Washington. Lord even asked Assad to take on some additional roles at the Pentagon. “She asked me if I would take the acting position of the defense procurement and acquisition policy job as well as my own job,” he recalled. “I had to be in Washington five days a week.”
In January 2018, Lord called Assad to her office to vent her frustration with the inconsistent performance of major defense firms. She said she wanted to find a way to get better results from defense companies — a message that was frequently repeated by the president. “I said, ‘Sure, you impact their cash flow, you’ll get their attention to whatever you think is important,’” Assad recalled telling her. “If you tell companies their cash flow is dependent on it, they will respond.”
Assad’s proposal had to do with what are known as progress payments, or periodic payments made to contractors in order to alleviate their operating costs. The Pentagon hadn’t conducted a comprehensive assessment of its contract financing policies in three decades. Since that time, interest rates had plummeted to a historic low, which meant the Pentagon was perhaps fronting too much money to companies. It was an area, Assad believed, that was ripe for reform.
“We have been mostly overpaying these companies in the program’s payment,” Assad said. “By overpayment, if you went back to the original rule in the mid-1980s, it was based on having an interest rate of about 12.5 percent.”
At a meeting in late February 2018, Assad said he briefed his plan to reform progress payments to Lord as well as to Eric Chewning, head of the Pentagon’s industrial policy office, and Kevin Fahey, assistant secretary for acquisition. Assad explained that his plan would tie progress payments to company performance, rather than stages of production process. The progress payment rate is set at 80 percent of total costs of delivering on a contract, and Assad wanted to reduce that to a base rate of 50 percent.
Assad recalls that Lord approved of the proposal, and they agreed not to discuss it with industry until after Congress was briefed. Over the next few months, Assad held a host of briefings on the rule with representatives of various branches of the armed forces and the White House’s Office of Management and Budget. There were, he said, no objections to the rule.
But by August, though the rule had been approved by the OMB, Assad said he still hadn’t gotten approval from Lord, despite his multiple requests, to speak to Congress. Nonetheless, on Aug. 24, 2018, the proposed rule was published in the Federal Register.
Defense companies were outraged. During a public meeting held on Sept. 14, 2018, industry representatives blasted the proposal, saying it would punish them for things over which they had no control. Those complaints also went to Congress, and the heads of the Senate and House Armed Services Committees wrote to then-Deputy Defense Secretary Shanahan, calling the rule “fundamentally flawed.”
According to Assad, the congressional blowback was a result of Lord’s failure to let him brief staff on the Hill about the potential to reduce costs for taxpayers and increase efficiency. On Sept. 24, a month after the rule was made public, Lord herself met with congressional staff, but it didn’t go well. The next day, Lord met with Assad and two defense acquisition executives and announced the proposed rule would be withdrawn.
On Oct. 1, Shanahan, the deputy defense secretary, formally announced that the proposed rule would be rescinded. In letters to the congressional Armed Services Committees, Shanahan said the “proposed amendments were prematurely released absent full coordination.” Shanahan later told reporters that the proposed rule “never reached me. I don’t know if it reached Ellen [Lord] either.”
Assad disagrees. “The only thing we didn’t do is brief Congress,” he said.
It was at this point that Assad said he was instructed by Lord’s office to delete all the information he had concerning briefings on the proposed progress payment rule from a timeline he compiled for Shanahan’s review. “That in itself was really troubling,” Assad said. “I mean, it was really … people telling you, ‘destroy information,’ or ‘eliminate information,’ so that the secretary doesn’t know what really happened … I’ve never had anybody ask me to do that in 45 years, or direct me to do it.”
Weeks later, Assad sat down with Lord for a performance evaluation in which, after years of exemplary reviews and service awards, she rated him as having a “minimally acceptable performance,” citing his “leadership issues” as the reason.
A colleague of Assad’s said he was unfairly blamed for the blowback, even though Lord had supported the proposal. “When we first met in early 2018 with the senior leaders to talk about some of these ideas, I walked away with the impression that these were her ideas,” said the former colleague of Assad’s. “Whether that’s true at that stage or not, certainly when there was a significant pushback from industry, she didn’t hesitate to throw Shay under the bus.”
