Viewpoint: Reverse Auctions Don’t Help Agencies or Taxpayers

The tool does not guarantee the lowest price for a contract—just ask small construction firms.

Editors note: As lawmakers continue to weigh the merits of federal agencies’ use of reverse auctions, Government Executive asked a leading opponent of the procurement tool to weigh in on the topic.

Dozens of organizations representing hundreds of thousands of America’s small construction firms— whether minority-owned, women-owned, veteran-owned, HUBZone or just plain old small business—agree: using reverse auctions to procure construction services for the federal government does not save money, does not encourage quality and does not help small businesses. 

Reverse auctions do not guarantee the lowest price for a contract. Rather, like in “The Price is Right” game show, they guarantee that one business will underbid others by just one dollar. A bidder has no incentive to offer its best price and may never have to offer its lowest price. Nevertheless, business do offer their best price for low price technically acceptable procurements and other contracting approaches conducted through sealed bids, where competitors do not know their competitor’s price. Data reporting any bid savings is, therefore, highly questionable.

Reverse auctions do not make sense for the procurement of many contracts, particularly those for professional services and especially construction services. When contracting for a complex service like construction, the past performance, expertise and quality of a firm’s proposal should be significant factors. In reverse auctions, however, the focus is singular: price. When price is the most important factor, the level of quality of the service procured is likely to suffer.

Ask yourself this: If you were looking for a doctor to perform surgery on you or your loved one, would you choose that doctor through a reverse auction? If your answer is no, does it make sense to allow the federal government to spend your tax dollars on complex, professional services acquired through a reverse auction? It doesn’t.

Construction projects are subject to highly variable conditions and the teams acquired—contractors, engineers, architects, etc.—must have considerable experience and expertise. Because of these factors, FedBid, a major reverse auction vendor to the federal government, and the Army Corps of Engineers, the largest and most experienced federal purchaser of construction services, have stated that reverse auctions do not make sense for the acquisition of construction services. Yet FedBid and other federal agencies continue to use reverse auctions for construction.

The reverse auction process places significant risks on small and emerging businesses. The game-like process with multiple rounds of bidding in quick succession can move too quickly for participants to accurately reassess their costs. As a result, participants, particularly small businesses, may forgo quality or timelineness, sacrifice profit, and risk default or even bankruptcy.

The statistics some cite to justify using reverse auctions are misleading. For example, the Government Accountability Office found that 86 percent of federal reverse auction procurements are won by small businesses. Yet 80 percent of the contracts awarded to small businesses via reverse auctions were valued between $3,000 and $150,000. Not coincidentally, contracts of this size are required to be reserved for small businesses. In other words, just 6 percent of reverse auction competitions, instead of 86 percent, were won by small businesses when they were required to compete against large business using reverse auctions.

So, the next time you hear radio ads touting how reverse auctions help small businesses, remember that America’s small businesses do not agree. Congress must take action to help small businesses, the government and taxpayers by prohibiting reverse auction acquisitions for construction services by supporting legislation like the Construction Consensus Procurement Improvement Act (S.1526) introduced by Sens. Rob Portman, R-Ohio, and Mazie Hirono, D-Hawaii, and the Commonsense Contracting Act (H.R. 1444) introduced by Rep. Richard Hanna, R-N.Y.

Jimmy Christianson is director of government affairs for the Federal and Heavy Construction Division of the Associated General Contractors of America.

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