Reverse Auctions: Guidance Is Needed to Maximize Competition and Achieve Cost Savings
Published: 2013-12-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Reverse auctions are one tool used by federal agencies to increase competition and reduce the cost of certain items. Reverse auctions differ from traditional auctions in that sellers compete against one another to provide the lowest price or highest-value offer to a buyer. GAO was asked to review issues related to agencies' use of reverse auctions. This report examines (1) what agencies are buying through reverse auctions and trends in their use; (2) how agencies are conducting reverse auctions; and (3) the extent to which the potential benefits of reverse auctions are being maximized. GAO identified five agencies conducting about 70 percent of government reverse auctions. GAO analyzed available data and guidance and interviewed agency officials and contractors. GAO also reviewed a random sample of contract files to understand agency procedures; the results of this analysis are generalizable to all reverse auctions for four of the five agencies in our review.
section_title: What GAO Found
paragraphs: The Departments of the Army, Homeland Security, the Interior, and Veterans Affairs used reverse auctions to acquire predominantly commercial items and services--primarily for information technology products and medical equipment and supplies--although the mix of products and services varied among agencies. Most--but not all--of the auctions resulted in contracts with relatively small dollar value awards--typically $150,000 or less--and a high rate of awards to small businesses. The four agencies steadily increased their use of reverse auctions from fiscal years 2008 through 2012, with about $828 million in contract awards in 2012 alone. GAO was not able to analyze data from a fifth agency, the Defense Logistics Agency (DLA), because it collected only summary level information during fiscal year 2012. DLA guidance states that the reverse auction pricing tool should be used for all competitive purchases over $150,000.
Four agencies used the same commercial service provider to conduct their reverse auctions and paid a variable fee for this service, which was no more than 3 percent of the winning bid amount. DLA conducts its own auctions through a purchased license. Regardless of the method used, according to agency officials, contracting officers are still responsible for following established contracting procedures when using reverse auctions.
GAO found that the potential benefits of reverse auctions--competition and savings--had not been maximized by the agencies. GAO found that over one-third of fiscal year 2012 reverse auctions had no interactive bidding, where vendors bid against each other to drive prices lower. In addition, almost half of the reverse auctions were used to obtain items from pre-existing contracts that in some cases resulted in agencies paying two fees--one to use the contract and one to use the reverse auction contractor's services. There is a lack of comprehensive governmentwide guidance and 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. As a result, confusion exists about their use and agencies may be limited in their ability to maximize the potential benefits of reverse auctions.
section_title: What GAO Recommends
paragraphs: 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. OMB generally agreed with GAO's recommendations, noting that FAR coverage should be considered and that, before taking concrete steps to amend the FAR, they would discuss GAO's findings and conclusions with the FAR and Chief Acquisition Officers Councils.

section_title: Letter
paragraphs: In recent years, federal agencies have been using reverse auctions—in  which sellers compete against each other to sell their products or services  to the buyer—as a tool to reduce the price they pay for certain types of  items. In theory, a reverse auction leverages competition, enabling  agencies to obtain lower prices and reduce acquisition costs. Our prior  work found that government agencies were increasingly using reverse  auctions as a means to drive down prices. You asked us to review issues  related to agencies’ use of reverse auctions. This report examines (1)  what agencies are buying through reverse auctions and trends in their  use; (2) how agencies are conducting reverse auctions; and (3) the extent  to which the potential benefits of reverse auctions are being maximized.
To conduct our work, we identified the agencies that used the greatest  number of reverse auctions in fiscal year 2012 by reviewing contract  award information in Federal Business Opportunities (FedBizOpps.gov).  The award information identifies when reverse auctions were used;  however, not all contract award actions are required to be announced in  FedBizOpps. Over 99 percent of the fiscal year reverse auctions listed in  FedBizOpps showed that the agencies used the same contractor, FedBid,  Inc. (FedBid), to conduct their reverse auctions. Because the federal  agencies did not maintain the level of detailed information needed for our  review, we obtained reverse auction data from FedBid. We used this data  to: (1) confirm that the Departments of the Army (Army), Homeland  Security (DHS), the Interior (DOI), and Veterans Affairs (VA) were primary  users of reverse auctions; (2) determine the types of products and  services acquired by these agencies; (3) compute the fees charged by  FedBid for its services; and (4) analyze the savings. By relying on the  FedBizOpps data, we also selected the Defense Logistics Agency (DLA)  for examination because it had the greatest number of reverse auctions  that did not use FedBid. Together, these five agencies represent  approximately 70 percent of government-wide reverse auction activity,   We were not able to perform  based on FedBid and FedBizOpps data.detailed analysis of DLA data for fiscal year 2012, because the agency  collected only summary level information. Agency officials told us that  providing the data for each auction would require them to review all  contract files to determine whether a reverse auction had been used. We  determined that it would not be a good use of DLA’s resources to conduct  that review. However, we interviewed DLA officials and obtained their  summary level information to assess the agency’s use of reverse  auctions. Throughout the report, our quantitative analysis primarily refers  to Army, DHS, DOI, and VA.
