Reverse Auctions for Procurement

Policy

It is the position of the International Institute of Building Enclosure Consultants (IIBEC) that reverse auctions should not be used for the procurement of public construction projects.

Issue

Providers of architecture, engineering, and design services have a history of supporting qualifications-based selection (QBS) of their services to ensure the project utilizes appropriate professionals experienced, trained, skilled, educated, and knowledgeable for specific to the project. Pricing is not a determinant of the designer selection process.  Alternative procurement methods, like reverse auctions and cooperative purchasing, are best paired with commodities where a purchaser can easily determine the value of the offer for the product.

Unlike a traditional auction where a buyer with the highest bid wins the right to purchase a good or service, in a reverse action a buyer seeking a good or service solicits bids, multiple sellers offer bids, and the seller with the lowest bid wins the competition. The practice of reverse auctions in construction and design procurement fails to properly allocate risk, does not necessarily result in selection of a qualified provider, makes it difficult for small and disadvantaged businesses to be awarded a bid, and inhibits the competitive bidding process.  The practice of using reverse auctions for purchasing goods and services has grown over the past decade aided by online tools.

Rationale

Reverse auctions are inappropriate platforms for procurement of design and construction services. Due to the complexities of design and construction projects, the procurement of these services using the reverse auction method fails to take into account the unique mix of services and systems tailored to individual owner needs and budgets, site conditions and local requirements, and the changing composition of the project team, unlike products and commodities which are manufactured with little or no variability. The reverse auction procurement method often favors businesses offering the lowest price, rather than those that are most qualified, which cancompromise quality, overlook small businesses, or even require a new bidding process down the road, eliminating any perceived initial savings.

Reverse auctions do not offer federal owners an appropriate way to evaluate non-price factors nor do they guarantee any proven savings over competitive bidding. When price is not the sole determinant, owners increasingly rely on selection criteria such as past performance, qualifications and the capacity to meet the project’s unique needs. Reverse auctions do not promote this dynamic. Instead reverse auctions promote an approach in which parties focus only on price.

 

When the Government Accountability Office (GAO) reviewed the use of reverse auctions they found the following problems:

  • The five agencies reviewed indirectly paid about $13 million in fees to reverse auction providers through awardees in 2016. However, 28 of the 30 contracting officials GAO interviewed did not fully understand how fees were set.
  • One of the major problems described was the non-competitive nature of reverse auctions with only one bidder (a $19 million dollar construction contract was cited).
  • Further, in 2016, agencies GAO reviewed indirectly paid approximately $3 million in fees for reverse auctions for which a fee-free alternative was likely available.
  • None of the guidance GAO reviewed provided sufficient information for contracting officers to assess the appropriateness of these fees. Without better information, contracting officials may be offsetting potential savings by paying more in fees than necessary for the level of services required.

The US Army Corps conducted a year-long pilot program to evaluate the use of reverse auctions in construction projects and found the following:

  • There was no basis to determine that reverse auctioning provided any significant or marginal savings over a traditional contracting process for construction.
  • Reverse auctions are beneficial when the commodities or manufactured goods procured are of a controlled and consistent nature with little or no variability.
  • Construction is not a commodity and is more closely related to a professional service.
  • Procuring construction by reverse auction neither ensures a fair and reasonable price nor selection of the most qualified contractor.

The Congressional Budget Office reviewed the Army Corps study, GAO analysis, and a General Services Administration review in 2019 and reached the same conclusion: that reverse auctions have not been suitable for complex contracts like design and construction services because they do not consistently result in procurement costs that are lower than what would result from other contracting methods such as sealed bids or negotiated procurements.