For the second time in the last two years, the Veterans Affairs Department decided to stop using reverse auctions to buy products and services.

The decision comes as lawmakers are growing more concerned about whether agencies are paying higher than necessary prices and not getting adequate competition from this increasingly popular procurement approach.

The exact reason behind VA’s decision is unclear.

Jan Frye, the deputy assistant secretary in VA’s office of acquisition, logistics and construction, told a joint hearing of the House Veterans Affairs and Small Business committees Wednesday that the department is conducting another review of this procurement approach.

“VA is evaluating the value proposition of reverse auctions. Specifically, the Veterans Health Administration is crunching the numbers in an effort to evaluate whether the dollar, time and process efficiencies estimated by the advocates of these tools are being realized,” Frye said. “Efficiencies alone cannot be the only measure of value. The reverse auction process is also being evaluated to ensure compliance with regulation and policy.”

Frye said VA also is aware of small business concerns, which was part of the reason VA decided to pause its use of reverse auctions in March 2012.

But since that initial pause, VA’s use of reverse auctions has steadily increased. In 2011, VA conducted 2,261 reverse auctions and spent about $78 million. In 2012, VA held 7,587 reverse auctions worth $305 million. Of that, 79 percent of the awards went to small businesses.

In all, VA spent more than $17 billion on goods and services last year, so $305 million isn’t a great deal of money, generally speaking.

Dramatic growth over last five years

But lawmakers and industry associations are growing concerned as agencies use reverse auctions more and more, and see the impact on small businesses.

The Government Accountability Office released a report earlier this week and testified at the hearing about what it found in looking at the top four agencies that used reversed auctions the most. Michele Mackin, a director of acquisition and sourcing management at GAO, said VA, the departments of Homeland Security, Interior and the Army accounted for 70 percent of all reverse auctions in 2012. Across the government, Mackin said the use of reverse auctions increased by 175 percent over the last five years and agencies spent more than $800 million through this tool.

This growth is part of the reason the two committees are reviewing the policies and laws guiding reverse auctions.

Additionally, this is the second time VA has suspended the use of reverse of auctions and that attracted the attention of legislators. Back in 2012, Frye said there were several reasons for the pause, including an outcry by small businesses.

“One of the things we noticed in March of 2012 when we put a moratorium in place was that the prices that were touted as savings or savings valued were being provided by the reverse auction firm, FedBid. We didn’t think that was probably the way to go,” Frye said. “So one of the things we required as we put a new policy in place and promulgated that policy was that for VA, or more specifically VHA contracting officers, were required to calculate those savings and document the file with regard to those savings.”

Much of the hearing focused on VA’s use of FedBid as a reverse auction provider, as well as GAO’s findings.

Most of the time agencies pay a fee of 3 percent of the total price of the contract, which is capped at $10,000, to FedBid for the reverse auction services.

Both Mackin and lawmakers say the concerns over reverse auctions have little to nothing to do with FedBid. It’s more about how agencies are using reverse auctions.

Missing real competition?

Mackin said her biggest concerns center on competition and presumed savings from reverse auctions.

“Regarding competition, we found two main buckets. What we call interactive bidding where multiple vendors are bidding against each other. This happened 65 percent of the time,” Mackin said. “However, there is also what we call ineffective competition where only one vendor submitted a bid or multiple vendors submitted only one bid each. This happened about 35 percent of the time, and clearly there are concerns here about whether the benefits of competition is being realized.”

Auditors also found FedBid’s savings calculation could be faulty. Mackin said FedBid estimated a savings of $98 million in 2012 across the four agencies GAO analyzed.

“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.”

The competition piece is of great concern to lawmakers and small businesses as well.

Representatives from the Association of General Contractors and the American Legion also testified before the committee and said reverse auctions hurt small businesses. The two associations say many firms have decided not to bid on contracts let through this approach.

The reasons are many why some vendors don’t believe they can make a profit through reverse auction. Others say they don’t trust the system, including some who have concerns whether the computer is bidding against the vendors in order to drive down the prices.

OFPP needs to get involved

Mackin said a big part of the problem is a lack of guidance or policy exists around how agencies should use reverse auctions.

“The key thing here is putting something into the Federal Acquisition Regulations, and agency specific regulations. The Office of Federal Procurement Policy has taken some steps to do so over the past 10 years, but it never has materialized into the regulations, so I think that’s critical,” she said. “But even before that happens because that could take some time, some governmentwide guidance, best practices, when does this make sense, when doesn’t this make sense, I think would be helpful. Each agency has guidance and they are not always the same. I think that’s part of the concern from the vendor community.”

The Office of Management and Budget said it agreed with GAO’s recommendations in its report to give agencies some guidance on reverse auctions. OFPP didn’t offer a timetable for that communication.

Major Clark, the assistant chief counsel for advocacy in the Small Business Administration’s Office of Advocacy, said he’s not sure a new regulation in the FAR is necessary. He said a new policy from OFPP is what’s needed more immediately because agencies’ use of reverse auctions continues to evolve.

SBA’s Office of Advocacy expressed concerns about the impact on reverse auctions to OFPP a handful of times over the last seven years. Clark said the office wrote to OFPP in January 2012 that some agencies may not be complying with the Simplified Acquisition Threshold (SAT) to award all contracts between $3,000 and $100,000 to small firms.

VA’s Frye said less than 5 percent of all reverse auctions fall under the SAT.

While waiting for OFPP to act, the other option may be to use the General Services Administration’s reverse auction tool.

New tool available

Bill Sisk, GSA’s deputy commissioner in the Federal Acquisition Service, said the agency offers training to government and industry, and is focused on non-complex commodities and simple services.

He said GSA launched its reverse auction tool in July just for schedule contractors.

“It’s run by a government agency so we have government contracting officers looking at what’s available through that program,” Sisk said. “It’s also based on the platforms we have available for our E-Buy system, which is a system for government contracting officers to go out and get quotes from contractors, so they can use sign-in information to get into our reverse auctions platform. It’s another tool that’s available for them. In addition to that, we also have visibility over all the prices paid through this system. We hope this information can help us educate government contracting officers in a better way going forward to get the best price for the American taxpayers.”

So far, GSA has run 485 reverse auctions and averaged about 6.7 percent savings as compared to previous prices paid for the same services or products.

Sisk said GSA is considering expanding who could use the reverse auction tool, including other governmentwide acquisition contracts such as NASA’s SEWP or National Institute of Health’s CIO-SP3.

Rep. Richard Hanna (R-N.Y.), the chairman of the Small Business Subcommittee on contracting and the workforce, introduced legislation earlier this year to prohibit the use of reverse auctions for construction services. While that bill hasn’t progressed out of committee, it’s on legislators’ radar and likely will come again next session.

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