On June 1, 2015, the Office of Federal Procurement Policy (“OFPP”) released a Memorandum for Chief Acquisition Officers and Senior Procurement Executives to provide guidance on “Effective Use of Reverse Auctions.”[1] Reverse auctions are a web-based procurement tool that allows sellers to compete with successively lower bids to obtain awards for products and services. Although the use of reverse auctions by contracting agencies has been steadily increasing (nearly tripling from 7,193 actions to 19,688 between FY 2008 and FY 2012, reaching a value of $828 million), the tool is not currently addressed under the Federal Acquisition Regulations (“FAR”). A December 2013 Government Accountability Office (“GAO”) report highlighted the growing trend in use of this tool and called upon OFPP to issue comprehensive government-wide guidance.[2] In response, OFPP’s June 1, 2015 memorandum provided a set of “reminders” to help contracting officers maximize the potential benefits of this tool.

This article briefly explains how reverse auctions work, identifies trends in use, and summarizes highlights of OFPP’s recommendations that may impact future use of reverse auctions.

How reverse auctions work

Reverse auctions are a vehicle for pricing contracts whereby sellers compete by submitting successively lower bids in order to win the contract award. The goal is to increase savings to the government (by driving down prices) and to enhance competition (through enabling multiple rounds of interactive bidding for continued price reductions).

According to the December 2013 GAO report, most of the agencies that use reverse auctions use the same fee-based contractor, FedBid, as a platform. Other agencies, such as the Defense Logistics Agency and GAO run their own platforms through a purchased license.   Contracting officers set preferences for selection criteria and choose the awardee. As a basic example, contracting officers can choose to set a target price, which vendors must bid below (and below any other subsequent bids) in order to be the leading (lowest) vendor. Competing vendor names and prices remain anonymous. Contracting officers can award a contract even if it is not to the lowest bidder or does not meet the target price. Vendors must be registered with the respective auction platform in order to bid. Vendors can submit questions about the procurement through FedBid’s system, which will notify the contracting officer via e-mail.

Although reverse auctions are not addressed by the FAR, agency officials agree that contracting officers are required to follow other applicable acquisition regulations when deciding to use a reverse auction and throughout the award process. For example, contracting officers are expected to determine when an acquisition will be set aside for small businesses.[3]

Trends in Use

GAO’s 2013 report identified that five agencies conducted 70 percent of reverse auctions between FY 2008 to FY 2012, including the Departments of the Army, Interior, Veterans Affairs, Homeland Security, and the Defense Logistics Agency.[4] Some of the key trends identified based on these reverse auctions included the following:

  • Reverse auctions are overwhelmingly used by agencies to procure products. In FY 2012, 90 percent ($746 million) of contract awards analyzed by GAO that resulted from reverse auctions were for products. Although the top products varied across agencies, on average, Information Technology (“IT”) products and medical equipment and supplies topped the list. Where reverse auctions were used to procure services, nearly 60 percent ($83 million) were for lease and rental equipment, IT and Telecom, medical services, and maintenance and repair.
  • Most of the reverse auctions (95 percent) resulted in awards that were below the SAT of $150,000.
  • The use of reverse auctions has resulted in significant participation for small businesses. Over 80 percent of the FY 2012 reverse auctions reviewed by GAO were awarded to small businesses.
  • About half of the reverse auctions conducted in FY 2012 were placed under existing contract vehicles used by federal agencies to leverage buying power and obtain lower prices (g., the GSA Multiple Award Schedule, multi-agency contracts, and Government-Wide Acquisition Contracts). Some of these contract vehicles charge the ordering agency a use fee for ordering (which is paid on top of any fee the contracting agency pays for usage of a reverse auction platform by third party contractors).
  • Agencies covered in GAO’s report achieved over $98 million in savings in FY 2012 through use of reverse auctions. According to GAO, this estimate is based on FedBid’s calculation for savings achieved through reverse auctions, which is determined by the difference between the government’s independent cost estimate (the auction target price) and the final award price.

 

[1] See Effective Use of Reverse Auctions (June 1, 2015), available at https://www.whitehouse.gov/sites/default/files/omb/procurement/memo/effective-use-of-reverse-auctions.pdf.

[2] See REVERSE AUCTIONS: Guidance Is Needed to Maximize Competition and Achieve Cost Savings (GAO-14-108), http://www.gao.gov/assets/660/659530.pdf.

[3] FAR 19.502-2(a) requires that acquisitions of supplies or services with expected values of more than $3,000 but not over $150,000 are reserved for small businesses, with some exceptions. If a determination is made that a small business set-aside is inappropriate, contracting officers must document the reason. For acquisitions above the SAT, contracting officers must set-aside for small businesses when there is a reasonable expectation that offers will be obtained from at least two responsible small business concerns and an award will be made at fair market prices. See FAR 19.502-2(c).

[4] Although GAO identified DLA as one of the top agencies that uses reverse auctions, its generalized quantitative analysis is based on data obtained for the remaining four agencies, which it obtained from FedBid.