As opposed to a traditional auction, where buyers bid prices up to win an item, in a reverse auction, sellers bid prices down in an online forum to win a government contract. In recent years, federal agencies have been using reverse auctions as a tool to reduce the price they pay for certain types of items, such as information technology (IT) products and medical equipment. In theory, a reverse auction leverages competition, enabling agencies to obtain lower prices and reduce acquisition costs. Since GAO reported in 2004 that the US Postal Service was using reverse auctions, other government agencies have increasingly used this tool, and the Office of Federal Procurement Policy, among others, has explored the benefits of its use.
In December 2013, GAO found that the Departments of the Army, Homeland Security, the Interior, and Veterans Affairs (which together accounted for about 70 percent of fiscal year 2012 reverse auctions) have steadily increased their use of reverse auctions in volume and dollars. From fiscal years 2008 to 2012, the number of reverse auctions for these agencies almost tripled—from 7,193 to 19,688—and resulted in about $828 million in fiscal year 2012 contract awards. While there is no requirement to limit reverse auctions to commercial items, agencies generally used them to acquire commercial products and services—primarily for IT products and the lease or rental of equipment.
GAO found that competition and savings—two of the key benefits of reverse auctions cited by the agencies—were not always being maximized. Both had been limited because not all reverse auctions involved interactive bidding, where vendors bid against each other to drive prices lower. GAO found that over one-third of fiscal year 2012 reverse auctions had no interactive bidding. These included situations where only one vendor submitted one or multiple bids and where multiple vendors submitted only one bid each. GAO also found that the agencies paid a company that provided the reverse auction services $3.9 million in fees for these auctions. The company charged a variable fee up to 3 percent of the winning bid and not to exceed $10,000. However, GAO also found that agencies were not aware of the fees they were paying.
The company that ran almost all of the government’s fiscal year 2012 auctions estimated savings of more than $98 million for the four agencies. But GAO questioned the accuracy of these savings estimates, which are based on the difference between the government’s independent cost estimate and the amount of the winning bid. GAO found that the government’s cost estimate may be set too low or too high, which may affect the accuracy of calculated savings.
The Federal Acquisition Regulation (FAR), which is the primary document for publishing uniform policies and procedures related to federal acquisitions, does not specifically address reverse auctions. In addition, there is no governmentwide guidance addressing reverse auctions, including how and when they should be used, the roles and responsibilities of the contracting officers, and what agencies should do if there is no interactive bidding during an auction. Without comprehensive guidance, agencies may be limited in their ability to maximize the potential benefits of reverse auctions.
In December 2013 GAO recommended that the Director of the Office of Management and Budget should:
Agencies’ use of reverse auctions is increasing, and without guidance on the effective use of reverse auctions, agencies may be limited in their ability to achieve the full potential of cost savings. Moreover, due to the lack of reliable and detailed agency-wide data, it is not possible to estimate the extent of potential cost savings associated with the use of reverse auctions in contracting for products and services.
The information contained in this analysis is based on findings from products listed in the related GAO products section. To address agencies’ use of reverse auctions, GAO identified the agencies that used the greatest number of reverse auctions in fiscal year 2012. However, because the federal agencies did not maintain the level of detailed information needed for the review, GAO obtained reverse auction data from the contractor that provided reverse auction services. GAO used these data to (1) confirm that the Departments of Army, Homeland Security, the Interior, and Veterans Affairs were primary users of reverse auctions; (2) determine the types of products and services acquired by these agencies; (3) compute the fees charged by the reverse auction service provider; and (4) analyze the savings. GAO also reviewed and analyzed government-wide and agency policies and guidance, where available, related to the use of reverse auctions. GAO also discussed the use of reverse auctions with government acquisition officials, including agency contracting officers, small business and competition officials, and officials from the Office of Management and Budget’s Office of Federal Procurement Policy. GAO also spoke with organizations representing government contractors to obtain their positions on the federal government’s use of reverse auctions. To understand how contracting officers conducted market research, determined government estimates, and made source selections, GAO selected a random sample of 119 contract files for acquisitions that used reverse auctions in fiscal year 2012 and reviewed the contract files from the selected agencies. Using the same sample, GAO compared the data obtained from the reverse auction service provider with the information contained in the contract files and determined that the data were sufficiently reliable for the purposes of this review.
In commenting on the December 2013 report on which this analysis is based, the Office of Management and Budget generally agreed with GAO’s recommendations, noting that FAR coverage should be considered and that, before taking concrete steps to amend the FAR, officials would discuss GAO’s findings and conclusions with the FAR and Chief Acquisition Officers Councils.
GAO provided a draft of this report section to OMB for review and comment. In an e-mail received on February 3, 2014, the Office of Federal Procurement Policy (OFPP) within OMB generally agreed with GAO’s recommendation to issue guidance regarding the use of reverse auctions in federal acquisitions. Current FAR coverage is being considered in discussions with the FAR and Chief Acquisition Officers Councils.
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