We also reviewed and analyzed government-wide and agency policies  and guidance across all 5 agencies, where available, related to the use of  reverse auctions. We discussed the benefits and disadvantages of using  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 (OFPP). We 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, we selected a random sample of  119 contract files for acquisitions that used reverse auctions in fiscal year  2012 for the Army, DHS, DOI, and VA and reviewed the contract files.  The results of our sample are generalizable to the entire population of  19,688 reverse auctions conducted at the four agencies during fiscal year  2012. We specifically obtained documentation to determine how independent government estimates were made, what type of market  research was conducted, and whether small business consideration or  other preferences were exercised. We also obtained documentation  addressing technical and price evaluation, the source selection decision,  and any estimated savings related to the use of reverse auctions. Using  the same sample, we compared the data obtained from FedBid with the  information contained in the contract files and determined that the data  were sufficiently reliable for our purposes.
We conducted this performance audit from November 2012 to December  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. For more information on  our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Reverse auctions are similar to traditional auctions, except that the sellers  compete against each other to sell their products or services to the buyer.  Unlike a traditional auction, in which multiple buyers bid against one  another to push the price up, reverse auctions enable a buyer to evaluate  proposals submitted from multiple sellers, in which sellers compete  against one another to provide the lowest price or highest-value offer.  After considering all offers, the buyer selects the winning proposal, often  at a reduced price. Figure 1 compares these two types of auctions.
Prior to 1997, auctioning techniques were prohibited in the federal  government under the Federal Acquisition Regulation (FAR) procedures  for negotiated procurements. Agencies were prohibited from advising an  offeror of where its bid stood compared with those of other offerors and  furnishing information about other offerors’ prices, both of which are key   tenets of a reverse auction. In 1997, the FAR Council rewrote Part 15 of  the FAR to eliminate these prohibitions as part of an overall effort to make  the source selection process more innovative, simplify the process, and  facilitate a best value acquisition approach. Currently, while the FAR  does not specifically address reverse auctions, several provisions  facilitate agencies’ use of them, such as allowing the use of innovative  strategies and electronic commerce. OFPP has considered the necessity  for government-wide guidance on reverse auctions numerous times since  1997, when the auctions prohibition was removed from the FAR. In  October 2000, the FAR Council issued a notice in the Federal Register  requesting information from the acquisition community to help determine  the best approach to inform thinking regarding the use of reverse auction  techniques. In 2007, when responding to the Conference Report  accompanying the National Defense Authorization Act for Fiscal Year  2006, OFPP conducted a survey of both sellers and buyers to assess  how federal government buying activities could most effectively use  reverse auctions to increase savings. According to OFPP officials, neither  of these efforts resulted in guidance being provided to federal agencies.
In 2001, the Department of Defense (DOD) issued guidance on acquiring  commercial items that stated where competition exists, the reverse  auction environment results in driving down the sellers’ offered prices.  Since then, several reviews have addressed agencies’ use of reverse  auctions. In 2003, the Army Corps of Engineers concluded that the  method was useful for commodities purchases but was not suitable for  construction services acquisitions. In 2004, we reported that the U.S.  Postal Service claimed over $5.9 million in savings by using reverse  auctions in fiscal year 2003; however, we found that $2.1 million of the  claimed savings was questionable because of incorrect baseline data. We  also noted that the Postal Service may not have obtained the lowest  prices possible when, in about a quarter of the auctions, it received only  one bid. In 2011, we found that half of the 24 agencies involved in an  Office of Management and Budget (OMB) cost savings initiative reported  using reverse auctions to improve competition and reduce prices on  commonly purchased products and services.
section_title: Agencies Increased Their Use of Reverse Auctions Predominantly to Purchase Commercial Items
paragraphs: The agencies we reviewed—Army, DHS, DOI, and VA—have steadily  increased their use of reverse auctions in volume and dollars in recent  years. From fiscal years 2008 to 2012, the number of reverse auctions  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 information  technology (IT) products and the lease or rental of equipment.  Combined, the agencies used reverse auctions to award only a small  portion of all commercial acquisitions—not quite 7 percent of actions.  Across the agencies we reviewed, reverse auctions shared several  common characteristics, such as relatively small dollar value awards and  a high rate of awards to small businesses. DLA’s guidance, issued in  June 2012, states that the reverse auction pricing tool should be used for  all competitive purchases over $150,000.
subsections: section_title: Reverse Auctions Have Increased and Have Been Used Primarily to Buy Commercial Products and Services
paragraphs: Across the agencies we selected, use of reverse auctions increased  almost 175 percent between fiscal years 2008 and 2012. Figure 2  summarizes the growth in use of reverse auctions in dollars and number  of auctions.
Agencies in our review used reverse auctions to purchase a variety of  commercial products, although the top five categories varied among  agencies. For example, Army, DHS, and DOI purchased mostly IT  products, while the VA purchased mostly medical equipment and  supplies. In addition, DHS and DOI purchased comparatively less in  medical supplies than the Army and the VA. Across the selected  agencies, 41 percent of all reverse auctions were for IT-related items and  23 percent were for medical supplies in fiscal year 2012, as shown in  figure 3.
Of the $828 million in fiscal year 2012 contracting actions that resulted  from reverse auctions, $746 million—or 90 percent—were for products.  Services, in contrast, constituted about 10 percent. Across the agencies,  four categories of services—Lease or Rental of Equipment; IT and  Telecom; Medical Services; and Maintenance, Repair, and Rebuilding of  Equipment—made up nearly 60 percent of the $83 million used to buy  services through reverse auctions.
In fiscal year 2012, the four agencies in our review collectively reported  more than 234,000 contract actions, excluding modifications, for  commercial items that were valued at $21.5 billion.agencies used reverse auctions to award only a small portion of all  commercial acquisitions—not quite 7 percent of actions—which  represented a little less than 4 percent of the dollar value of those  commercial actions. Figure 4 compares the relationship between the  number and value of reverse auctions as a percent of all commercial  actions in fiscal year 2012.
