Reverse auctions draw strong criticism on Capitol Hill

Reverse auctions are overused, underregulated and might be a monopoly, according to recent testimony on Capitol Hill.

By Sean McCalley
Federal News Radio

Electronic reverse auctions can sometimes help agencies save money. But according to recent testimony before the House Small Business committee, the rules and policies in place right now have the potential to do the government and its industrial base more harm than good.

“The more you’re dealing with commodity, the more likely [a reverse auction] is a good candidate,” said Dan Gordon, George Washington University procurement professor and former administrator of the Office of Federal Procurement Policy. “If all you care about is price, reverse auction probably makes sense.”

Gordon was speaking at the third in a series of hearings on small business contracting policies. On the same day, Rep. Steve Chabot (R-Ohio) introduced a small business contracting reform bill that, in part, adds more rigor in how agencies use reverse auctions.

At the hearing, Gordon said the biggest problem is the difficulty knowing the true details behind the contracts. That stems from relying on a private sector company to award contracts via reverse auction, a responsibility Gordon characterized as “inherently governmental.” This is the case with the private company FedBid, which has a contentious history with some agencies:

“FedBid has an organizational conflict of interest. They control the data. They control the information,” said Gordon. “They have a financial interest in having as many reverse auctions as possible, regardless of whether the procurement is suitable for one.”

In other words, a reverse auction company will push for one — and collect a fee — even when a contract has no competition. Gordon also argued some other business transactions, like service contracts, should instead have evaluations based on past performance, and other factors not strictly related to price.

Gordon also cautioned the House Small Business Committee the amount of work absorbed by FedBid looks dangerously close to a monopoly. The Government Accountability Office found the company manages about 99 percent of reverse auctions.

Both Gordon and the Government Accountability Office see potential in reverse auctions to drive down agency costs, and promote contracting competition. But after five years of increased reliance on the tactic, as of 2013 “the potential benefits … had not been maximized by the agencies” that use them, reported GAO.

Also, “it’s still troubling that federal agencies, according to GAO, often don’t know that they’re paying FedBid,” Gordon said. Specifically, instances where agencies wound up paying two fees because they obtained items from pre- existing contracts.

“That is not a healthy situation,” he said.

Where it can succeed

Congress and federal agencies do recognize the value of reverse auctions. The trick is to use them properly, wrote Reps. Jeff Miller (R-Fla.) and Sam Graves (R-Mo.) in a letter to the Office of Federal Procurement Policy in December. Their goal, which reflected the recommendations from GAO, was to add more guidance and better policy to the Federal Acquisition Regulation.

At the time, Joe Jordan, former OFPP administrator and now president of FedBid’s public sector business, wrote in an e-mail to Federal News Radio:

“Numerous reports, including a March 2014 analysis by Gartner, Inc., of e- sourcing best practices that drive savings and the 2011 IBM Center for the Business of Government study, have demonstrated the quantifiable benefits of using reverse auctions.”

This perspective was echoed at times during the House Small Business Committee hearing on Thursday.

“In my experience, FedBid has done an excellent job,” Gordon said. “They’ve been efficient, they’ve been helpful, they’ve helped the government get savings. They’ve provided a good platform that works well. They’ve provided administrative and training support. FedBid has done an excellent job.”

Gordon added the fee, which is no more than 3 percent of a winning bid, is low.

But the overall consensus from the committee is that the system is flawed.

Squeeze on small businesses

As reverse auctions require vendors to undercut one another in order to land a contract, some leaders of the small business community say the process is putting undue pressure on companies. They complain the process is muscling out some small businesses from a competition, or forcing them to accept payment that cripples their bottom line.

“And there is a risk of circumventing regulations related to [an agency’s] small business requirements,” said Margot Dorfman, CEO of the U.S. Women’s Chamber of Commerce. “In many instances, it may be more efficient and cost effective to simply purchase off a schedule.”


House lawmakers call for OFPP to issue reverse auction guidance

VA puts reverse auctions on hiatus again to study value proposition

Time for OFPP to weigh in on use of reverse auctions

Savings from reverse auctions not being maximized

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