An auction, whether on e-Bay or at Sotheby’s, allows buyers to bid on a purchase and also know what the competition is bidding. Contracting to supply a customer is usually the opposite, secretive and without any knowledge of what competitors are doing. In government contracting, the secrecy of the bid process has been so important that people have gone to jail for revealing such information.
In contrast is the reverse auction. The Defense Logistics Agency (DLA) recently announced that reverse auctions would be the agency’s preferred method for price negotiations in competitive contracts exceeding $150,000 in costs. What is a reverse auction?
The GSA, in 2007, described a reverse auction as
“the type of auction in which the role of the buyer and seller are reversed. In a traditional auction, such as those conducted on eBay, buyers compete for the right to obtain a good. In a federal reverse auction, contractors compete for award of a contract. Today, reverse auctions offer the ability to conduct real-time price competitions within hours. The process allows the government to reveal to each offeror the prices offered by all other offerors (anonymously). Offerors then have the chance to continually revise their prices as each revision is revealed to all of the offerors. The process is repeated until all offerors stop "bidding" or until the auction closes.”
The DLA is using an on-line auction tool provided by Procurex. About 400 reverse auctions have been held in 2012, and the savings is estimated to be in the $30 million range. The process can take as little as an hour.
The DLA sees reverse auctions as an encouragement for greater vendor efficiency. Suppliers will have to look at every aspect of their business as they work to win the bid at the lowest auction price. It may reduce profits for contractors but it also affords them the long-term opportunity to become more efficient and cost effective. This may be the largest use of reverse auctions within the Federal government.
Charles Simmins brings thirty years of accounting and management experience to his coverage of the news. An upstate New Yorker, he is a free lance journalist, former volunteer firefighter and EMT, and is owned by a wife and four cats.
