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Agencies realize cost savings through reverse auctions

Jun. 25, 2012 - 02:23PM   |  
By SARAH CHACKO   |   Comments

Agencies are increasing their use of reverse auctions to drive down prices on goods and services, from office supplies to medical equipment.

Unlike a typical auction, where bidders increase the price they are willing to pay to win, reverse auctions require vendors to lower their prices as they compete to win a contract.

In 2011, agencies spent $1.4 billion through reverse auctions hosted by an online marketplace called FedBid. That is 58 percent more than agencies spent through the company in 2009 and double what agencies spent in 2007.

Several agencies contract with FedBid for reverse auction services, including the Army, Department of Homeland Security, FBI and State Department.

The Navy signed a contract with FedBid in June after piloting reverse auctions with the company for a year.

“A couple years ago, because of the new budget pressure, it became appealing to look for different solutions and different tools that might be available,” said Jamey Halke, the program manager for strategic sourcing at Naval Supply Systems Command.

FedBid reverse auctions on average saved 13.5 percent of what products and services would have cost through open competition, and 12 percent of what agencies would have spent had they used the federal supply schedule, according to data provided by FedBid.

The Navy piloted reverse auctions with FedBid at its Naval Supply Systems Command last year, before signing a contract with the company this year. The command awarded contracts worth more than $20 million through reverse auctions and saved more than $2 million when compared with the government’s price estimates.

The decision to use reverse auctions instead of other procurement vehicles, such as the federal supply schedule or multiple award contracts, is at the contracting officer’s discretion, Halke said. As the command increases its use of reverse auctions, guidance on its use may follow in coming years, he said.

Contractors and agencies have raised some concerns about the use of reverse auctions, particularly that they not be used for complex services and that proper market research is done before starting an auction. The Veterans Affairs Department stopped using reverse auctions for about a month while officials drafted guidance on how to use and manage them.

The Veterans Health Administration, VA’s primary user of reverse auctions, has asked its contracting officers to consider using reverse auctions when buying commercial products, such as small information technology equipment, medical supplies and furniture, or commoditized services, such as janitorial and landscaping services, Susan Taylor, VHA’s deputy chief procurement officer, said in an email.

For example, VHA purchased a medical device for $8,240 after eight companies submitted 32 bids on the procurement, Taylor said. The final price was nearly $3,000 lower than the agency’s estimate based on market research, she said.

“The current budget makes use of FedBid even more attractive since we realize substantial cost savings using reverse auctions,” Taylor said.

Agencies are not required to pick the lowest bidder, and some still consider factors other than price when they make procurement decisions, said Steve Kelman, a former federal procurement official and FedBid board member. The reverse auction tool is just a way to try to get vendors to lower their prices, he said.

Some companies may not like the pressure that agencies are putting on price, but it is a focus for agencies now across procurement platforms, not just reverse auctions, Kelman said.

“The idea that the government should not put pressure on vendors to lower their rates, especially in this budget environment, is absurd,” Kelman said.

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