While to date most reverse auctions have been used for commercial  products, some agency officials told us that the use of reverse auctions to  acquire services is increasing and are also being used for more complex  contract actions.
section_title: Most Reverse Auctions Share Common Characteristics
paragraphs: Our analysis of the data from FedBid identified four common  characteristics among contract awards:  For $150,000 or Less  There is no requirement to limit reverse auctions to a certain award value,  and the reverse auctions at the selected agencies in fiscal year 2012  resulted in awards that ranged in value from about $100 to almost $6.3  million. However, we found that about 95 percent of the acquisitions using  reverse auctions resulted in awards of $150,000 or less. See figure 5.
While we could not assess DLA’s activity at this level of detail, its  guidance states that the reverse auction pricing tool should be used for all  competitive purchases over $150,000.
About 86 percent of fiscal year 2012 acquisitions using reverse  auctions—16,906 of 19,688—went to small businesses, in keeping with  the FAR requirement that acquisitions of supplies or services with  expected values of more than $3,000 but not over $150,000 are reserved  for small businesses, with some exceptions.accounted for $661 million (80 percent) of the dollar value of all reverse  auction awards. See figure 6.
Almost half of the reverse auctions in fiscal year 2012 across the four  agencies in our review—9,257 of 19,688—were conducted to place  orders for products and services using existing contracts. Federal  agencies can use a number of existing contract vehicles to leverage  buying power and obtain lower prices, including the General Service  Administration’s (GSA) multiple award schedule (Schedule) program,  multi-agency contracts, and government-wide acquisition contracts  (GWAC). In some cases, the use of these contract vehicles includes a  fee that the ordering agency must pay. The remaining reverse auctions  did not result in placing orders under existing contracts but were  considered open market transactions. See table 1. See appendix II for a  description for each of the existing contracts used and the associated  fees.
Almost 60 percent of the contract actions resulting from reverse auctions  conducted in fiscal year 2012 across the selected agencies were awarded  at the end of the fiscal year, as shown in figure 7.
Agency officials told us that the surge of fourth quarter reverse auctions  parallels what happens with acquisitions in general at that time of the year  and can be due to late release of funds. According to agency officials,  reverse auctions, which can take as little as an hour for uncomplicated  purchases, can facilitate the timely award of contracts at the end of the  year. In prior work, we reported that a contracting officer turned to  procedures that facilitated the rapid award of contracts in the fourth  quarter.
section_title: Most Agencies Use the Same Fee-Based Contractor and Are to Follow Established Contracting Procedures to Conduct Their Reverse Auctions
paragraphs: Four of the five agencies included in our review used the same service  provider, FedBid, to conduct their reverse auctions. Agencies pay a  variable fee to conduct reverse auctions through FedBid, which is no  more than 3 percent of the winning bid. FedBid has a limited role in the  acquisition process, since contracting officers are still responsible for  making key decisions that affect the auction, such as selecting the  winning vendor. For example, contracting officers select the basis for  award, which may include award to other than the lowest priced bidder  and we found that about a fourth of the 2012 contract actions resulting  from reverse auctions were not awarded to the lowest bidder.
subsections: section_title: Four of the Five Selected Agencies Used the Same Reverse Auction Contractor
paragraphs: The Army, DHS, DOI, and VA contracted with a company called FedBid  to conduct their reverse auctions during fiscal year 2012. The agencies  used an existing GSA Schedule contract to procure FedBid’s services,  which include an online user interface, data management, and regular  reports on reverse auction activity. According to FedBid, its product is a  commercially available online procurement service that allows sellers of  commercial items to the government to compete against each other in  real time and in an interactive environment. FedBid also states that it  safeguards each seller’s identity and pricing. Other companies also  conduct reverse auctions, and some officials noted their agencies had  undertaken a cost/benefit analysis to determine which company to  contract with for this service.
Agency acquisition officials told us that using a contractor for their reverse  auctions reduced some of their administrative duties and allowed senior  contracting officers to spend more time on complex acquisitions. For  example, FedBid offers remote and on-site assistance to train, set up  accounts, and provide technical support for federal reverse auction users.  According to a FedBid representative, the company provides staff for an  on-site helpdesk at the Army and DHS full time, and at DOI and VA on- demand as needed, typically in the fourth quarter of the fiscal year.  According to agency officials, FedBid employees also provide training on  the use of their system at government contracting facilities. In addition,  FedBid provides technical support to vendors on how to use their system.  However, vendor questions about contract requirements are directed to  the contracting officer.
OFPP procurement policy notes that agencies should provide a greater  degree of scrutiny when contracting for professional and management  support services, which include acquisition support, program evaluation,  and other services that can affect the government’s decision-making  authority. We did not conduct a detailed review of FedBid’s role in  providing technical support to contracting officials at the agencies.  However, regarding its use of FedBid, DHS’s Office of Procurement  Operations recognized this concern and issued an operating procedure to  emphasize that documentation in the contract file must clearly state that  the contracting officer made all acquisition decisions throughout the  procurement process, and that the role of any acquisition support  contractor personnel was solely administrative and not decision-making.  Other agencies in our review noted that this is a good practice and one  that could be easily implemented.
