VA launches probe of reverse auctions

Acquisition officials at the Veterans Affairs Department are drafting a report for top VA officials on how the department has managed its use of reverse auctions, a spokeswoman said March 8.

On March 3, a senior VA acquisition official ordered the Veterans Health Administration to stop using reverse auctions, due to several possible problems. Now, top officials have asked the Office of Acquisition, Logistics and Contracting for an in-depth examination of reverse auctions. Acquisition officials are currently reviewing the VA’s use of the unusual procurement technique by checking 25 randomly selected reverse auction contract files for the report.

“VA acquisition officials have to learn more about the issue, which is why we stopped the reverse auctions, but we are still looking at how wide and deep the problem is, including whether or not any violations occurred in managing the program,” said Jo Schuda, a spokeswoman for the department.

The technique was "causing significant perturbations in the VA supply chain,” Jan Frye, VA’s deputy assistant secretary for acquisition and logistics, wrote in the memo ordering the halt. The disruptions are “at least one protest, potential increased costs, small-business program anomalies, violations of our VA contract hierarchy, and a ground swell of complaints from our suppliers.”

He also wrote that contracting officers, when conducting reverse auctions, have handed over too much of the rein to FedBid, the company that hosts the reverse auctions for the VA, without proper oversight by "cognizant contracting officers."

“We simply did not think through all of the unintended consequences of reverse auctions when we recently made the decision to allow their use,” Frye also wrote.

A source close to the situation said Frye took an unusual approach in halting the auctions in his memo. Under ordinary circumstances, an agency would conduct a review or an audit and then decide how to proceed.

“Frye has unilaterally violated this governmental best practice by summarily suspending all contract activity without grounds to do so,” the source said.

In a reverse auction, companies bid to sell their products to the government and the price goes down with more competition for an agency’s bid. According to FedBid, small businesses win more than 80 percent of the dollars competed through the auctions.

Frye's memo's applies only to the VA, but it could get federal officials elsewhere to think about how their offices manage reverse auctions, experts said.

Even if agencies don't follow the VA and immediately stop the use of reverse auctions, "it is likely to at least raise an alarm in the contracting offices of other agencies to make sure the use and procedures surrounding reverse auctions are appropriate,” said Gunjan Talati, senior associate at the Reed Smith law firm.

Larry Allen, president of the Allen Federal Business Partners, said the VA’s decision sends a message to all the other agencies. The message is, reverse auctions won’t meet all your acquisition needs, especially for complex procurements. The auctions are best for simple commodities

“I liken it to using a Phillip’s head screwdriver when you need a flat-head screwdriver instead,” he said.

The effects on industry won't be fully measurable until the review is done and VA decides how to proceed, Talati said. Nevertheless, Allen said many companies are happy with the VA’s decision. Proponents of reverse auctions have made federal officials see only the potential savings, not the limitations, of using the approach. 

He said industry isn’t against reverse auction, but just want it used where it fits best.

“Using reverse auctions for complex procurements tend to drive legitimate suppliers to the sidelines,” he said.