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

Letter

Background

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.

Agencies Increased Their Use of Reverse Auctions Predominantly to Purchase Commercial Items

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.

Reverse Auctions Have Increased and Have Been Used Primarily to Buy Commercial Products and Services

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.

Most Reverse Auctions Share Common Characteristics

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.

Most Agencies Use the Same Fee-Based Contractor and Are to Follow Established Contracting Procedures to Conduct Their Reverse Auctions

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.

Four of the Five Selected Agencies Used the Same Reverse Auction Contractor

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.

Contracting Officials Are to Follow Established Contracting Procedures When Using Reverse Auctions

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.

The Vendor with the Lowest Bid Does Not Always Receive the Award

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.

Competition and Savings Are Not Always Maximized, in Part Due to Lack of Comprehensive Guidance

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.

Agencies Emphasize the Need for Competition through Interactive Bidding, but This Was Not Present in Over One-Third of Reverse Auctions

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.

Reverse Auction Savings Hinge on Agencies’ Established Target Price

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.

Agencies Lack Data to Independently Evaluate Fees Paid and in Some Cases Pay Two Fees

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.

Regulations and Guidance Do Not Comprehensively Address Reverse Auctions

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Scope and Methodology

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.

Appendix II: Reverse Auctions Used to Place Orders under Existing Contracts for Selected Agencies, Fiscal Year 2012

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.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.