DLA, the fifth agency we reviewed, did not obtain reverse auction  services from FedBid, but rather purchased a license that allows it to  conduct its own real-time, web-based auctions. The site allows DLA to  manage its reverse auctions without the need for contractor services, with  the exception of occasional technical support.
section_title: Contracting Officials Are to Follow Established Contracting Procedures When Using Reverse Auctions
paragraphs: The design of online reverse auctions can vary based on the acquisition  strategy selected by the contracting officer. While the FAR is silent on  reverse auctions specifically, agency officials told us contracting officers  are required to follow other applicable acquisition procedures as outlined  in the FAR and agencies’ specific acquisition regulations when deciding  to use a reverse auction and then throughout the auction and award  process. For example, the program office or contracting officers are  required to conduct market research for acquisitions above the simplified  acquisition threshold (currently $150,000) or, for acquisitions below that  threshold, when adequate information is not available and the  circumstances justify its cost. The contracting officer is also expected to  determine whether an acquisition will be set aside for small businesses if  it generally has an estimated value exceeding $3,000 but not over  $150,000, and to follow simplified acquisition procedures to the greatest  extent possible for all purchases not exceeding the simplified acquisition  threshold. When using a reverse auction, contracting officers can utilize  an existing contract vehicle, such as the GSA Schedule, or set aside the  procurement for certain small business communities, where appropriate  under applicable regulations. Contracting officers determine other  features as well, including the length of the auction and the amount of  information available to bidders about each other’s bids. These strategies  or features can affect the competitive environment of the auction and  affect the magnitude of cost savings.
When setting up an auction on FedBid’s system, a contracting officer can  choose to set a target price, which may be based on a government cost  estimate or market research. If a target price is in effect, or “active,” a  vendor must bid below that price—and below any other subsequent  bids—in order to be the leading vendor. A vendor is informed when they  are the leading vendor during the auction, though other vendors’ names  and bid prices remain anonymous. A contracting officer can award a  contract even if no submitted bids meet the target price.
Vendors must register with FedBid and agree to the requirements  established by the contracting officer before submitting a bid in an  auction. These requirements may include delivery terms, whether the  acquisition must be a brand name item, or other terms specific to the  acquisition. Vendors can use FedBid’s system to submit questions about  requirements during the auction, and the system notifies the contracting  officer via e-mail. It is up to the contracting officer to decide whether to  answer them. Questions about using FedBid’s system are usually sent to  FedBid employees.
Figure 8 outlines the acquisition process when using a reverse auction,  along with the roles of the agency officials procuring the item, FedBid,  and the bidding vendors.
When a vendor submits a bid, FedBid automatically adds its fee and  ranks the adjusted bid (i.e., the vendor’s bid plus the fee) against adjusted  bids submitted by other vendors. When the reverse auction ends and the  contracting officer receives the results, the bids, which already include  FedBid’s fee, are ranked from lowest to highest. According to agency  officials, contracting officers are then responsible for determining that the  results of the reverse auction have met the competition, savings, and  other criteria for the procurement, selecting a winning vendor from those  results, and awarding the contract. When the agency receives the goods  or services, it pays the entire bid amount to the selected vendor, including  the reverse auction fee. FedBid then sends an invoice to the selected  vendor for the reverse auction fee. FedBid caps its fee at 3 percent of the  winning vendor’s bid, but the fee may be less depending on the specifics  of FedBid’s contract with the agency. For example, in June 2009, DHS’s  Office of Procurement Operations negotiated a reduced fee for its reverse  auctions.
In addition, FedBid may reduce its fee or charge no fee in specific  circumstances, such as if the adjusted bid exceeds the contracting  officer’s target price or if the fee would exceed $10,000. In fact, our  analysis found that FedBid received no fees in 20 percent of reverse  auctions conducted in fiscal year 2012 at the selected agencies. In those  cases, the agencies paid the price of the winning vendor’s bid with no  FedBid fee added. However, in 6 percent of the auctions, agencies paid  the maximum fee even when the final award price exceeded the agency’s  target price. See figure 9.
In July 2013, GSA launched its own reverse auction tool to allow  agencies to use reverse auctions with the GSA Schedule without using  separate contractor to conduct the auctions. GSA officials told us that  they do not intend to charge a reverse auction fee for awards made to  GSA Schedule holders; however, the usual 0.75 percent fee for using the  GSA Schedule will apply to these awards.
section_title: The Vendor with the Lowest Bid Does Not Always Receive the Award
paragraphs: After the auction ends, a contracting officer can accept the auction results  or start over with a new one. For example, a contracting officer might  choose to repost the solicitation to a wider pool of potential vendors in an  attempt to garner additional participants. Alternately, a contracting officer  can choose to make an award even if the bids exceeded the target price.  The contracting officer must also establish the basis for award. For  example, the contracting officer can make the award to the lowest bidder  or make the award based on a cost/technical tradeoff process where it is  in the best interest of the government to consider other than the lowest  price. If a contracting officer is concerned about a vendor’s ability to meet  the requirements, he or she may select another vendor, even if that  vendor submitted a higher bid. On the basis of our analysis of a random  sample of fiscal year 2012 auctions, we estimate that 24 percent of all  reverse auction contracts were not awarded to the lowest bidding  vendor.
section_title: Competition and Savings Are Not Always Maximized, in Part Due to Lack of Comprehensive Guidance
paragraphs: Competition and savings—two of the key benefits of reverse auctions  cited by the agencies we reviewed—are not always being maximized.  Both have been limited because not all reverse auctions involve  interactive bidding. Agencies have awarded a significant number of  contracts when there was only one offeror or a lack of interactive bidding  among vendors. As a result, agencies paid a fee without realizing the key  benefits they initially sought. It is also unclear whether savings due to  reverse auctions are accurate because target prices maybe set too low or  too high. In some cases, agencies are paying two fees, but they generally  lack the data to provide transparency into the fees they are paying. To  some degree, these shortcomings result from confusion caused by a lack  of comprehensive government-wide guidance.