At the end of October, Assad was given an ultimatum: He could be demoted to a position within the Defense Contract Management Agency in Boston starting January 2019, or he would be terminated. Assad, who had been preparing for retirement, decided he would leave the Defense Department at the end of the year.
In the fall of 2018, Assad was nearing the end of his career in government, but with one final major task on his desk. The Pentagon’s Defense Contract Audit Agency (DCAA) had contacted him in October, wanting to discuss the key findings of work it had been doing at his request.
One preoccupation of Assad’s over the past few years was an issue called “defective pricing.” The terms comes from the Truth in Negotiations Act, or TINA, which requires companies to certify that accurate, current and complete cost or pricing data was disclosed to the government for negotiated procurements above a certain value (the current threshold is $2 million or more). In other words, are the costs that you claim are associated with the product you’re selling truthful?
Whether intentional or not, false certifications by contractors can cost taxpayers millions — and potentially billions — of dollars over time. Several years earlier, Assad had gone to Anita Bales, head of the auditing agency, to talk about what he describes as some “outrageous stuff” in Pentagon contracts.
The agency had not, as a result of resource constraints, been auditing contracts for defective pricing for a number of years. Assad wanted to change that. “Shay started lighting a fire under them in the teens, in 2012 and 2013,” said a former colleague. “He really wanted them to start looking at defective pricing.”
Documents released to Yahoo News from the DCAA confirmed that the agency saw a significant — and worsening — problem. The DCAA reported a cumulative $642 million backlog of unsettled defective pricing audits between 2014 and 2019, with recovery of money on a “steep decline.” Whereas in 2012 the documents showed a 94 percent recovery rate, by 2018 that had dropped to just 3 percent.
Since 2012, however, reports of defective pricing have risen at a consistent rate, according to those documents, while resolution of those claims steadily decreased over the same period, likely because of “new contractor strategies.” The DCAA mentioned factors including that companies were “more inclined to argue even when defense is weak,” a strategy to “run out the clock,” and their belief that the Pentagon lacked legal expertise in defective pricing.
Not all of the documents Yahoo News requested were released by the Pentagon, and according to Assad’s recollection and notes, the auditing agency had in total, counting its headquarters and field offices, completed an analysis of approximately 250 contracts covering $95 billion of spending between 2008 and 2015. What it found, said Assad, was astounding: Within this relatively small sample, some $900 million of defective pricing findings were uncovered, meaning approximately 1 percent of the covered contracts. Among the biggest defective pricers, according to Assad, were Lockheed Martin, BAE, Boeing and Textron, Ellen Lord’s former employer.
“To be clear, the Department strongly disputes the claim that 1% of contract spending has been lost to defective pricing,” Lt. Col. Mike Andrews, a Pentagon spokesperson, wrote in response to queries.
“Defective pricing dollars are a concern and will be pursued,” Andrews continued. “The Defense Contract Audit Agency’s (DCAA) data indicates a cumulative backlog in the amount of approximately $600M in potential defective pricing amounts, an amount that indicates the cited figure of 1% of contract spending is very much an inflated number.”
The records released to Yahoo News demonstrate that the number cited by Andrews is selective, at best. While the backlog is $642 million, a chart released by the DCAA shows that cumulatively between 2012 and 2018, the auditing agency found nearly $870 million in defective pricing, a number that supports Assad’s claim.
It wasn’t just the cumulative amount of defective pricing that was a concern for auditors. Assad said that in December 2018, just weeks before he was set to retire, auditors informed him about what they called the “golden nugget,” a case so egregious it warranted referral to criminal investigators.
Textron had over a two-year period provided the Pentagon’s auditors with thousands of pages of data, according to Assad. Drilling down into these reams of data, an auditor found a management review showing that for a specific item — what Assad would only identify as a “widget” — the company misrepresented the production costs. Worse, of the Textron contracts examined by the auditors, 100 percent had defective pricing allegations.
“There’s a word for that,” Assad said. “Fraud.”
While documents released through the Freedom of Information Act confirm Assad’s broader conclusions about the scope of defective pricing, the Defense Department redacted the names of specific companies involved, and declined to provide details in response to questions about the auditors’ findings.
