Sold to the lowest bidder: Reverse auctions play cost-savings role for agencies

Reverse auctions are gaining traction in the government procurement community as federal executives look for new ways to make their purchases in the age of Acquisition 2.0, experts say.

Agencies have witnessed the success of other agencies' procurements through the use of reverse auctions, said Neal Fox, former assistant commissioner of commercial acquisition at the General Services Administration and now president of Neal Fox Consulting.

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"To me, reverse auctions are an acceptable tool for governmentwide use by agencies in a tried-and-tested approach," Fox said. "They have proved to be both useful and safe.”

Reverse auctions are the opposite of traditional auctions in which a number of buyers compete. In reverse auctions, the sellers compete for a single buyer by offering lower bids and driving down prices for the buyer.

A growing number of procurement executives are interested in the procurement type, said Dan Gordon, administrator of the Office of Federal Procurement Policy, after a panel discussion on procurement reforms held Dec. 10. He cited the Homeland Security Department as an important new user of reverse auctions. He said the department’s acquisition officials held more than 2,000 such procurements in fiscal 2010.

“It’s a terrific thing, as long as we use it in a sensible way,” Gordon said. He warned that the auctions are best for buying commodities. When agencies are buying services, the purchases often are more complex than simply considering prices.

“You shouldn’t be using these for everything,” Gordon said. “They work best when price is the only evaluation factor.”

With the growth of the reverse auction in recent years, FedBid, the leader in hosting such auctions, has reaped the benefits.

Government agencies bought $1.15 billion worth of products and commodities through the company’s online auction house in fiscal 2010. That's an increase of more than 30 percent from 2009 and 50 percent from 2008, the company reported in December. The company facilitated $875 million in sales in 2009 and $728 million in sales in 2008.

In 2010, agencies used FedBid for more than 14,000 purchases — an increase of 16 percent from 2009 numbers. The company estimates that the auctions saved an average of 12 percent on what officials paid versus how much they expected to pay for their purchases.

Civilian agencies were among the first to use reverse auctions, starting with the State Department in 2002. In recent years, the approach has piqued other agencies’ interest, particularly in the military.

Fox said defense agencies' acquisition officials have found they can meet their requirement to get at least three bids on a procurement by using reverse auctions. “The military has been looking for ways to institutionalize methods for expanding the bidder pool,” he said.

Jaime Gracia, president and CEO of Seville Government Consulting, said the government acquisition community will need to further explore new procurement methods to create initiatives that save lots of money across government.

In many cases, reverse auctions can beat prices for products in the Federal Strategic Sourcing Initiative catalog. “Many program managers and other acquisition officials I have spoken to state that they do not always get the best prices by using these types of prenegotiated arrangements,” Gracia said. As a result, they often buy directly from vendors or conduct procurements outside the initiatives.

Some federal officials cite various reasons for avoiding reverse auctions. However, Gracia disagrees with the most common: transparency and technological barriers, which he considers disingenuous.

Agency officials need to get past those issues as they struggle with tight budgets. He said the benefits of potentially significant savings and more transparency, collaboration and competition “all outweigh any barriers that seem to be artificially created by federal organizations.”

Particularly in this age of technological advancement, “the reverse-auction process is Acquisition 2.0 in motion,” he said.

But the government is risk-averse, and the fear of protests and other issues are hampering decisions on acquisitions, he said.