subsections: section_title: Agencies Emphasize the Need for Competition through Interactive Bidding, but This Was Not Present in Over One-Third of Reverse Auctions
paragraphs: All five agencies we reviewed characterize a benefit of reverse auctions  as driving prices lower by having vendors compete against each other.  For example, DHS Customs and Border Protection’s guidance notes that  a benefit of reverse auctions is the increased competition on commonly  purchased commodities. DLA guidance states that reverse auctions allow  the government to procure products and services in a competitive and  dynamic environment where vendors bid prices down until the end of the  auction. In addition, according to information FedBid provides to the  agencies, their service allows sellers to compete against each other in  real time and in an interactive environment.
The benefits of competition in acquiring products and services from the  private sector are well established. However, contracts that are awarded  using competitive procedures but for which only one offer is received  (one-offer awards) have recently become an area of concern. We  reported on this issue in 2010, and OFPP has noted that competitions  yielding a response of only one offer deprive agencies of the ability to  consider alternative solutions in a reasoned and structured manner.  DOD, in its September 2010 Better Buying Power initiative memorandum,  referred to competitive procurements for which only one offer was  received as “ineffective competition.”
Over a third of the fiscal year 2012 reverse auctions conducted by FedBid  for the agencies in our review had no interactive bidding—where vendors  engage in multiple rounds of bids against each other to drive prices lower.  We found that 27 percent of the auctions involved only one vendor who  may have submitted one or multiple bids, and another 8 percent had  multiple vendors who only submitted one bid each. Agencies paid $3.9  million in fees for these auctions. The remaining 65 percent of auctions  involved multiple vendors where at least one vendor submitted more than  one bid. Figure 10 shows the percentage of FedBid’s fiscal year 2012  auctions for the agencies in our review that had interactive bidding among  multiple vendors, versus those that did not, and the fees the agencies  paid to FedBid.
In fiscal year 2012, the selected agencies conducted 3,617 auctions  where only one vendor participated and submitted only one bid. Agencies  in our review paid $1.7 million in fees for these types of auctions. In this  situation, agencies may not be getting the best price. In prior work, we  found that a successful bidder did not initially offer his best price and it  would not have been his final offer had there been competing bids. A few  vendors that we spoke to also noted that it is in the vendor’s best interest  to submit a high initial bid and wait for another vendor to offer a lower  price before lowering their own price. In our review of 119 contract files  for awards resulting from reverse auctions for the agencies in our review,  24 auctions (20 percent) only had one offeror and the contracting officers  did not negotiate a lower price but accepted that vendor’s bid.
The agencies in our review also conducted 1,707 auctions in fiscal year  2012, where a single vendor submitted multiple bids. This can occur  when a vendor makes more than one attempt to submit a bid below an  active target price to become the leading vendor. Given that FedBid  does not disclose vendor identities, the target price, or bids, vendors do  not know when they are bidding against themselves. While this could lead  to lower prices, it does not meet agencies’ goals of increasing  competition, and these prices could possibly be obtained through  traditional acquisition procedures. However, agency officials stated that  using reverse auctions reduced some of the time that would otherwise be  spent on the acquisition. The agencies paid $1.1 million in fees when only  one vendor participated in the auction but made more than one bid.
We also found that the agencies in our review paid $1.1 million in fees in  fiscal year 2012 for 1,663 auctions where multiple vendors submitted a  single bid. In theory, a contracting officer could have obtained the same  results by soliciting bids or offers from multiple vendors and avoided the  reverse auction fee.
In fiscal year 2012, the agencies in our review conducted 12,701 auctions  where more than one vendor participated, and had multiple bids, with an  average of six vendors and 15 bids total. In our review of selected  contract files, we found evidence that contracting officers took proactive  steps to increase the number of bidders in an effort to realize lower  prices, such as by asking FedBid to hold another auction to include  additional vendors. In one case, a DHS contracting officer used a reverse  auction to place an order for office supplies under an existing contract  vehicle but did not receive any bids. Consequently, the contracting officer  conducted another auction to place the order under GSA’s Schedule  program, which resulted in four vendors submitting a total of 40 bids. The  contracting officer did not believe the auction resulted in the best price  and invited all vendors to submit bids.vendors submitting a total of 74 bids and yielded an even lower price.
section_title: Reverse Auction Savings Hinge on Agencies’ Established Target Price
paragraphs: Agencies cite savings as one of the benefits of reverse auctions.Although the agencies in our review stated that they do not publicly report  the savings, they use the information—provided by FedBid—to assess  the potential costs and benefits of reverse auctions. Savings information  could also be used to determine whether to increase use of reverse  auctions and to make decisions about what types of products or services  are appropriate for that technique. FedBid calculates the savings by  determining the difference between the government’s independent cost  estimate (which becomes the auction target price) and the final award  price. Agency officials stated that savings can be calculated using  multiple methods. According to a DLA official, for its reverse auctions,  DLA calculates savings in some situations by calculating the difference  between the award price and the auction’s first bid.
Using FedBid’s approach, savings from fiscal year 2012 reverse auctions  for the Army, DHS, DOI, and VA totaled more than $98 million. See figure 11 for calculated savings based on the level of interactive bidding.
