Are Reverse Auctions Actually Meeting the Intended Competition and Cost Intentions?

February 10, 2014

Federal agencies hope to generate lower prices on non-complex commodities and simple services (from office supplies to medical equipment) via reverse auctions but are reverse auctions actually meeting the intended competition and cost intentions? A U.S. Government Accountability Office (GAO) study on this topic was released December 9, 2013. Entitled “Reverse Auctions – Guidance Is Needed to Maximize Competition and Achieve Cost Savings (GAO-14-108)”, the GAO study indicates that the potential benefits of reverse auctions – competition and savings – had not been maximized at the four agencies studied. During FY 2008 through 2012 the Departments of the Army, Homeland Security, the Interior, and Veterans Affairs used reverse auctions to acquire predominantly commercial items and services, primarily information technology products and medical equipment and supplies. Most of the auctions resulted in small dollar value contracts of $150,000 or less, with a high rate of award to small businesses. The study also found that the four agencies used the same commercial services provider (FedBid) to conduct their reverse auctions and paid a variable fee for the service of up to 3 percent of the winning bid amount.

Almost half of reverse auctions were used to obtain items from pre-existing contracts that in some cases resulted in agencies paying two fees – one to use the contract and one to use the reverse auction contractor’s services. Some agencies including the General Services Administration (GSA) have rolled out their own reverse auction platforms to avoid use of a third-party contractor’s services and fees. GSA’s reverse auction platform, launched on July 1, 2013 for select GSA multiple award schedules and blanket purchase agreements. The decision to use reverse auctions instead of other procurement vehicles or platforms such as GSA eBuy or Multiple Award Contracts, is at the contracting officer’s discretion. GAO noted the lack of comprehensive government-wide guidance regarding use of reverse auctions as a concern.

Jackson Kelly commented on the GAO study:

“While noting that the use of reverse auctions is on the rise [a 175 percent increase in the use of reverse auctions between FY2008 and FY2012 to $828 million], the GAO noted several issues with how agencies currently conduct reverse auctions. First, GAO raised concerns over a lack of interactive bidding in more than one third of agency reverse auctions. The lack of competition led to inefficient bidding. Second, GAO noted concerns over how agencies demonstrate cost savings from reverse auctions. In particular, GAO expressed concerns over how agencies set a target price from which they judge the benefits of reverse auctions. Finally, GAO noted that while the FAR permits reverse auctions, the FAR lacks specific guidance and results in an agency by agency approach to reverse auction guidance and procedures.”

“The takeaway from this GAO study is that the Federal Government is actively looking for ways to increase the use of reverse auctions and to achieve the overall cost savings that reverse auctions are purported to produce. As the anecdotal stories of cost savings spread, more agencies are likely to start using or increase their use of reverse auctions. In other words, reverse auctions are likely to be a large part of the future of government contracting.”

 Please contact Hope Lane at 301.231.6266 or Vanessa Payne for questions or assistance related to government contracting issues.

About the Author: As a senior consultant in Aronson LLC’s Government Contract Solutions Group, Vanessa Payne has more than 15 years of full life-cycle government contracts and consulting experience. She currently specializes in GSA Schedule contract preparation, renewals, and providing ongoing contract management, administration, and compliance support with a special interest in organizational procedure and policy review, improvement, and standardization.