VA’s Use of Reverse-Auction Contracts Comes Under Attack

The use of so-called reverse auctions to lower contracting costs at the Veterans Affairs Department and General Services Administration came under tough scrutiny on Wednesday at a House joint committee hearing.

Rather than saving money, critics said, the tool drives out competition, favors a single auction company and risks a lowering of quality in the work if applied to complex projects such as construction.

Reverse auctions are a contracting process used by the government since the late 1990s to promote competition by having the agency buyer solicit bids from multiple sellers, in contrast to a standard auction where a seller solicits bids from multiple buyers. GSA in July launched a new reverse auction initiative aimed at the purchasing of supplies, or commodities, more than complex services.

But both a recently concluded two-year House investigation and a just-released Government Accountability Office report faulted the technique, noting that more than one-third of fiscal 2012 reverse auctions had no interactive bidding, and agencies paid $3.9 million in fees for those auctions. In March 2012, Veterans Affairs temporarily suspended the tool’s use so it could study the claimed savings for purchases of information technology products, medical equipment and supplies.

“Having worked in the industry for 30 years, I know firsthand that small contractors are concerned that using reverse auctions for construction places them at a competitive disadvantage,” said Rep. Richard Hanna, R-N.Y., chairman of the House Small Business oversight subcommittee, which joined with its Veterans Affairs Committee counterpart to hold the hearing. “Washington should do more to ensure a level competition process for small construction contractors. It should start by prohibiting the use of reverse auctions for bidding on construction contracts.”

Rep. Mike Coffman, R-Colo., who serves on both the veterans and small business panels, criticized VA’s use of a sole contractor, FedBid Inc., to run the auctions. “FedBid’s real compensation comes from the fee -- up to 3 percent-- it adds onto the final award price of vendor contracts,” he said in a prepared statement. “Accordingly, some advocates have concluded from this arrangement that FedBid’s service is free to the government. However, it is obvious that when FedBid’s fee is tacked onto the final award price of a contract, the seller is effectively passing on the fee to the government.”

Democrats largely agreed on the need for reforms. “One has to question the need for any auction when there’s only one bidder,” said Rep. Grace Meng, D-N.Y. , a member of the Small Business Subcommittee on Contracting and the Workforce.

GAO in testimony said, “the potential benefits of reverse auctions -- competition and savings -- had not been maximized by the agencies” examined, which included the Army and the Homeland Security, Interior and Veterans Affairs departments.

“Almost half of the reverse auctions were used to obtain items from pre-existing contracts that in some cases resulted in agencies paying two fees -- one to use the contract and one to use the reverse auction contractor's services, “ said Michelle Mackin, GAO’s director of acquisition and sourcing management. "There is a lack of comprehensive governmentwide guidance and the Federal Acquisition Regulation, which … does not specifically address reverse auctions. As a result, confusion exists about their use and agencies may be limited in their ability to maximize the potential benefits of reverse auctions.”

Several witnesses denounced the use of reverse auctions. Nigel Cary, president of Cox Construction Co., warned against any use of the tool for complex construction projects, and said agencies are driving out the number of bidders on specific contracts. “Reverse auctions ignore best value,” he said. “It’s unfortunate and misguided that each agency learns the lesson on their own.”

Louis Celli Jr., director of the legislative division of the American Legion, said his members call reverse auctions “unfair, deceptive and fraught with cheating.” They put the federal government in a “predatory position” that allows agencies to accumulate savings in a “slush fund” out of Congress’ control, he testified.

But William Sisk, deputy commissioner of GSA’s Federal Acquisition Service, defended use of reverse auctions to purchase supplies. GSA data indicate that 485 auctions produced a 6.7 percent savings rate and averaged three vendors per auction, and 85 percent of the awards went to small businesses, he said. The Web-based platform introduced last summer has generated “considerable interest” and will provide insight in possible use of such auctions for strategic sourcing.

At Veterans Affairs, reverse auctions make up only 5 percent of contracts, but “when used appropriately, save money and time,” said Jan Frye, deputy assistant secretary at the Office of Acquisitions and Logistics. Reverse auctions were used increasingly in recent years, and in fiscal 2012, VA used the tool in 7,587 auctions for a volume of $305 million, with 79 percent going to small businesses, he said.

Frye acknowledged, however, the need for last year’s moratorium, saying the department needed to “crunch the numbers” on the savings claimed by the FedBid auction service. A new policy, he said, requires contracting officers to do an independent review of the savings.

Philip Matkovsky, assistant deputy undersecretary for health for administrative operations at the Veterans Health Administration, said the 3 percent fee is built into the contractor’s final price, adding that the VA has not had in-house capacity to conduct auctions. Construction awards, he said, are for “local, noncomplex projects such as roof repair and flooring, not major design/build on a new operating room.”

Solutions offered at the hearing included increased oversight and training, and passage of H.R. 2157, which would prohibit federal agencies from using reverse auctions to bid out construction contracts suitable for awards to small businesses. The White House Office of Federal Procurement Policy, GAO noted, has agreed that new guidance is needed.