However, it is also unclear whether savings due to reverse auctions are  accurate. For example, the estimated savings may be too high since it  includes $24 million in savings from auctions where vendors did not bid  against each other to drive prices lower. Additionally, the accuracy of the  calculated savings depends on the validity of the agency’s target price.  Based on our contract file reviews, we found that most contracting officers  relied on their market research or government independent cost estimate  to establish the target price. However, our analysis shows that the target  price may have been set too low in some cases, because in 1,111  auctions that had interactive bidding among vendors in fiscal year 2012,  the final award price was higher than the target price. For example, VA  conducted a reverse auction to obtain medical equipment and 4,418  vendors were notified. For this reverse auction, two vendors submitted a  total of eight bids, all of which were higher than the target price. A  contracting official stated that since it was best value procurement, the  lowest bid was accepted even though the bid was above the target price.
section_title: Agencies Lack Data to Independently Evaluate Fees Paid and in Some Cases Pay Two Fees
paragraphs: Four of the agencies we reviewed do not collect their own data, but rather  rely on FedBid to identify their reverse auction activity. We found that  these agencies do not track how much they pay in reverse auction fees.  Without independently collecting or verifying this information, agencies  are not able to independently assess the cost effectiveness of reverse  auctions. In addition, we found that agencies sometimes pay two sets of  fees when using an existing contract vehicle in conjunction with a reverse  auction. When an agency limits a reverse auction to a group of vendors  under a certain contract vehicle, the agency can pay one fee for the  auction and a separate fee for the use of the contract vehicle. For the  agencies in our review, 47 percent of acquisitions using reverse auctions  in fiscal year 2012 were ordered under pre-existing contracts resulting in  $6.5 million in reverse auction fees paid to FedBid. For example, for  reverse auctions resulting in orders under Schedule contracts, the  selected agencies in fiscal year 2012 paid $1.3 million to GSA and VA for  the use of pre-existing contracts and another $2.8 million to FedBid in  reverse auction fees.
section_title: Regulations and Guidance Do Not Comprehensively Address Reverse Auctions
paragraphs: The degree to which agencies are able to maximize the benefits of  reverse auctions are hindered by a lack of comprehensive government- wide regulations and guidance. Standards for internal control in the  federal government identify the need for documenting policies and  procedures to ensure appropriate measures are taken to address risk.  Accordingly, the federal government publishes uniform policies and  procedures for federal acquisitions in the FAR, which provides guidance  to federal agencies and that the public, to include vendors, may read to  better understand the federal acquisition process. However, as noted  above, the FAR does not specifically address reverse auctions. Agencies  have developed their own guidance, which generally encourages the use  of reverse auctions for certain types of procurements and highlights the  benefits of competition and savings from reverse auctions. But most  agency guidance does not provide contracting officers with information on  what to do in certain situations, for example, when only one vendor  submits a bid. Only one agency out of five—VA—addresses what action  should be taken when auctions fail to generate interactive bidding, but  even then only requires that contracting officers document that  occurrence in their contract files.
VA has taken action to gain greater insight into its use of reverse  auctions. In an effort to determine the effect of reverse auctions on the VA  supply chain, in March 2012 the VA Senior Procurement Executive halted  the use of reverse auctions until an assessment of their effect could be  completed. Subsequently, in April 2012, VA issued guidance requiring  contracting activities to develop internal controls and standard operating  procedures to establish independent oversight of reverse auction  procurements, such as determining savings and fees paid. In conducting  our file reviews, we found examples of cases where the contract files are  now including this information. DLA, which manages its own reverse  auction activity, independently collects summary information from its  buying commands on use and savings obtained.
We found agency officials and vendors were uncertain about how reverse  auctions fees are paid. For example, an Army contracting official  incorrectly believed the vendors are charged the fee by FedBid, and  another Army official stated that vendors may be confused about fees  charged by FedBid, with some vendors believing they are paying the  reverse auction fee, even though it is the procuring agency that does so.  In another case, an Army procurement official told us he believed that if  an auction does not generate any savings, FedBid would not charge a  fee. However, we found that in fiscal year 2012, the selected agencies  paid fees in 33 percent of auctions that did not generate any savings.  Industry representatives also told us that their members were uncertain  who pays the auction fee (it is paid by the ordering agency to the vendor,  who is later invoiced by FedBid).
Confusion also exists about how reverse auctions are managed. Several  vendors stated that FedBid’s interface creates an additional layer  between the vendor and the end user that can inhibit their efforts to clarify  details in the solicitation—such as the type of material an agency  requires— that are important in setting a bid price. While questions can  be submitted through FedBid, some vendors told us their questions  concerning the requirements are sometimes ignored if they do so. In fact,  although vendor questions are posted on the FedBid website, it is the  sole responsibility of the contracting officer—not FedBid—to respond to  them.FedBid’s system only invited GSA Schedule holders currently registered  with FedBid to submit bids. However, according to FedBid officials all  GSA Schedule holders are automatically invited to bid, but must register  with FedBid to submit bids. An agency official stated that vendors had  concerns over security and privacy. Another agency official added that  some vendors did not want to register with another contractor, which can  reduce the level of competition and may not result in lower prices.  Additionally, several vendors expressed concerns that the reverse auction  system usually identifies the lowest bidder and is awarded the contract. In  fact, it is the contracting officer’s responsibility to award the contract and,  as discussed above, we estimated that about a quarter of the auctions did  not result in awards to the lowest bidder.
