How Can the Government Get More Bang for its Buck? Ban Reverse Auctions.

By: Heather McGuire

When you are looking to make a big purchase, say a new refrigerator, you will likely shop around to various big-box stores and perhaps one or two local appliance stores to find the best price. The government makes its purchases through a similar method, receiving bids for service from various large-scale contracting firms, and a couple smaller firms.[1] Though, the government has learned the hard way that the best price is not always the best deal. Unlike when an ordinary individual finds the prices for the a given refrigerator from a couple stores and purchases accordingly, the government employs “reverse auctions” which allow competing firms to see each other’s bids as they are submitted online and permits multiple and consecutive, low-priced back and forth bids.[2]

In a reverse auction, the rapid bidding continues until the contractor with the lowest bid price is declared and ultimately awarded the government’s contract.[3] Beyond that rough outline of procedure, there are no regulations addressing impartiality or credential verification; left unregulated, reverse auctions in the U.S. federal system “have spawned a number of practices that raise concerns under fundamental principles of U.S. procurement law.”[4] Reverse auctions often favor larger firms which are able to undercut their competitors on price.[5] While this practice generally results in an initial bargain for the government, the quality of the product, delivery terms, and other features of the final contract can be subpar – defeating the usefulness of the low price in the first place.[6] At the same time, small businesses, especially those with superior track records, are overlooked in the process.[7]

Admittedly, the inducement of reverse auctions – lowest possible price – is alluring. In May 2000, the U.S Navy conducted a reverse auction for 756 recovery sequences used in airplane ejection seats.^[8] During the fifty-one-minute auction, the price dropped from a starting bid of $3.2 million to a final contract price of $2.37 million.^[9] But as mentioned, repeated price drops during reverse auctions are a red flag, indicating that quality or contract terms are likely to be negatively compromised.

To this end, Representative Mark Meadows (NC-R) introduced the Construction Consensus Procurement Improvement Act of 2020, co-sponsored by Representative Ro Khanna (CA-D).^[10] In short, if enacted, the bill would prohibit the use of reverse auctions for design and construction services procurements.^[11] If the bill is passed, the Federal Acquisition Regulation (“FAR”) would be amended to prohibit the use of reverse auctions when awarding contracts for services such as: site planning; performance of substantial construction work for facility, infrastructure, and environmental restoration projects; delivery and supple of construction materials to construction sites; and substantial alteration of public buildings or works.[12] This change to the FAR would come at no cost to taxpayers while ensuring tax dollars are put to better use.[13] In fact, the U.S. Army Corps of Engineers has already implemented a prohibition on reverse auctions for construction contracts due to the poor performance received while reverse auctions were in place.[14] Plus, this legislation has bipartisan support![15]

Contractors who excessively undercut their competitors during the bidding process may find themselves stuck deciding between compromising quality or subjecting their firm to the False Claim Act.[16] The Construction Consensus Procurement Improvement Act of 2020 would relieve this burden on contracting companies and restore the thorough, meritorious auction method.[17] To get all the promised bang for its buck, the government, like an ordinary individual browsing for a refrigerator, should cease its use of reverse auctions and take bids at their initial face value.

[1] Major Susan L. Turley, Wielding the Virtual Gavel – DOD Moves Forward with Reverse Auctions, 173 Mil. L. Rev. 1, 47 (2002) (describing the infrequency of small firms competing for government contracts).

[2] See Congress Addresses Federal Procurement Issues for Design Firms, Am. Society of Landscape Architects (Jan. 13, 2014), https://www.asla.org/land/LandArticle.aspx?id=42328.

[3] See id.

[4] Christopher R. Yukins, A Case Study in Comparative Procurement Law: Assessing UNCITRAL’S Lessons for U.S. Procurement, 35 Pub. Cont. L. J. 457,465 (2006).

[5] See Courtney Bublé, Bipartisan Bill Would Ban Reverse Auctions for Federal Construction Contracts, Gov’t Exec. (Jan. 17, 2020), https://www.govexec.com/management/2020/01/bipartisan-bill-would-ban-reverse-auctions-federal-construction-contracts/162528/.

[6] See Federal Manager’s Daily Report, Bill Would Halt Reverse Auctions, Require Zero Emissions Vehicles, FEDweek (Jan. 29, 2020), https://www.fedweek.com/federal-managers-daily-report/contracting-other-proposals-introduced/.

[7] See id.; Danielle Ivory, ‘Reverse Auctions’ Draw Scrutiny, N.Y. Times (Apr. 6, 2014), https://www.nytimes.com/2014/04/07/business/reverse-auctions-draw-scrutiny.html (reporting small business skepticism of a system that favors firms’ prices over track records).

[8] Major Susan L. Turley, Wielding the Virtual Gavel – DOD Moves Forward with Reverse Auctions, 173 Mil. L. Rev. 1, 7 (2002).

[9] Id. (calculating a twenty-eight percent savings for the U.S. Navy).

[10] H.R. 5644, 116th Cong. (2nd Sess. 2020).

[11] Id.

[12] H.R. 5644, 116th Cong. (2nd Sess. 2020).

[13] See Press Release, Representative Mark Meadows, Meadows, Khanna Introduce Bipartisan Construction Consensus Procurement Improvement Act (Jan. 17, 2020), available at https://meadows.house.gov/news/documentsingle.aspx?DocumentID=3107.

[14] See Courtney Bublé, Bipartisan Bill Would Ban Reverse Auctions for Federal Construction Contracts, Gov’t Exec. (Jan. 17, 2020), https://www.govexec.com/management/2020/01/bipartisan-bill-would-ban-reverse-auctions-federal-construction-contracts/162528/.

[15] See id.

[16] See GSA’s Reverse Auction Platform May Present Difficulties, Law360 (Sept. 23, 2013), https://www.law360.com/articles/473552/gsa-s-reverse-auction-platform-may-present-difficulties.

[17] See H.R. 5644, 116th Cong. (2nd Sess. 2020).