Reverse Auctions: Past, Present & Future

For years, many Contractors have complained about the Reverse Auction process driving their margins down. However, the writing on the wall says we can expect Reverse Auctions to grow even more popular in the coming years.

What is Reverse Auction?

Reverse auctions were intentionally engineered to intensify competition and decrease government costs. In a Reverse Auction, sellers are challenged to earn business from federal agencies, with prices continuously reducing as the auction advances. Reverse Auctions permit suppliers to view what competitors are bidding, thereby encouraging them to propose a lower figure time-and-again until the auction closes.

This is unlike conventional bidding, where suppliers are in the dark on who their competitors are or how much they are bidding. Reverse Auctions are meant to force contractors to be more efficient and offer at the best possible price. Commercial items and services–primarily for IT products and medical equipment and supplies are commonly found in Reverse Auction platforms.

Reverse Auctions generally amount to 7% of total government contracts, which comes to roughly $31.2 billion. A GAO report found that Reverse Auctions saved government buyers 23%, while also improving transparency, collection of data, and reducing acquisition processing time and costs.

The History of the Reverse Auction

FedBid (a private company) dominated the Federal Reverse Auction market for years, but were recently barred from government contracts.

The DLA RA launched their Reverse Auction platform in 2010. While the GSA’s launched in 2013, for use by federal, state, and local government under the authorities of the Cooperative Purchasing and Disaster Purchasing Programs.

How Can A Contractor Participate in Reverse Auctions

Are you looking to grow your business with the Army, DLA, DHS, DOI, or VA? In recent years these agencies have increased their usage of the Reverse Auction strategy – So this is a low impact way to offer up your products or services to these Agencies.

The DLA partnered with Procurex on to manage their Reverse Auction, which has a self registration. Any Company registered with a SAM can participate in the DLA Reverse Auction, they simply must Register.

In order to participate in the GSA Reverse Auction, a Contractor must have a GSA Contract. You simply log in using your E-Buy credentials. If you are interested in getting a GSA Contract, so you can compete in the GSA Reverse Auction, the best place to start is the GSA Focus “Pre-Qualify” form, so we can surface any major hurdles before we are heavily invested in the process.

Reverse Auction Sales Statistics

“Over the past year, GSA’s government-developed and managed reverse auction platform (ReverseAuctions.gsa.gov) has seen amazing growth, with usage surging over 1000 percent from the first quarter of FY14 compared to first quarter of FY15.” – Joan E. Kornblith, GSA FAS Communications Manager

GSA Reverse Auction Statistics (July 1, 2013 thru January 31, 2015)

  • Sales jumped from $737,000 to $10.8 million, with the total awarded auctions for small and large businesses equaling $24 million.
  • 22 agencies across government created over 900 auctions and saved more than $6.8 million
  • While 60 percent of the auctions were set aside for small business, agencies awarded more than 85 percent ($22 million) of the procurements to small businesses
  • $24 million in awarded auctions
  • GSA’s Reverse Auction Platform generated 22 percent savings off Independent Government Cost Estimates and 29 percent savings against the highest bid
  • Total FY14 savings for agencies equaled 23.58 percent

DLA Reverse Auction Statistics

  • Using Reverse Auctions on all competitive contracts valued at more than $150,000
  • In 2014 DLA has substantially increased its reverse auction opportunities, which have led to savings of more than $1.6 billion over the past year, including $400 million from three DLA Energy auctions alone.

The Future of The Reverse Auction

“This government-run reverse auction tool is a fantastic innovation for GSA’s customers, and we expect it will continue to drive even more savings and speed into the acquisition process.” – FAS Commissioner Thomas A. Sharpe, Jr. (GSA Blog)

Reverse Auctions are experiencing a definite shake-up in 2015. Due to the recent FedBid debarment from Reverse Auctions, there is 90% of market share that will be dispersed among other contract vehicles. This is an estimated $31.2 billion that will very likely flow to GSA and DLA Reverse Auctions’s because of their similarity to FedBid’s system. 2015 will be a year of dramatic growth for both of these systems.

Additionally, the use of Reverse Auctions’s has steadily been growing – the GSA Reverse Auction has reported a 1000% increase in Q1 this year compared to 2014. The DLA Reverse Auction keeps their statistics tightly-held, so only insiders know the growth that platform is currently experiencing.

“GAO recommends that the Director of the Office of Management and Budget (OMB) take steps to amend the FAR to address agencies’ use of reverse auctions and issue government-wide guidance to maximize competition and savings when using reverse auctions.” – Reverse Auctions Report (GAO-14-108)

GAO found that the potential benefits of reverse auctions–competition and savings–had not been maximized by the agencies. GAO also found that confusion exists about their use and agencies may be limited in their ability to maximize the potential benefits of reverse auctions. Just like anything that is facing widespread adoption among Federal Agencies, Reverse Auctions will likely face a major growth regulation. There will likely be some specific FAR clauses in the near future directed at Reverse Auctions.

Small Business Wins

“Small businesses and taxpayers have benefited the most from the Reverse Auction program. Even though 60 percent of auctions had been set aside for them, 85 percent of the auctions (more than $22 million) awarded through the initiative went to small businesses. “- Joan E. Kornblith, GSA FAS Communications Manager (GSA Blog)

Reverse Auctions make it easier for small businesses to compete, because of their low barrier to entry and minimal time investment, compared to a lengthy bidding process that requires more experienced manpower. A common thread among auctions is that many result in contracts with dollar value awards below $150,000 or less, and a high rate of awards goes to small businesses.

The GAO report noted that over one-third of fiscal year 2012 reverse auctions had no interactive bidding. So, even though the point of Reverse Auctions is to drive down prices through competition, many Contractors are winning auctions with no competition. Many small businesses offer specialized goods and services that are difficult to gather 3 competitive bids for. For the time being, Reverse Auctions has been a place for Federal Buyers to purchase from small businesses without direct competition.

Conclusion

For years, many Contractors have complained about FedBid and the auction process grinding their margins dangerously close to nothing. However, due to the adoption of these Reverse Auction platforms by federal agencies, and their growing use, they are here to stay. And although they do not fit the mold for every type of acquisition, the writing on the wall says we can expect Reverse Auctions to grow even more popular in the coming years.

References:

http://gsablogs.gsa.gov/gsablog/2015/02/09/usage-jumps-1000-as-agencies-save-with-gsas-reverse-auction-tool/

http://www.gao.gov/products/GAO-14-108

http://www.bizjournals.com/washington/blog/fedbiz_daily/2015/02/fedbid-may-be-down-and-out-for-now-but-reverse.html?page=all

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