This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its July 2018 report entitled Additional Guidance Could Help Increase Benefits and Reduce Fees, the U.S. Government Accountability Office (GAO) recommended that the government enhance its understanding of the fee structures used by electronic reverse auction service providers. While the report noted the significant benefits available to the government in using reverse auction platforms, it also found that the government could do a better job at enhancing the use of these bidding tools while controlling related service fees:
Federal agencies’ use of reverse auctions—a process where vendors bid against each other with lower prices to win government contracts—declined between fiscal years 2013 and 2017, from about 34,000 to 19,000 auctions valued at about $1.9 billion and $1.5 billion, respectively. In fiscal year 2016, the year GAO studied in detail, nearly three-quarters of auctions at the agencies GAO reviewed resulted in iterative bidding—when there are multiple bidders and at least one bidder submits more than one bid during the auction (see figure).
The five agencies GAO reviewed indirectly paid about $13 million in fees to reverse auction providers through awardees in 2016. However, 28 of the 30 contracting officials GAO interviewed did not fully understand how fees were set. Further, in 2016, agencies GAO reviewed indirectly paid approximately $3 million in fees for reverse auctions for which a fee-free alternative was likely available. None of the guidance GAO reviewed provided sufficient information for contracting officers to assess the appropriateness of these fees (see table). Without better information, contracting officials may be offsetting potential savings by paying more in fees than necessary for the level of services required.
Though the report found room for improvement in the management of service fees, it also noted that overall, reverse auctions resulted in significant process efficiencies and cost savings to the government when compared to single-bid processes:
Contracting officials we spoke to cited reduced administrative burden, particularly at the end of the fiscal year, as a key factor in the decision to use reverse auctions. Based on data from reverse auction providers, reverse auctions that took place in 2016 resulted in contract awards that were an estimated $100 million below the government’s pre-auction estimate, though the extent to which this figure represents actual savings is difficult to determine.
In fact, the report found significant measurable price reductions in competitions that engaged multiple bids using reverse auctions when compared to bidding processes that limited bidders to single-bid submissions.
The report recommended that the government improve its use of electronic reverse auctions by promoting better overall knowledge of this method across government and by helping government departments identify the appropriate situations for using those tools.