Instead, the agency responded with a general statement confirming that the majority of the audits found defective pricing, but cautioned against making assumptions. “Over the last three fiscal years, DCAA has issued 108 audit reports using a risk-based approach, 79 of which resulted in findings of defective pricing,” wrote Christopher Sherwood, a Defense Department spokesperson. “However, the contracts selected for [Truth in Negotiations] audits represent a very small percentage of total contracts DoD-wide, so DCAA’s reported TiN audit results cannot be used as a basis for generalizations about the entire population of DoD contracts or trends at specific contractors.”
Sherwood said that the claim of fraud requires “proof of intent, and audit results do not determine intent.” It would be up to investigators to determine fraud, he continued. (The Defense Criminal Investigative Service did not respond to a request for comment.)
Textron did not respond to a request for comment.
Another person involved in reviewing the audits, who asked not to be named to prevent professional retaliation, agreed that fraud relies on proving intent, but said that in a number of cases they found “extraordinarily large variances” between what companies claimed and what auditors found in the records. “It would certainly appear that contractor officials were aware that they were providing data that wasn’t accurate or wasn’t complete,” the person said.
In his final days before retirement, Assad felt strongly that something should be done. According to the recollections and notes he provided to Yahoo News, around noon on Dec. 21 he wrote to Lord. “We’ve got a real problem. DCAA has just come to me. This is what they’ve told me,” he recalled telling her. “I’m recommending that a special unit be set up within the department. … It should not report to you.”
Whether Lord and her staff saw this as an attempt at retaliation from a soon-to-be-former employee is unclear. In response to detailed questions, Andrews, the Pentagon spokesperson, referred to Lord’s public statement from earlier this year referring to her signed ethics agreement ensuring she would guarantee there was no conflict of interest with her prior Textron work. “Any claim that Ms. Lord has been involved in any way with Textron Systems since her arrival is completely false,” Andrews wrote.
In any case, Assad never got a response. But just hours after that message to Lord, he got more bad news: An article published by Defense One, an online publication, described Assad’s removal from his job, claiming he had “racked up thousands of dollars in travel costs.”
Assad, the article said, had a special commuting arrangement that cost the government $502,758 between 2012 and 2019. The information was provided to the publication by Andrews, an unusual if not unprecedented release of a civil servant’s travel records. (Based on the numbers presented in the article, this would have worked out to a little more than $1,300 for airfare, hotel, and food and incidental expenses on each trip.)
While the article conceded that “neither Ash Carter, then the Pentagon’s acquisition chief, nor his successor Frank Kendall objected to this arrangement,” it noted that “Ellen Lord, the current undersecretary for acquisition and sustainment, has stopped paying for Assad’s travel between Boston and Washington.”
The Pentagon had not only failed to defend the travel, which had been required of him, but implied it was the reason Assad was removed from his job.
“I was furious, because the reality of life is that I had been acting as the director of defense procurement and acquisition policy, as well as doing my own job, at the request of Ellen Lord,” he said. “I couldn’t travel without her approval.”
Andrews, who serves as a spokesperson for Lord, declined to answer most questions about Assad’s allegations on the record, but in a written statement said that after “a reporter’s claim that the Department had paid hundreds of thousands, if not millions, in travel and per diem for Mr. Assad, the Department released transportation expenses travel records to show transparency and accountability.”
For Assad, the information provided for the article was a clear attempt to discredit anything he might reveal in the future by making him look like a disgruntled employee. Former officials who had worked with him agreed with this contention, describing the Pentagon’s efforts to plant a negative story about him as a baseless attack on a career civil servant.
“Someone had to provide that information, and that kind of made it clear to me that this wasn’t done by accident and somebody that had that knowledge inside the Pentagon was trying to make Shay look bad, and that was really disgusting, frankly,” said a former colleague of Assad’s, who asked not to be identified because it would jeopardize ongoing work with the Pentagon.
The former senior Pentagon official said Assad had become a “scapegoat” for the political backlash against the progressive payments scheme. Assad’s commute from Boston was not a perk, the former senior official insisted, but a long-standing accommodation for someone the Defense Department wanted and needed in the job. “It was characterized as this huge expense, this unreasonable thing he was getting away with,” the former official said. “It wasn’t that at all.”