Further, some contracting officers incorrectly thought that  Government acquisition officials and vendors told us that government- wide guidance on the use of reverse auctions would be useful in clearing  up some of the confusion about the role that reverse auctions play in the  acquisition process. OFPP is responsible for providing overall direction for  government-wide procurement policies, regulations and procedures, and  to promote economy, efficiency, and effectiveness in acquisition  processes. OFPP officials told us that in 2012 they requested agencies to  submit any existing guidance they had, but have yet to determine their  next step. The lack of government-wide guidance addressing the use of  reverse auctions and the confusion within the vendor community about  the process may limit the potential benefits from the use of reverse  auctions.
section_title: Conclusions
paragraphs: Recent trends clearly indicate that agencies’ use of reverse auctions is on  the rise. Because the FAR is silent on reverse auctions, agencies are left  to decide when and how to use them. While most reverse auctions have  been used to acquire commercial items of relatively small dollar value,  this is by no means the case across the board. And some agencies are  now considering expanding their use of reverse auctions to buy more  services and for complex auctions. Further, some agencies are directly  encouraging use of reverse auctions for certain procurements without full  information about whether they are, in fact, gaining the intended benefits  from the auctions in terms of competition and savings.
Confusion about the functions and responsibilities of the reverse auction  contractor and the government, and a lack of transparency regarding the  fees the contractor is charging, suggests that guidance is needed. We  found confusion about who is making final award determinations and the  basis for those determinations. Further, some vendors expressed concern  that they were not able to contact the contracting officer directly with  questions pertinent to a given requirement. And while we found that the  contractor did not charge a fee in about 20 percent of fiscal year 2012  auctions, it is troubling that agencies are not aware of the fees they are  paying—including paying more than one fee under certain circumstances.  More transparency about the reverse auction fees could help contracting  officers determine whether use of an auction is the best tool for a given  procurement.
Certain issues that are not addressed by agencies and could be included  in government-wide guidance are whether reverse auctions should be limited to commercial items; be used only for simple services acquisitions; and be used only for items of a relatively low dollar value ($150,000 or  less).
In addition, factors that could be considered in government-wide guidance  to help ensure that the intended benefits of reverse auctions are  maximized include:  steps, if any, contracting officers should take when only one bid is  received;  factors contracting officers should consider when deciding whether to  use a reverse auction to place orders under certain contract vehicles,  such as the GSA Schedule; and whether contracting officers should be urged to examine whether the  lowest price, plus any applicable fee(s), actually results in a savings  below the target price when deciding to follow through with an award.
section_title: Recommendations for Executive Action
paragraphs: To help mitigate confusion about the use of reverse auctions in federal  acquisitions, we recommend that the Director of the Office of  Management and Budget take the following two actions:  (1) Take steps to amend the FAR to address agencies’ use of reverse  auctions.  (2) Issue guidance advising agencies to collect and analyze data on the level of  interactive bidding and, where applicable, fees paid, to determine  the cost effectiveness of using reverse auctions, and disseminating best practices from agencies on their use of reverse  auctions related to maximizing competition and savings.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to OMB, DHS, DOD, Interior, VA, and  GSA. We received e-mail and oral comments from OMB. We received  minor technical comments from DOD, DHS, and Interior which were  incorporated as appropriate. In technical comments, DOI officials stated  that the department has benefited from reverse auctions and generally  supports a FAR revision and the need for government guidance. We  received e-mails from VA and GSA noting that they had no comments.
Senior OMB staff stated that they generally agreed with our  recommendations. While they stated that many of the issues we identified  may be more suited to management guidance than regulatory coverage,  they agreed that FAR coverage should be considered. They indicated  that, before taking concrete steps to amend the FAR, they would discuss  our findings and conclusions with the FAR and Chief Acquisition Officers  Councils.
We are sending copies of this report to interested congressional  committees; the Director of the Office of Management and Budget; the  Secretaries of Defense, Homeland Security, the Interior, and Veterans  Affairs; and the Administrator of the General Services Administration. The  report also is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have questions regarding this report, please contact  me at (202) 512-4841 or MackinM@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: Our objectives were to determine (1) what agencies are buying through  reverse auctions and trends in their use; (2) how agencies are conducting  reverse auctions; and (3) the extent to which the potential benefits of  reverse auctions are being maximized.
To determine what agencies are buying through reverse auctions and  trends in their use, we identified the agencies that conducted the greatest  number of reverse auctions in fiscal year 2012 by reviewing contract  award information in Federal Business Opportunities (FedBizOpps.gov).  The award information identifies when reverse auctions were used;  however, not all contract award actions are required to be announced in  FedBizOpps. Over 99 percent of the reverse auctions for fiscal year 2012  listed in FedBizOpps showed that the agencies used the same contractor,  FedBid, Inc. (FedBid), to conduct their reverse auctions. Because the  federal agencies did not maintain the level of detailed information needed  for our review, we obtained reverse auction data from FedBid. We used  this data to: (1) confirm that the Departments of the Army (Army),  Homeland Security (DHS), the Interior (DOI), and Veterans Affairs (VA)  were primary users of reverse auctions; (2) determine the types of  products and services acquired by these agencies; (3) compute the fees  charged by FedBid for its services; and (4) analyze the savings. We used  the data for Army, DHS, DOI, and VA to determine how agencies used  reverse auctions in their acquisitions; these agencies comprised  approximately 69 percent of government-wide reverse auction activity  based on FedBid data. By relying on the FedBizOpps data, we also  selected the Defense Logistics Agency (DLA) for examination because it  had the greatest number of reverse auctions that did not use FedBid.  Together, these five agencies represented approximately 70 percent of  government-wide reverse auction activity during fiscal year 2012 based  on FedBid and FedBizOpps data. We were not able to perform detailed  analysis of DLA data for fiscal year 2012, because the agency collected  only summary level information. Agency officials told us that providing the  data for each auction would require reviewing the contract file to  determine whether a reverse auction had been used. We determined that  it would not be good use of DLA’s resources to conduct that review.  However, we interviewed DLA officials and obtained their summary level  information to assess the agency’s use of reverse auctions.
