Can Reverse Auctions Move Your Contracting Process Forward?

By Anna Hartley, Senior Acquisition Specialist

Reverse auctions, a relatively new contracting method used by the government to procure a variety of good and services where the price is the main factor, has caused much debate and provoked heavy criticism among contracting professionals in the last few years.

Some believe that reverse auctions are an excellent method to streamline the procurement process and increase competition while bringing the government’s procurement costs down – an essential element to achieve agencies’ mission objectives under dwindling federal budgets. Others claim that while the government is saving money on reverse auctions, it is damaging relationships with its suppliers because it creates a “win-lose” situation where the supplier is always a loser.

Further, some also believe that reverse auctions create a competition so steep among sellers that it results in an unintended consequence of suppliers discounting the price deeply (in many cases at a loss) to win the business and penetrate a market, only to resort to damaging actions later to make up for the loss.

The Government Accountability Office (GAO) reported in December 2013 that the use of reverse auctions has increased from FY2008-12, primarily to buy commercial products and services. Agencies such as the Army, Department of Homeland Security, Department of Interior, and Veterans Affairs used them in seven per cent of procurements, a relatively low number but one that is on the rise. In my primer on reverse auctions I’ll review what they are and what contracting professionals tell me are the pros and cons of using them.

What are Reverse Auctions?

As the name suggests, a reverse auction refers to a scenario where the roles of the buyer and the seller are reversed. The seller is the bidder, not the buyer. Under reverse auctions, a buyer offers a tender for goods or services. To initiate a reverse auction, an agency must issue an RFQ (request for proposals) describing its needs and requirements. The agency needs to utilize specialized software to issue an RFQ and to run the reverse auction and can even choose a certain action format over the other. A virtual auction is created where the sellers (suppliers) bid against one another pushing the price down. The seller with the lowest price will normally win.

The first company to run reverse auctions for the government was FedBid. Recently, the GSA introduced its own website – GSA Reverse Auctions – where agencies can acquire goods and services only from the vendors that hold contracts under GSA’s Multiple Award Schedules program and blanket purchase agreements.

Both GSA and FedBid charge the winning bidder 3% of the price for using their services. This fee is a concern for some contracting professionals who feel they have no visibility into the fees being charged. Let’s say the RFQ calls for a product priced at $100.00 and at the end of the bidding process the bid comes in offering to supply the product for $90.00. A contracting officer has no way of knowing what the “real” bid has been in the beginning. Was it $87.30 and the fee was built into the price or was the bid even lower than that because the contractor had already built the fee into its price before beginning the bidding process? Some contracting professionals even wonder if the 3% fee is a fee across the board or if different fees apply to different supplies/services and acquisition dollar values. In the report on reverse auctions cited above, the GAO identified a lack of transparency and guidance.

What are Benefits to Suppliers?

While the cost-savings benefit of using reverse auctions for the government are apparent, there are also some benefits to suppliers. Reverse auctions facilitate access to new opportunities among small businesses which they would have been unaware of otherwise. Participating in reverse auctions also allows businesses to compare their prices to those of competitors in real-time settings. It may motivate them to re-evaluate their price structure not just to achieve their short-term goals, but also to improve competitiveness in the future.

I spoke to a small business concern which lately has bid on several tenders using reverse auctions on FedBid. They did not feel they were under any more competitive pressure bidding for opportunities using the reverse auction than competitive acquisitions that used more traditional contracting methods. Moreover, the CEO told me that since the company started participating in reverse auctions, it won several awards with state and local governments, expanding its client base beyond Federal agencies.

What do Contracting Professionals Say?

The first two contracting officers I contacted had only briefly heard about this contracting method, but did not really know much about it, let alone had an opportunity to participate in or run the auctions. I was eventually able to reach several contracting professionals who have been actively using reverse auctions to procure a variety of goods and services for their respective agencies, and I asked them what they see as the benefits and disadvantages of this contracting method.

They report the main pros are:

• Shorter time to complete the process. Unlike a traditional sealed bidding, the reverse auction bidding can be accomplished in days and sometimes even in several hours.
• The ease of bid comparisons. The bids can be lined up beside each other in a chart formation for an easy and straightforward comparison.
• The ability to reach great discounts on items when buying supplies off the GSA schedules.

The main cons of reverse auctions reported by contracting professionals are:

• Resistance to switch to a new, more technologically advanced, contracting method.
• Reverse auctions are mostly limited to the acquisition of supplies, only where the terms are clearly defined and there is no room for ambiguity; many services acquisitions have too many variables and thus are unfit for this contracting method.
• When applied to the acquisition of commodities with complex specifications, reverse auctions become time consuming and confusing due to the increased number of clarification requests from vendors.

Indeed, reverse auctions were not created to be used for the procurement of all goods and services. There are ongoing debates as to what types of acquisitions are best suited to this method. It is evident that there is still much uncertainty among contracting professionals about the correct application of reverse auctions, and the Federal Acquisition Regulation (FAR) does not specifically address this issue.

While the FAR may not have specific instructions, contracting professionals should still conduct federal procurements according to FAR guidelines. If a particular acquisition requires a Justification and Approval (J&A) or a Determination and Findings (D&F), this documentation must be prepared regardless of which contracting method is used. Reverse auctions should not be viewed as an “easy button” which will deliver the desired product or service without the due diligence of following FAR rules.

In its December 2013 report to congressional requesters, the GAO recommended that the Director of Office of Management and Budget (OMB) amend the FAR to include reverse auctions. The OMB said that before making any final decisions, it will need to discuss GAO’s findings and conclusions with the FAR and Chief Acquisition Officers Councils.

A Complementary Tool

When applied properly, reverse auctions can certainly add variety to an agency’s procurement processes and move those processes forward. I think it is critical to view reverse auctions as a complementary method of contracting and not as a substitute for any existing contracting tool.

What do you think? Have you used or benefited from reverse auctions?

Reposted from the Integrity Matters – Perspectives on Acquisition and Program Management blog.