Reverse Auctions: Where Are The Cost Savings?

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Reverse auctions are back in the news this week, highlighted by a Government Accountability (GAO) report critical of the process, and by the Small Business Committee’s Contracting and Workforce Subcommittee, which held a joint hearing with the Veterans’ Affairs Committee’s Oversight and Investigations Subcommittee earlier this week as well.

The title of the hearing, Contracting Away Accountability – Reverse Auctions in Federal Agency Acquisitions, was a good indication of what Congress thought of the procurement tool.

Firstly, I think reverse auctions are a great tool to save money, increase competition (especially for small businesses), and speed up procurement times. However, there is one caveat: when used appropriately.

I have written about this issue in the past (click here), and the GAO report started the salvo of calling into the question the use of reverse auctions through disturbing findings at the center of testimony provided by Michelle Mackin, Director of Acquisition and Sourcing Management at the GAO

…Competition and savings-two of the key benefits of reverse auctions cited by the agencies we reviewed-are not always being maximized… because not all reverse auctions involve what we refer to as interactive bidding, where vendors engage in multiple rounds of bids against each other to drive prices lower. We found that over a third of the fiscal year 2012 reverse auctions had no interactive bidding-and agencies paid $3.9 million in fees for these auctions…

Further disturbing news in the report and testimony from Mackin was that many federal users did not understand that fees were associated with the reverse auction platform, most notably through the use of FedBid, a Vienna, Va.-based company that offers the most popular tool. FedBid charges a fee of 3 percent of the winning contract, not to exceed $10,000. However, FedBid can, and sometimes does, offer discounts on those fees.

…”We were, frankly, a bit surprised to learn that agencies didn’t know how much they were paying FedBid in fees. They didn’t know how much duplicative fees–for lack of a better word–they were paying when they were using a schedule contract, for example, for a reverse auction,” said Mackin…

Some agencies, such as the Department of Veterans Affairs (VA), are now trying to capture and track fee data, but it remains an illusive goal. VA had halted the use of reverse auctions last year, as according to Jan Frye, deputy assistant secretary at VA’s Office of Acquisition and Logistics, who said in a keynote at the April 26 Coalition for Government Procurement 2012 Spring Conference:

…“I’m not against reverse auctions, but I’m concerned that sometimes we don’t know what we’re doing when we set about to do reverse auctions”…

Apparently the doubt remains, as the VA has once again halted the use of reverse auctions this week, further pointing to issues on the use of this technique at the VA, and especially when it comes to construction contracts.

Also disturbing in the testimony from GAO was that more than one-third of auctions reviewed by the GAO in their report had only one bidder, and over half of auctions were used to procure items from pre-existing contracts.

…There’s a notion, said Mackin, that reverse auctions result in the lowest price. But at times the final price exceeded the government estimate and agencies may have been able to get a better price through other mechanisms…

GAO auditors also found issue with FedBid’s savings calculation across the four agencies GAO analyzed, which according to Mackin, was an estimated $98 million in 2012.

…”We have questions about the accuracy of these savings. For example, if there was no interactive bidding, agencies perhaps could have gotten a better price using other mechanisms,” she said. “Also, the target price or government estimate may not be sound. For example, we found over 1,000 cases where the winning bid actually exceeded the government’s estimate even with interactive bidding.”…

Some of the most insightful testimony came from construction firms, who denounced the use of reverse auctions. Nigel Cary, president of Cox Construction Co., discussed the negative effects of using reverse auctions  for complex construction projects, and further stated agencies are hindering competition on specific contracts due to issues with unrealistic requirements for unrealistic prices.

“Reverse auctions ignore best value,” he said. “It’s unfortunate and misguided that each agency learns the lesson on their own.”

Not to be outdone was Louis Celli Jr., director of the legislative division of the American Legion, who shared the message with the Committee on how his members feels about reverse auctions, as he stated that his members believe reverse auctions “unfair, deceptive and fraught with cheating.”

What is the path forward?

It seems that reverse auctions are a “love them or hate them” proposition. The vast majority of small businesses I know who actively use reverse auctions have negative attitudes toward the use of this tool, for the same reasons highlighted in the testimony. The overwhelming feedback is that they are being used for the wrong procurement (e.g. wrong requirements for the wrong price point), and not necessarily think that reverse auctions in and of themselves are a negative procurement method.

What do we do about this issue? Some solutions that were offered at the hearing included increased oversight and training, and passage of H.R. 2157, which prohibits the use of reverse auctions on construction contracts which are specifically suitable for awards to small businesses. Mackin also stated that the Office of Federal Procurement Policy (OFPP) has also agreed that new guidance is needed.

Nonetheless, I think construction contracts are the wrong requirement for reverse auctions, as sealed bidding is a preferred method to ensure best value, and ensure the right vendor, with the right requirements, at the right price.

Further, OFPP guidance, along with oversight, is clearly needed, as reverse auctions seem to be doing more harm than good. 

We’ll see what comes of this, but I hope reverse auctions do not go away entirely, as I am not a fan on taking tools away from the procurement process. We just need to do a better job of using the right tool for the right job.