“In order of magnitude, he saved the Department of Defense billions of dollars … over several years. A hundred thousand dollars for travel for him, it’s insignificant compared to the money he was saving the DoD,” the former official added.
If the need for a pricing director situated at the Pentagon was the reason for removing Assad from the job, then that explanation appears to be contradicted by the Defense Department’s own actions. An email from earlier this year seen by Yahoo News inviting applications for Assad’s former position as pricing director states that candidates for the job could choose to work from one of five locations outside the Washington, D.C., area, including Boston.
Shortly after Assad officially retired from the Defense Department, Rep. Stephen F. Lynch, D-Mass., spoke on the House floor, calling Assad “the most decorated contracting and pricing professional in the career civil service.”
Those who worked with him over the years offered similar praise for his efforts to save the government money. “I have great respect for Shay and what he accomplished at DoD and for protecting the taxpayers’ interest while also protecting the department’s interest as well,” said Tim DiNapoli, director of the Government Accountability Office’s contracting and national security acquisitions team. “They’re not mutually exclusive.”
Assad is still retired and living near Boston, though he sometimes travels to Washington to brief congressional oversight committees on defective pricing. He is still angry, however, about how he was treated at the Pentagon. “I mean, it’s just that crazy,” he said. “I never witnessed that in — whether it was a Democratic administration or a Republican administration — I never witnessed that kind of just wanton disregard or disdain for career civil service.”
He is angrier, however, that the issues he worked on are still not being addressed.
Contractors overcharging the Pentagon did get a bit of attention earlier this year, when the Defense Department inspector general released a report concluding that TransDigm Group had sold parts to the military at profit margins of as much as 4,451 percent. In one case, the company charged $4,361 for a half-inch pin in a 2018 contract; the item should have cost just $46, according to the inspector general.
That inspector general report, however, dealt with only one company, and all but one of the contracts reviewed was below the TINA threshold, where firms have to provide certified cost data. In other words, almost all of those contracts were of lesser value than those that Assad has asked the Pentagon auditors to review. If TransDigm’s transgressions were in the millions of dollars, the scope of defective pricing that Assad says auditors have identified is exponentially larger.
Defective pricing on a percentage basis may be small — just 1 or 2 percent — but when the size of contracts is large, the money involved can be substantial. A congressional staffer who has been looking at the issue said the money lost to defective pricing was likely “well into the billions.” That amount may be “a drop in the bucket compared to the overall budget,” but it’s a large amount given the extent of the violations.
“It’s a number that in my opinion would probably be pretty eye-opening for folks,” the staffer said.
In the meantime, the savings on military contracts promised by the Trump administration appear elusive. In September, Bloomberg reported that the Pentagon, despite promising more than $1 billion in savings on the F-35, the costliest weapons program in history, would reap only about a third of that amount.
As for Assad’s larger concerns about the conflict of interest inherent in having former industry executives in charge of overseeing contracts, that too remains unchanged. Ellen Lord continues to serve as the Pentagon’s weapons czar, and in June, Esper, the former Raytheon top lobbyist, was confirmed as the new defense secretary. Sen. Warren voted against confirming Esper, who refused to recuse himself from dealing with contracts tied to his former employer.
As for Assad’s old job, the Pentagon last week finally selected its permanent replacement for the head of pricing and contracting. The new director, according to Assad, will be based in Dayton, Ohio.
As for the money that Pentagon auditors found under Assad’s watch that defense companies had overcharged, there is no evidence the Pentagon’s leadership made any headway getting any of it returned. The Pentagon, in response to queries from Yahoo News, said there’s a plan to establish a task force at the Defense Contract Management Agency, but provided no specific details on timing, or if it would report to Ellen Lord.
The lack of progress on recovering the money isn’t because nobody knew.
Shortly before leaving his Pentagon post, Assad delivered a talk at a Bank of America conference, enjoining his colleagues to continue fighting fraud and waste within the Pentagon.
“I hear someone’s looking for 1 to 5 billion,” said Assad, referring to money President Trump was seeking for a border wall. “I am pretty sure it is sitting over in the Defense Department as defective pricing and contract fraud, if someone has the courage to go get it.”