Effective Savings Requires Regulation Amendments

Last week, reverse auctions used by the Department of Veteran Affairs (VA) were the subject of a hearing before a Joint Subcommittee of the House Committee on Veterans' Affairs’ Subcommittee on Oversight & Investigations and the House Committee on Small Business’s Subcommittee on Contracting and Workforce. Critics claimed that, rather than saving money, the VA reverse auctions are reducing competition and risking lowering the quality of work if applied to complex projects such as construction.

Reverse auctions are used by federal agencies to leverage competition and reduce the cost of certain items. The concept is simple; one buyer proposes a price and then vendors compete against one another to provide the lowest-price or highest-value offer for the buyer.

To maximize competition and achieve cost savings, Michele Mackin, the Director of the Acquisition and Sourcing Management at Government Accountability Office “recommended that the FAR [Federal Acquisition Regulation] be amended to address reverse auctions from a regulatory standpoint, and also recommended that the Office of Management and Budget (OMB) issue guidance addressing competition and fees and to share agency best practices.”

The benefits of competition in acquiring products and services from the private sector are well established. However, the misapplication of reverse auctions as a federal procurement tool has raised concerns.

A two-year House investigation and a new Government Accountability Office (GAO) report both criticized the techniques followed in conducting a reverse auction by federal agencies.

The GAO submitted a report to congressional requesters finding that more than one-third of fiscal year 2012 reverse auctions had no interactive bidding, and agencies paid $3.9 million in fees for those auctions.

The GAO report was based on data from five different agencies—the Departments of the Army (Army), Homeland Security (DHS), the Interior (DOI), Veterans Affairs (VA), and Defense Logistics Agency (DLA)—conducting about 70 percent of the reverse auctions.

Despite the fact that FAR does not specifically address reverse auctions, there has been an increase in their use. For that, agencies have been following the general FAR provisions when using reverse auctions. For example, the GAO found that 86 percent of fiscal year 2012 acquisitions using reverse auctions went to small businesses, keeping with the federal regulations reserving acquisitions of supplies or services with expected values of more than $3,000 but not exceeding $150,000 for small businesses.

Furthermore, although the FAR does not limit the use of reverse auctions to commercial items or to award values of $150,000 or less, GAO noted that agencies have generally self-restricted their use to acquiring commercial items, and to awards of $150,000 of less; the GAO found that 95 percent of reverse auctions acquisitions were valued at $150,000 or less.

The lack of government-wide regulations and guidance on reverse auctions hinders their effectiveness. For example, as mentioned, the GAO found that over one-third of fiscal year 2012 reverse auction had no interactive bidding where vendors bid against each other to drive prices down, which stifled the process. Steven Kelman, a proponent for simpler federal buying (who sits on the board of advisors for the leading reverse-auction provider to the government— FedBid Inc.), believes that one-bid auctions are more a product of “very restrictive specs, perhaps combined with set-asides, or sometimes by excessively low government target prices.” Those explanations aside, he added that the lack of competition “deserves further research.”

Additionally, the GAO found that the lack of comprehensive government-wide guidance led to confusion on how reverse auctions are managed and how reverse-auction fees are paid.

Four agencies out of the five reviewed by the GAO have contracted with FedBid to manage the agencies’ auctions. The usual fee paid to FedBid to administer an auction is an additional 3 percent of the amount of the winning bid. This fee is added to the bid amount and the agency will have to pay this fee eventually. In some cases, the GAO found that agencies sometimes pay two sets of fees when using an existing contract vehicle in conjunction with a reverse auction. When an agency limits a reverse auction to a group of vendors under a certain contract vehicle, the agency will pay one fee for the auction and a separate fee for the use of the contact vehicle. Almost half of the reverse auctions audited were used to obtain items from pre-existing contracts, leading to double fee payments from the agencies.

POGO has advocated for wider use of reverse auctions. However, POGO also has been advocating for adequate competition in the federal contracting system to help control costs and incentivize performance. Improving the reverse auction system can help the government achieve those goals.