A reverse auction is a type of auction in which the sellers do the bidding, not the buyers. In a reverse auction, the sellers compete to obtain business from the buyer, and prices will typically decrease as the auction continues, as the sellers undercut each other. Since the award is made solely on the basis of the prices that are bid, reverse auctions are much better suited to commodity products than to proprietary ones.
Reverse auctions serve as an alternative way to acquire federal contracts, as opposed to the traditional federal procurement method in which bidders respond to the General Services Administration’s (GSA) requests for proposals or quotations.
These auctions are held online, through an online procurement service provider such as FedBid.com. Fedbid.com affords both government and commercial buyers an online marketplace where they can post Invitations For Bids (IFBs), and registered sellers compete with one another by submitting bids in hopes of being awarded the contract.
One thing that makes reverse auctions different from conventional bidding is that they allow sellers to submit multiple bids before the bidding period ends. Once a bid is placed, FedBid notifies the bidder of the bid’s status: LEAD means that a bid is in the lead position at a specific moment in the process, and LAG means that a bid is not in the lead position at a specific moment in the process.
Recently, reverse auctions have proved to be a very effective way of increasing competition between bidders and providing goods to the government at bottom-dollar prices, ultimately saving big bucks for taxpayers. They are completely legit, too. Reverse auctions have been embraced by the federal government since 2004, when the Office of Federal Procurement Policy (OFPP) issued a memorandum encouraging the use of online procurement services to conduct reverse auctions whenever possible.
Additionally, the validity of reverse auctions was upheld by both the General Accounting Office and the Court of Federal Claims in 2005 after MTB Group, Inc., challenged the fairness of their use by the United States Department of Housing and Urban Development. In 2010, the Office of Management and Budget cited “continued implementation of innovative procurement methods, such as the use of web-based electronic reverse auctions” as a significant reform that could help federal agencies meet their acquisition savings goals.
So how do reverse auctions affect small businesses? Well, in Fiscal Year 2011, FedBid.com alone produced $150 million in savings on nearly $1.4 billion worth of goods and services. And because these online procurement services enhance opportunities for small businesses by increasing their awareness of, and access to, federal procurement opportunities, FedBid facilitated the award of $950 million in contracts to U.S. small businesses in Fiscal Year 2011.
But despite this positive impact on small businesses, some believe that the reverse-auction model makes it easier for federal agencies to sidestep the simplified acquisition threshold requirements of the Small Business Act. It is not clear that this has actually been the case, but this concern has been brought to the attention of the OFPP by the Small Business Administration (SBA) in a letter dated January 21, 2012. In the letter, the SBA asked the OFPP to develop a policy that explicitly required government buyers to adhere to certain threshold requirements in using reverse auctions. So far, nothing of the sort has been solidified by the OFPP.
Reverse auctions are still inadequate for service contracts, because bidding in reverse auctions are based solely on price and they are not set up to accommodate specifications such as past performance or qualifications of personnel. Thus it is unlikely that reverse auctions will ever fully overtake the GSA’s conventional bidding methods.