Reverse auctions

Reverse auctions

Transparent, online bidding can drive prices down for agencies

By Kevin McCaney

GCN Staff

The Naval Supply Systems Command broke new ground in federal procurement last month when it conducted an online reverse auction for technology components of aircraft ejector seats.

'This was for items that were needed in a hurry by the Air Force,' NAVSUP spokesman Jim Nieb said. The May 5 auction lasted 51 minutes, and NAVSUP officials said the $2.4 million contract award, made within an hour after bidding closed, saved 28.9 percent over the projected price of the equipment.

It was the first time a federal organization has used an online reverse auction for a purchase, said Capt. Kurt Huff, director of contracts for NAVSUP's Naval Inventory Control Point, which procures spare parts for U.S. and foreign aircraft, ships and submarines.

The contract calls for delivery of 756 recovery sequencers, components of the Advanced Concept Ejection Seats used in B-1, F-15, F-16 and F-117 aircraft. NAVICP awarded the contract to Hi-Shear Technology Corp. of Torrance, Calif.

The auction was conducted with FreeMarkets Inc., a Pittsburgh company that has performed auctions for businesses since 1995. In April, the company's service, B2B eMarketplace, was added to the General Services Administration's Information Technology Schedule.

The Postal Service in April made an agreement with FreeMarkets but had not yet held an auction as of mid-May.

Pioneer state

Pennsylvania, meanwhile, is the first state to use FreeMarkets, having conducted reverse auctions for such things as rock salt, coal, office furniture and telecommunications installation. State officials estimate the process has saved an average of more than 10 percent on the purchases, so far totaling in the millions of dollars, according to a statement from Gov. Tom Ridge.

A FreeMarkets spokesman said the $2.7 billion in private-sector reverse auctions the company conducted last year saved clients an average of 15 percent.

Online reverse auctions take advantage of the Internet to give agencies an edge in the bidding process, said Dave McCormick, FreeMarkets' vice president for public-sector business. 'There is certainly an efficiency in time,' he said, 'but there is definitely a benefit in cost.'

The online, real-time nature of the auction saves time; the transparency of the bidding can save money.

Traditionally, bidders submit either sealed bids or competitive proposals in a process that can take weeks. Online reverse auctions typically take 30 to 45 minutes, McCormick said, and allow bidders to see other bids, though not the identities of the other bidders.

The practice can bring down prices if vendors decide to compete. The NAVSUP auction was scheduled for 30 minutes but was extended to 51 minutes as vendors made late bids, McCormick said.

Huff said it took about 21/2 weeks to set up the auction. But while that time could be cut by about a week, he said the time saved is not as important as the money saved.

'This is a pricing tool, not a procurement tool, if you get the subtle difference,' Huff said. The advance work that goes into a competitive procurement is the same, and, although the May 5 auction was an emergency bid, the time saved typically would not be significant, he said. The real value of a reverse auction is in bringing down prices. 'In our case, it did,' he said.

FreeMarkets conducts the auctions using its BidWare technology, which supports 29 auction formats and can host bidding across multiple countries and in multiple currencies.

BidWare is included in the fee buyers pay to use FreeMarkets and is supplied free to bidders. Vendors must be invited by the purchasing agency to take part in the auction, after which FreeMarkets supplies the software, log-in and password. 'The bidders were all pre-qualified,' in the NAVSUP auction, Nieb said.

No need to go low

Agencies are not held to accepting the lowest bid. 'They make a best-value decision,' after the bidding is closed, McCormick said. 'The only requirement is that they award to one of the participants.' But an agency also can reject all offers, Nieb said.

Reverse auctions might not fit every type of procurement, but they do give agencies another buying tool. Huff estimated the process would work for less than 10 percent of NAVICP's purchases, although other organizations that more frequently make large procurements could find more use for them.

McCormick said FreeMarkets generally recommends the service for bids of $1 million or more, although it can work for smaller amounts in some cases. Huff agreed.

'Basically, [for] anything that is competitive and over $500,000, you could do it. It would be worth looking at as a tool,' Huff said. 'But I wouldn't want to create the impression that it's a panacea.'

NAVSUP officials said they expect to make use of online auctions where appropriate and hope to make the practice available departmentwide.

'It's our vision to set up a single contract for the Navy,' whether with FreeMarkets or one of several other vendors that have entered the field, Huff said.

Besides saving money, he'd also like to see the auction agent save his staff some legwork. 'Due to limited personnel, we have a hard time doing extensive market research,' he said. 'I'd want them to find more vendors.'

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