GUEST OPINION

Auction Techniques May Aid Federal Catalog Contracts

By Jeffrey Robinette

Reverse auction techniques are becoming increasingly popular in federal procurement. Several commercial companies already have created or are gearing up Web sites aimed at automating auction techniques and other market pricing mechanisms for the federal marketplace.

The General Services Administration also has its own site, Buyers.gov, in recognizing the potential competition posed by these commercial efforts and the potential benefits that could accrue to its schedule program from reverse auction techniques.

Using auction techniques would appear to be a natural evolutionary step for the GSA schedules and the numerous multiple-award and indefinite delivery, indefinite quantity contracts that became popular in the 1990s. These "catalog contracts" provide an easy-to-use procurement mechanism that allows government buyers to place smaller orders without having to compete every requirement.

The problem with catalog contracting is that the larger the contract, the more difficult it is to maintain, particularly for quickly evolving high-tech products. Once a catalog contract is established, pricing and product offerings are quickly outdated and require consistent oversight, updates and modifications to remain viable resources.

Government buyers and the companies that enter into catalog contracts find themselves in an endless administrative effort of product and pricing maintenance.

The promise created by using auction techniques and similar spot market pricing mechanisms in conjunction with catalog contracts ? which is what Buyers.gov proposes to do ? is that they could solve the price maintenance issue. The buyer, instead of relying on a catalog with prices that are one step behind the market, can be assured that an auction or quoting mechanism will exert a degree of market pressure on a contractor's pricing.

While the reverse auction is great for government buyers, it creates anxiety for government contractors who fear too much emphasis will be on price and other important factors like quality. More pressure on already low margins is another concern.

The good news for contractors is that the notoriously unpopular price reductions clause and most-favored customer clauses used in catalog contracts should lose whatever value they provide. After all, what better reassurance can there be that the government is achieving competitive pricing than a spot market dynamic.

Perhaps more promising is the potential impact that e-commerce could have on open market purchases. Numerous companies have geared up or are developing Internet-based ordering systems aimed at the federal marketplace. Among the concepts being considered are market exchanges, where government buyers and government contractors meet to conduct spot market purchases online.

Exchanges may prove to be the most directly competitive of Buyers.gov, because they can easily facilitate smaller purchases of commercial items: purchases that are of roughly the same size and type as those purchases served by the schedules. Like placing an order against a catalog contract, a market exchange attempts to create a simple tool whereby a government buyer can obtain good pricing quickly, without exerting significant effort.

Aggregation, or the process of linking numerous government purchases of smaller quantities into a single pool, may be the key to the success of the market exchange concept. Aggregation essentially makes into a sizable purchase what would otherwise be numerous smaller purchases from different buyers. In this manner, aggregation leverages government volumes into deeper quantity-based discounts.

Volumebuy.com is an example of a company that is using aggregation in the
commercial marketplace. Fedbid.com
is a company that is using aggregation
in the federal marketplace. Essentially,
Fedbid.com can be used to permit a buyer in California who is purchasing 10 printers and a buyer in Texas who is buying five printers to join an auction sponsored by a buyer in Virginia, who is purchasing 100 identical printers.

By aggregating these identical requirements, the government should obtain a better price for all of the printers than it would have obtained absent aggregation.

While Buyers.gov and other catalog-based sites are also exploring using aggregation techniques, exchanges provide an obvious and significant advantage over sites that remain linked to catalog contracts.

Not only do exchanges benefit from continuously up-to-date pricing, but they also benefit from up-to-date products. As a result, both the product and pricing maintenance issues traditionally associated with catalog contracting should be alleviated under the exchange model.

While sites that remain linked to catalog contract backbones likely will continue to be hampered by product refreshment issues, even after implementing reverse auction and other market pricing techniques to rectify their pricing deficiencies, market exchanges should provide a truly spot market dynamic with continuously fresh products and prices.

Jeffrey Robinette is an attorney at Reed, Smith, Hazel & Thomas LLP. He counsels clients on government contracting issues, including federal e-commerce and commercial item acquisition.

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