Launch Slideshow

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Winner pays all

Winner pays all

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    During a reverse auction, suppliers only see their own bid and rank. They see no other data from competitors. Image: BidBridge

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    When comparing a traditional paper method and electronic bidding, there are no differences in the process other than the ability to lower your bid. Image: American Public Works Association

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    Bidders went wild during a reverse auction for waste collection services in Dallas, Ga., submitting 160 bids in 67 minutes with 22 first-place turnovers. Photo: City of Dallas, Ga.

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    During a reverse auction for 140-hp John Deere mowers for two airports, the Johnson County (Kan.) Public Works Department decided not to accept any bid and instead awarded a supplier who had submitted an earlier offer of $88,000. Photo: Johnson County



MYTH #3: A REVERSE AUCTION'S NOT WORTH MY TIME BECAUSE IT WON'T BEAT THE STATE CONTRACT PRICE.

For the most part, though not always, this is true.

Like public works departments, facilitators also have certain requirements. The value of the transaction must be at least $75,000. Potential bidders must be confident they can beat the state contract price.

“We have to be really sure that it's a good fit for reverse auction,” says Bid-Bridge Vice President of Operations Cindy Sisloff, who says the eight-year-old firm has had more repeat business over the last several years from public clients and logged a 91% award ratio so far this year.

MYTH #4: MY GOVERNING BODY WON'T ALLOW IT.

A reverse auction is nearly identical to a traditional bid process except that potential suppliers are allowed to submit more than one bid. Potential vendors don't know who their competitors are, nor can they see individual competitors' bids. During the auction, they're alerted only when their bid is no longer the lowest, at which point they can choose to submit another — or not.

The auction is monitored by the buyer and facilitator in a controlled environment, usually in a government office. Because it's conducted online, potential vendors participate from anywhere they'd like: the office, the library, and even, in some cases, the local coffeehouse. The final bid tabulation is released immediately to all participants.

Though sometimes not required, Bid-Bridge's Sisloff suggests public clients issue an RFP without asking for the price. In this way, the RFP acts as a prequalification and price becomes the final component.

The method has stood up in court during two legal challenges in 2005.

The Government Accountability Office and the U.S. Court of Federal Claims ruled that the Department of Housing and Urban Development didn't violate federal procurement law by disclosing bids during an auction for inspection services. Because the Web site didn't display the names of vendors to other vendors, the court considered the process legal. So far, there have been no such challenges at the state level.

Although some limit it to cities of certain sizes and others to certain powers or require enabling legislation, nearly all states provide for some type of home rule. Only three — Alabama, Nevada, and New Hampshire — do not; and 12 — Delaware, Massachusetts, Nebraska, Nevada, New Hampshire, New Mexico, Oklahoma, Rhode Island, Texas, Vermont, West Virginia, and Wyoming — don't provide for county home rule.

But even with the power to write its own procurement code, a governing body may need some convincing that reverse auctions are both fair and legal.

Johnson County, Kan., had a bid in hand when Purchasing Manager John Mahin decided to give it a try. “Normally you wouldn't have a bid in hand, so you'd assume that your low bid from the auction was really the low bid,” he says. It turned out to be a good way to gauge the true market value of the original quote.

The legal department wouldn't let Mahin move ahead until the county's purchasing procedure was amended. The procedure had defined competitive methods one of two ways: For products or services budgeted at $50,000 or higher, formal public bids must be conducted; for those valued at less than $50,000, informal competition such as written quotes was allowed.

To allow for the third methodology, the language was revised by the Purchasing Division with assistance from the legal department. The county manager then approved the revision.

“There was a lot of activity from the three higher bidders who got to within a small percentage of the opening bid, but not at the point where the higher bidders surpassed the low bid,” Mahin says. “The low bidder never had to move.”

Mahin decided not to award anyone from the auction and stuck with the original offer. This is allowed in the reverse auction process with no penalty to the buyer. Thus, local governments that have a best-value clause in their procurement guidelines can use the process to get the lowest price and the best value.

In addition, the auction data is highly valuable. “You can receive excellent reporting and tabulation, and in a successful auction event you can document the fact that you received good competition and best pricing,” Mahin says. Facilitators provide such documentation at no additional cost.

What about collusion? There are unconfirmed stories of bidders working with each other on the day of the auction, with one agreeing to relinquish the job to the other in return for doing the same the next time around.

BidBridge's Sisloff isn't naïve enough to claim that bid tampering never occurs in the industry, but she stands by her company's process. “I'm sure some of these vendors know what their competitors' prices are,” she says. “They all bid against each other all the time.”

But that doesn't faze Dallas, Ga.'s Smith. “I don't see any reason not to do it again,” he says.

And in Kansas, Mahin isn't disappointed that the reverse auction hasn't worked for him yet, mainly because he understands the benefit to his agency's bottom line.

“We had planned to use it for capital equipment purchases and had focused on our public works department as good potential users,” he says. “It's a good idea. We're just looking for the right fit.”

Web Extra

For a closer look at how a reverse auction works, click here.