VA launches probe of reverse auctions

Acquisition officials at the Veterans Affairs Department are drafting a report for top VA officials on how the department has managed its use of reverse auctions, a spokeswoman said March 8.

On March 3, a senior VA acquisition official ordered the Veterans Health Administration to stop using reverse auctions, due to several possible problems. Now, top officials have asked the Office of Acquisition, Logistics and Contracting for an in-depth examination of reverse auctions. Acquisition officials are currently reviewing the VA’s use of the unusual procurement technique by checking 25 randomly selected reverse auction contract files for the report.

“VA acquisition officials have to learn more about the issue, which is why we stopped the reverse auctions, but we are still looking at how wide and deep the problem is, including whether or not any violations occurred in managing the program,” said Jo Schuda, a spokeswoman for the department.

The technique was "causing significant perturbations in the VA supply chain,” Jan Frye, VA’s deputy assistant secretary for acquisition and logistics, wrote in the memo ordering the halt. The disruptions are “at least one protest, potential increased costs, small-business program anomalies, violations of our VA contract hierarchy, and a ground swell of complaints from our suppliers.”

A source close to the situation said Frye took an unusual approach in halting the auctions in his memo. Under ordinary circumstances, an agency would conduct a review or an audit and then decide how to proceed.

“Frye has unilaterally violated this governmental best practice by summarily suspending all contract activity without grounds to do so,” the source said.

Frye also wrote that contracting officers, when conducting reverse auctions, have handed over too much of the rein to FedBid, the company that hosts the reverse auctions for the VA, without proper oversight by "cognizant contracting officers."

“We simply did not think through all of the unintended consequences of reverse auctions when we recently made the decision to allow their use,” Frye also wrote.

In a reverse auction, companies bid to sell their products to the government and the price goes down with more competition for an agency’s bid. According to FedBid, small businesses win more than 80 percent of the dollars competed through the auctions.

Frye's memo's applies only to the VA, but it could get federal officials elsewhere to think about how their offices manage reverse auctions, experts said.

Even if agencies don't follow the VA and immediately stop the use of reverse auctions, "it is likely to at least raise an alarm in the contracting offices of other agencies to make sure the use and procedures surrounding reverse auctions are appropriate,” said Gunjan Talati, senior associate at the Reed Smith law firm.

Larry Allen, president of the Allen Federal Business Partners, said the VA’s decision sends a message to all the other agencies. The message is, reverse auctions won’t meet all your acquisition needs, especially for complex procurements. The auctions are best for simple commodities

“I liken it to using a Phillip’s head screwdriver when you need a flat-head screwdriver instead,” he said.

The effects on industry won't be fully measurable until the review is done and VA decides how to proceed, Talati said. Nevertheless, Allen said many companies are happy with the VA’s decision. Proponents of reverse auctions have made federal officials see only the potential savings, not the limitations, of using the approach. 

He said industry isn’t against reverse auction, but just want it used where it fits best.

“Using reverse auctions for complex procurements tend to drive legitimate suppliers to the sidelines,” he said.

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Reader comments

Mon, Jun 24, 2013 Chicago, IL

As a manufacture of a quality product Fed Bid has been a complete joke. We have had several large orders where the specs get complete ignored by fed bid. We bid as per the specs only to find out that they awarded the contract to a product made in China that only meets a few of the important specs. They simply go by price. The true cost is in the lack of quality and the customer is not getting what they asked for.

Sun, Jul 15, 2012 Kenneth Hibberd, Mercurie Gruppe Germany

I am with all of you. It is impossible for a small business to either win or make a profit on FedBid. We too have given industry standard, manufacture prices as an experiment to see if a win can happen, yet it was still a loss. God help the poor soul the makes that experiment and then wins because they still will pay a 3% final value fee out of their pocket. In the end, you are buying the item for the customer. On our end, we have been told of agency requirements to use FedBid. This tells me that there are government connections in play here. We are all about good quality and talented procurement specialists finding the customer a deal but if I have a distribution partnership for a manufacturer to buy at a certain price and then sell within a certain range and then turn around and sell their product below the manufacturer price, then I am reducing that manufactures product value, significantly. So now on a wider view, not only is the small business not able to compete, but the damage is taken to the manufacturer's product value, effectively hurting two entities at once.

Tue, Mar 20, 2012

Truly small businesses of 25 employees or less with distributorships and outstanding pricing from vendors cannot win on the FedBid website. An example I have, when I knew this FedBid site was a hoax, is --I quoted pricing from the actual manufacturer who assured me that everyone will receive the same price {as always in all bids I have had with this manufacturer}--put my lowest price in {under 2% profit) and still lost. I go back and see the winning bid and it was hundreds of dollars under my cost. How is that. It is a true waste of time for my business type (small, woman, minority owned) to bid on these reverse auctions through FedBid. My thought is they have someone on the "inside"... just thoughts

Mon, Mar 19, 2012 Peter G. Tuttle, CPCM

Mr. Frye should be congratulated for having the astute leadership for taking the risk to halt a process that is thought to be questionable instead of letting things languish for months waiting on the results of an investigation, possibly wasting many more taxpayer dollars. If his decision was right or wrong (as proven by the investigation) - hats off to him for making a decision in the first place. Firm, rapid, fact-based decision-making is in itself sometimes unusual commodity these days. Carry on sir!

Thu, Mar 15, 2012 SDVOSB New Jersey

In regards to the cost savings,has the VA added in pre -bid costs to put together the requirements for solicitation,post all pertinent data on Fed Biz Opps and then turnover to Fed Bid to collect bids! I've never been contacted by Fed Bid to confirm That we are actually SDVOSB's;but,have received several awards after the fact,when the ersatz firms have been thrown out by the contracting officers,who are doing the real legwork.Let's add those costs and see,if ;we're still saving the Two million

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