While reverse auctions have been gaining popularity in federal procurement for several years, vendor complaints about fairness, transparency and competitiveness are growing.

Federal agencies have touted lower prices and improved competition from reverse auctions, primarily for commodity purchases. Bidders compete to sell by offering their lowest prices.

At the same time, vendors are raising significant concerns. The Office of Federal Procurement Policy recently compiled a list of reports of vendor problems with reverse auctions, including allegations of inconsistent application of procurement laws and regulations, difficulties in communication, lack of transparency and increased costs for vendors.

Small businesses, in particular, have reported that they have encountered situations in which there is a false belief that the reverse auctions are exempt from small business set-asides, OFPP officials said.

“Some vendors have complained that some agencies are inappropriately treating reverse auctions as an exception to set aside requirements,” states a recent OFPP document titled, “Reverse Auctions: Benefits and Concerns,” which was obtained by Set-Aside Alert.

There also have been reports of reverse auctions not being published on the Federal Business Opportunities website, or of notices not indicating clearly that the procurement was a reverse auction or which vendors may participate.

Vendors also have claimed difficulties in identifying the government official involved in a reverse auction headed by a third-party entity such as FedBid Inc., OFPP said.

“In some cases where a reverse auction is run by a third party, FBO posting provides contact information only for the third party with no immediate way for vendor to reach a government official, which creates confusion–and potential risk of inherently governmental work being performed by a vendor,” the OFPP document said.

Furthermore, government agencies may not be handling the auctions consistently.

“Some bidders report having bid the lowest price only to then see requirements cancelled, rebid, and awarded for a higher price than their bid without explanation,” the OFPP document said.

The vendors also have pointed to problems with “brand name” procurements and with application of simplified acquisitions to reverse auctions.

Some vendors have noted a possible negative hit to cash flow, because of fees to participate in the auctions, as well as possible increases in refurbished or non-qualifying items being offered.

Several OFPP and Small Business Administration staffers recently met with members of the small business federal contracting community to discuss the reports. The OFPP staffers said at the meeting that the office is considering publishing guidance on reverse auctions to address the concerns and clarify the regulations, laws and procedures. The OFPP executives asked not to be identified as the meeting was a listening session intended for information-gathering purposes only.

“Some bidders report having bid the lowest price only to then see requirements cancelled, rebid, and awarded for a higher price than their bid without explanation...”

Raul Espinosa, founder and chief executive officer of the Fairness in Procurement Alliance, who participated in the meeting, said he was pleased with OFPP’s response thus far, but also wanted to note additional concerns.

“As a small business advocate, I must emphasize that the concerns go far beyond the issues on the OFPP list,” Espinosa said.

For example, Espinosa takes issue with the utilization of “Active Target Price” in reverse auctions, which he describes as “arbitrary” and “manipulative.”

“Sellers never compete against each other, but against the arbitrary Active Target Price entered by buyers without adequate research and without any oversight,” Espinosa said.

Overall, Espinosa claimed, the current rules of FedBid are resulting in a denial of small business participation.

FedBid, which has been operating as a third-party auction host for several years, currently serves about two dozen agencies. It claims 80% of the procurements go to small business.

FedBid executives declined an invitation to comment for this article.

The IBM Center for the Business of Government has estimated that reverse auctions could save the government $7 billion to $15 billion a year. OFPP officials have said reverse auctions work best for purchase of common products, and not for complex services.