Joint-Hearing Finds The Use Of Reverse Auction Contracts Limits Competition, Increases Costs For Taxpayer
The House Small Business Subcommittee on Contracting and Workforce, under the chairmanship of Rep. Richard Hanna (R-NY), today held a joint-hearing with the Veterans' Affairs Committee's Subcommittee on Oversight and Investigations to examine the uses of reverse auction contracts in the federal government, focusing on its budgetary impact, its effect on competition, and whether additional guidance or legislation is necessary to address its inefficiencies.
Under a reverse auction, companies continue to under-bid each other, usually through a digital portal, until one is declared the winner. The intention is to drive down prices to the lowest possible amount. However, the United States Army Corps of Engineers (USACE) found, last year, that the reverse-auction methodology did not work for construction contracts due to their high degree of variability. Further, USACE found that the methodology did not deliver the promised savings. Consequently, it issued a policy to stop using reverse auctions for construction contracts.
“Having worked in the industry for 30 years, I know firsthand that small contractors are concerned that using reverse auctions for construction places them at a competitive disadvantage,” said Chairman Hanna. “This week’s Comptroller General report on reverse auctions found that they also limit competition and increase costs for taxpayers. This is a serious problem because small businesses have proven that they can perform a service or produce goods for the government cheaper and often quicker than their larger counterparts. Washington should do more to ensure a level competition process for small construction contractors. It should start by prohibiting the use of reverse auctions for bidding on construction contracts.”
House Small Business Committee Chairmen Sam Graves (R-MO), Hanna and Small Business Subcommittee on Contracting and Workforce Ranking Member Grace Meng (D-NY) introduced the Commonsense Contracting Act of 2013 (HR 2751) in July. This bill would prohibit federal agencies from bidding construction contracts suitable for award to a small business through reverse auctions.
Materials from the hearing are available on the Committee’s website HERE.
Nigel Cary, President of Cox Construction Company in San Diego, CA, testifying on behalf of the Associated General Contractors of America, said, “AGC strongly supports full and open competition for contracts necessary to construct improvements to real property. We contend that reverse auctions create an environment where competition is unnecessarily limited to the detriment of the federal government and taxpayers. In fact, we contend that no objective public or private study, including a U.S. Army Corps of Engineers (USACE) study on the issue, has provided persuasive evidence that reverse auctions generate the best cost, or best value for the procurement of construction services.”
Louis J. Celli, Jr., Director of the Legislative Division at The American Legion in Washington, DC said, “The American Legion also notes that all of the evidence, both for and against reverse auctions consistently use the term “when used correctly, reverse auctions can be an effective purchasing tool”. However, “when used correctly” turns out to be the default phrase that places the responsibility for proper use squarely on the customer, in this case – the federal government. Contracting officers who are not formerly trained to use these tools have ended up taking unfair advantage of small businesses, and because these tools are not government tools, the oversight for structure and use lacks proper implementation.”
Michelle Mackin, Director of Acquisition and Sourcing Management at the Government Accountability Office in Washington, DC said, “Competition and savings-two of the key benefits of reverse auctions cited by the agencies we reviewed-are not always being maximized… because not all reverse auctions involve what we refer to as interactive bidding, where vendors engage in multiple rounds of bids against each other to drive prices lower. We found that over a third of the fiscal year 2012 reverse auctions had no interactive bidding-and agencies paid $3.9 million in fees for these auctions.”