Bidding Wars

Agencies navigate the controversial debate over eBay-style procurements without any official guidance.

Like eBay visitors prowling for the perfect faux-Tiffany ring or used iPod, federal buyers are turning more to online auctions to satisfy their shopping needs.

While prices go up in traditional auction fashion on eBay, agencies use reverse auctions, which get their name from the fact that prices go down as suppliers bid to offer a buyer the best deal. A search on FedBiz-Opps, where agencies post their upcoming procurements, reveals 332 active postings where reverse auctions will be used to buy items ranging from residential alarm systems for the State Department to software for the Homeland Security Department. The company that hosts most government reverse auctions, Vienna, Va.-based FedBid Inc., saw the value of its transactions more than double to $204 million in 2005 from $94 million in 2004. It expects to conduct $400 million worth of business by the end of this year. And that's all happening without any official regulation of reverse auctions.

The absence of regulations, combined with widespread use of these auctions, is a recipe for disaster, says Christopher R. Yukins, associate professor of government contracts law at The George Washington University Law School. Without oversight, he says, "There will likely be scandals . . . reverse auctions will be misused." Agencies don't know when it's appropriate to use reverse auctions or how to set them up, he adds.

Even the most vocal proponents-who, not surprisingly, are the companies that sell these services to the government-agree that reverse auctions are more appropriate for commodities and simple services, for which there are many potential suppliers and quality is relatively easy to determine. The chief benefit of reverse auctions is the ability to elicit low prices from bidders. Vendors compete with each other in real time over a period ranging from half an hour to three days or more. After the bids are evaluated, agencies negotiate final terms and conditions and make the award based on best value, which is not necessarily the lowest price. Most auction experts recommend assessing quality upfront so buyers know what suppliers are offering before the auction begins.

"It's an opportunity to drive the price down without creating unfair advantages. Everyone can see what's going on," David A. Drabkin, acting director for contract operations at the General Services Administration's Federal Acquisition Service, said at a February colloquium on reverse auctions at The George Washington University Law School. He does not see the need for more rules to govern reverse auctions. "We've got plenty of rules," he said.

None of the government's attempts to regulate reverse auctions has resulted in any guidance. The two councils that administer the Federal Acquisition Regulation for civilian and Defense agencies issued requests for comments on reverse auctions in 2000, but no rule was issued. The Office of Management and Budget released a memo in May 2004 stating that reverse auctions can ensure competitive prices if "used correctly," but did not define what that meant.

Reverse auctions became standard for government in 1997, after Steven Kelman, then head of the Office of Federal Procurement Policy, initiated the removal of the FAR prohibition on reverse auctions. At the time, many private sector companies already were using them.

Some agencies say they are doing just fine in the laissez faire environment. The Postal Service, which was one of the earliest adopters of reverse auctions in the federal arena, buys $300 million to $600 million worth of containers, labels, transportation and other goods and services through reverse auctions each year. USPS says it has saved $400 million through reverse auctions since 2000, and typically saves 10 percent to 12 percent per award. Robert Oates, USPS manager of supply chain management projects, says auctions reduce paperwork and back-and-forth calls between suppliers and contracting officers, freeing acquisition personnel for higher-level work.

Others are more skeptical. M.L. "Bob" Emiliani, associate professor at Central Connecticut State University's School of Technology, says savings through reverse auctions typically are overstated by 50 percent to 75 percent because executives don't look at total cost, which should include quality control, turnover, fees to online auction companies and other factors. FedBid, for example, charges agencies up to 3 percent of the total transaction value of each auction. Emiliani's research also has revealed that suppliers tend to underbid in auctions, which he says leads to lower quality goods and services. "The folks who run reverse auctions claim fabulous benefits, and what we found is that [they] oversell their services and . . . under-deliver," he says.

Industry groups have been vocal critics of the auctions, partly because lower prices can result in lower revenues for suppliers. Marco Giamberardino, senior director at the Arlington, Va.-based industry group Associated General Contractors of America, says reverse auctions hurt relationships between buyers and vendors because they squeeze prices at the expense of quality, and high-quality suppliers don't bother bidding as a result.

Oates says the Postal Service avoids that problem by setting up auctions that base awards not only on price, but also on quality. Using new technology, USPS assigns numerical weights to volume discounts, delivery times and other quality issues, which automatically are taken into consideration along with price when bidders are ranked.

Researching suppliers ahead of time and specifying exactly what an agency wants are essential, says Justin Sullivan, a manager at Sunnyvale, Calif.-based Ariba Inc., provider of reverse auction hosting services.

FedBid's general counsel, Lu Tupponce, says reverse auctions have helped small businesses win government contracts by putting them on a level playing field with bigger companies. He says 70 percent of purchases through the FedBid system, which hosts about 20,000 auctions a year at a total value of more than $400 million, go to small businesses, and 80 percent of the awards are done without preference to small or disadvantaged businesses. "Small businesses suddenly have huge visibility in the government marketplace," he says.