To determine the reliability of the data obtained, we selected a random  sample of all contract files for acquisitions where reverse auctions were  used in fiscal year 2012 for the four agencies and compared the data  obtained by the service provider, FedBid, with the information contained  in the contract files and determined that the data was sufficiently reliable  for our purposes. Table 1 shows the number of contract files reviewed at  each of the four selected agencies. We relied on FedBid to determine if a  vendor used automatic-rebid to lower its original bid. According to  FedBid officials, automatic-rebids are not counted as new bids but are  considered part of the original bids. The use of automatic-rebids  information was not included in the contract files and therefore, we were  not able to independently verify this information.
We randomly selected 119 reverse auctions from the set of all auctions  conducted in fiscal year 2012 by the Army, DHS, DOI, and VA. The  results of our sample are generalizable to the entire population of 19,688  reverse auction conducted at the four agencies during fiscal year 2012.  All percentage estimates from the file review have margins of error at the  95 percent confidence level of plus or minus 7 percentage points or less,  unless otherwise noted. Because we followed a probability procedure  based on random selections, our sample is only one of a large number of  samples that we might have drawn. Since each sample could have  provided different estimates, we express our confidence in the precision  of our particular sample’s results as a 95 percent confidence interval  (e.g., plus or minus 7 percentage points). This is the interval that would  contain the actual population value for 95 percent of the samples we  could have drawn.
The sample included a mix of products and services, single and multiple  vendors as shown in tables 2 and 3.
To determine how agencies are conducting reverse auctions and to  understand how contracting officers conducted market research,  determined government estimates, and made source selections, we used  the same random sample of contract files for acquisitions that used  reverse auctions as discussed above. We obtained documentation from  the contract files concerning the independent government cost estimate  and market research information to determine how the auction’s target  price was established. We also requested information on whether small  business participants were considered, why decisions were made to use  reverse auctions, the technical and price evaluation, and the source  selection decisions. We also determined if the contract was awarded to  the lowest bidding vendor and if the file contained documentation showing  the estimated savings and fees for using reverse auctions. We did not  systematically assess the relationship between auction outcomes and the  selected acquisition strategy or specific design features. We also met with  officials from the reverse auction service provider, FedBid, to discuss their  roles and responsibilities during the reverse auction process.
To determine to what extent agencies are maximizing the potential  benefits of reverse auctions, we analyzed the data obtained from FedBid,  identifying the government’s target price for the product or service, the  number of vendors and bids for each auction, the lowest bid submitted,  the savings estimated from the use of reverse auctions, and the type of  contract used to acquire the products and services. We also computed  the fees charged by FedBid. We also reviewed and analyzed, if available,  government-wide and the five agencies’ regulations, policies and  guidance assessing the use of reverse auctions. We met with government  acquisition officials, including officials from the Office of Management and  Budget’s Office of Federal Procurement Policy, and also contracting  officers, and small business and competition officials at the selected  agencies. We also spoke with members of the American Small Business  Chamber of Commerce representing small government contractors and  with officials from the Coalition for Government Procurement representing  both small and large federal contractors to obtain their members position  on the federal government’s use of reverse auctions, both located in  Washington, D.C.
We conducted this performance audit from November 2012 to December  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Reverse Auctions Used to Place Orders under Existing Contracts for Selected Agencies, Fiscal Year 2012
paragraphs: Appendix II: Reverse Auctions Used to Place  Orders under Existing Contracts for Selected  Agencies, Fiscal Year 2012 Characteristics  Provides a flexible procurement strategy through which Army users  may procure commercial off the shelf information technology  hardware, software and services via an e-commerce based process.  Does not charge a fee.
Provides DHS users with ability to order commercially available  information technology commodities, solutions, and value-added  reseller services through multiple award indefinite delivery/indefinite  quantity contracts with vendors in certain small business  socioeconomic categories. Does not charge a fee.
Provides DHS users ability to purchase tactical communications  commodity products, infrastructure, and services via a multivendor  indefinite delivery/indefinite quantity contract vehicle. Does not  charge a fee.
Provide commercial products and services at varying prices and a  streamlined process to obtain products and services at prices  associated with volume buying. Charge users a 0.75 and a 0.5  percent fee, respectively.
Provides all federal agencies information technology products via a  government-wide acquisition contract that includes 38 competed  prime contract holders. Charges users a 0.45 percent fee.
Provides users ability to purchase hardware, software, networking  and telecommunications equipment, scientific research stations,  warranties and maintenance service. Charges a .50 percent fee with  $10,000 cap per delivery order.
The VA operates its portion of the Schedule program under a delegation of authority from GSA.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Katherine Trimble, Assistant  Director; Russ Reiter; Carl Barden; Virginia (Jenny) Chanley; Dayna  Foster; Kristine Hassinger; Georgeann Higgins; Julia Kennon; Kenneth  Patton; Roxanna Sun; Bob Swierczek; and Jocelyn Yin made key  contributions to this report.