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By Steve Kelman

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Reverse auctions grow up


You know that a new practice has "arrived" in government when it becomes the subject of its very own GAO report. This is now the case for the use of reverse auctions in contracting, which was illegal until the Federal Acquisition Regulation was changed in 1997 and now has become an accepted part of the federal contracting environment. (According to GAO, at the four agencies they examined, there was a 175 percent increase in the use of reverse auctions between 2008 and 2012.)

The title of the GAO report -- Reverse Auctions: Guidance is Needed to Maximize Competition and Achieve Cost Savings -- is a bit of a parody of itself; along with "Progress Made, Problems Remain," GAO reports love to call for more regulatory guidance. However, the report is generally a balanced one, clearly recognizing the positive role reverse auctions play as a cost-savings driver in the federal procurement environment but also making suggestions for improvement. (Full disclosure: I am on the board of advisors of Fedbid, the leading reverse-auction provider to the government.)

One noteworthy element of the report was the information, which I don't think has been published before, that roughly a quarter of reverse auctions attract only one bidder. It is really not possible to imagine this is the fault of the procurement method, which widely advertises the availability of bidding opportunities and typically attracts many bidders. My guess is that these situations are produced by very restrictive specs, perhaps combined with set-asides, or  sometimes by excessively low government target prices (maybe contingent on funding availability). However, this question deserves further research. As with the data generated by government credit card transactions, the procurement method does not create problems so much as it creates transparency that sheds light on problems that existed all along.

Similarly, the report notes that savings numbers are hard to specify because they depend on the government cost estimate, which may be too high (or too low, again perhaps because of funding limits). This is a problem, but it is not unique to reverse auctions.

As for the report's request for "guidance," I guess on balance I think some FAR language would be a good idea -- not the least for those very conservative contracting officials who, despite the language in FAR Part 1 clearly stating that a practice is allowed if it is in the government's interest and is not forbidden, believe that if a practice is not explicitly authorized in the FAR, you can't use it. However, I would urge that the language be as unrestrictive as possible. It should cover only the most-important issues, and emphasize use of "may" rather than "shall."

For example, I disagree with the report's suggestion that reverse auctions be limited to buys under $150,000 or to "simple" services. One could imagine a larger price-driven buy that would be appropriate for reverse auctioning; indeed, guidance from the Defense Logistics Agency recommends use of this technique mostly for buys over $150,000. Also, I believe that in the future we will and should see the use of reverse auctions among shortlisted bidders on large-dollar  best-value contracts, which might involve very complex services, to determine the price part of a bid. That pricing could then be placed into a larger evaluation including other factors. So we don't want "guidance" to be unnecessarily restrictive. 

Reverse auctions continue to have real potential for the government. To the extent that GAO's suggestions add to the attractiveness of this technique for government customers, that is good for everybody.

Posted by Steve Kelman on Dec 13, 2013 at 6:55 AM

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Reader comments

Wed, Jan 29, 2014

The primary reason there is only one bidder 25% of the time is that many manufactures will provide a quote to only one seller or require it to go through a very restrictive authorized distribution source. This is a common practice primarily in medical supply and IT areas. It is even the case when bids are opened up to brand name or equal, but their is no way to get a competitive brand name or equal bid. Contracting officers know this so they put the bid out on reverse auction to document that it was put out to other suppliers, so they can say they only got one bid. This is because they know who they are going to buy it from and they know that no one else will be able to submit a responsive quote. So the items are sold to government at a higher price (set by manufacturer which give their one supplier ability to put significant margin on items) and also make the government pay the auction fee.

Fri, Dec 20, 2013 Al

I see that commenter did show up. Kelman disclosed his employment and any reader can consider that when considering these points. 'Shut up' is not a counter argument.

Tue, Dec 17, 2013 Market Rules

The growth of reverse auctions is a function of their success. Agencies and companies use them where they work and use other approaches where reverse auctions don't work. Having GAO scrutiny seems like the best indicator that RAs are making a real impact, and possibly even getting under the skin of some of those folks involved in those cozy non-competitive deals the inside the beltway crowd is so good at...

Tue, Dec 17, 2013 Jaime Gracia Washington, DC

I believe the $150K threshold would be to ensure small business participation, and make a pseudo small business socioeconomic set-aside platform. Further, the fact that many reverse auctions, especially for construction, contain more complex requirements than should be used in a reverse auction procurement, seem together to be a main impetus for the recommendation. Although I do not believe this is the way to go (akin to banning CPFF type contracts), the GAO report, and the subsequent hearings on reverse auctions, have demonstrated an environment of dubious cost savings figures and restricted competition. Like any procurement tool, reverse auctions should be used as appropriate, but that does not seem to be the case. There needs to be a wider review, and definitely guidance updates, on the proper use of reverse auctions by OFPP.

Tue, Dec 17, 2013 David

Dr. Kelman is again spot-on in this commentary. I think he highlighted some key points in regards to the fact that when using FedBid, it is a buyer-driven process. So, many times when there is not more than one bidder in a reverse auction, it is because of the decisions made by contracting personnel regarding the restrictions, set-asides, and their determination of the IGCE. Also, Dr. Kelman is correct in his discussion of the dollar amount threshold, as the percentage savings possibilities should not vary based on the projected dollar amount of the auction. Finally, he is correct in his assertions about services auctioning, as if the acquisition is properly specified, there is no reason that only the simplest of services should be procured through competitive bidding. All in all, Steve's commentary - and the report itself -makes the case for increased use of reverse auctioning - with perhaps some additional oversight and clarifying language in the FAR.

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