The Debate Over Reverse Auction Bidding

Reverse auction bidding is an alternative contracting method that has been hotly debated over the past decade. A reverse auction works in much the same way as a traditional auction. In a traditional auction you have multiple buyers driving the cost up in order to have the highest bid, whereas in a reverse auction an owner will place a project out to bid and contractors will drive the cost down by continually lowering their price to win the contract.  Reverse auctions are typically conducted online through a third-party service where all bidders are provided with the submitted prices and then allowed to submit successive lower prices through each round of bidding until no other bids are received or a predetermined amount of time has expired.

Proponents of reverse auction bidding claim that in addition to getting the lowest possible price it also saves additional time and money over traditional bids by speeding up and streamlining the process from bid to award to the start of construction. Opponents of reverse auctions decry it as nothing more than bid shopping.  They claim that it encourages imprudent bidding by contractors and could cause surety companies to be reluctant to provide bonding. They also feel that reverse auctions don’t guarantee the lowest bid possible because contractors are only submitting a lower amount than the previous bid to win the contract which might not necessarily be the lowest they are willing to go.

A number of construction trade organizations have come out against the practice of reverse auction bidding including the Associated General Contractors of America (AGC), Associated Builders and Contractors, Inc. (ABC), American Subcontractors Association (ASA) and the Mechanical Contractors Association of America (MCAA) just to name a few.  One of the arguments made is that reverse auctions are in direct violation of federal and state laws governing contracting methods. In fact, in 2005 the Georgia Branch of AGC, the ABC of Georgia and the Georgia Utility Contractors, Inc. initiated legal action against the City of Statesboro, GA for using a reverse auction to solicit bids for the construction of a police headquarters building. Based on local government public procurement law OCGA 36-91-20 requires construction contracts over $100,000 to be awarded either by competitive sealed bids or competitive sealed proposals. The Georgia Supreme Court found in favor of the plaintiffs and the city was barred from awarding a contract based on the results from the reverse auction.

Opponents of reverse auctions for construction, architecture and engineering services state there is no data to prove that reverse auctions result in the lowest possible price. Contractors who have won bids using this method claim that they have won projects with bid amounts higher than what they would have bid had the project been procured using a sealed bid process. This makes sense to me, let’s say I’m on eBay and want to bid on a new camera lens. I’m not going to start off with the highest amount I’m willing to spend. I’d start with an amount slightly higher than the current high bid and go from there. By doing this I’ve rarely had to spend my top dollar amount when making purchases. Contractors are doing the same thing except in reverse when participating in these auctions. In a sealed bid procurement contractors are more apt to submit their lowest price since they only have one shot at winning the bid. The United States Army Corps of Engineers (USACE) conducted a year-long pilot program from October 2002 to September 2003 on reverse auction contracting. The result of their study found that “there was no proof that reverse auctioning provided a significant or marginal edge over the sealed bid process for construction projects. In fact, there is NO valid measurement method to project any claim of significant or marginal savings from reverse auctions.”

Another concern from those that oppose reverse auction bidding is that it treats construction like a commodity. They also feel that reverse auctions are only concerned with obtaining the lowest price not the best value and doesn’t account for the complexities such as site conditions, weather delays, coordination with subcontractors and the contractors qualifications and work history. In an attempt to outbid the competition contractors could be compelled to reduce profit and contingency amounts causing them to try and cut costs elsewhere such as in labor, supervision and materials.

But if reverse auction bidding is so bad why do companies like Target, Best Buy, Kroger and Home Depot continue to utilize this procurement method to obtain construction services. For starters many of these companies have been using reverse auctions since their inception to procure commodities and are extremely familiar with the process. Also, let’s face it, with a few exceptions the Walmart stores in Florida looks exactly like the ones in Texas or Maine or any other state. Because of this the plans, specifications and building materials used are pretty much the same for every project.

Minneapolis-based Target Corporation is a strong proponent of reverse auction bidding. They utilize this method of procurement on over half of all their construction projects. Target developed their reverse auction bidding process in conjunction with general contractors who also help them determine best practices and methods. Only invited, prequalified contractors are allowed to bid on Target projects and are trained beforehand on how to participate in a practice online reverse auction. Contract documents are crafted in the same way as they would be for a traditional bid and include requirements such as pre-bid meeting attendance, bonding, alternates, proof of insurance and minority business enterprise (MBE) participation. In an instance like this it doesn’t appear the lowest amount is the sole determining factor in who will be awarded the contract. If all the safeguards found in a traditional bid contract are the same as those in a reverse auction contract then the only real difference is the method used to determine the price.

One of the purported advantages of using reverse auction bidding is the amount of time saved from the date bids are due to the date construction begins. Kroger Co. took bids earlier this year using a reverse auction for the construction of a new grocery store in Miamisburg, OH. The contract documents included requirements for a payment bond, MBE/WBE participation as well as an alternate for a four week accelerated construction schedule. Despite all this, construction on the project was scheduled to commence 18 days after bids were received.

It appears to me like reverse auction bidding could be a viable means of construction contracting if used properly. It seems to work great for something like a big box store where construction documents are straightforward and 100% complete, you’re working with a handful of prequalified and fully capable contractors and a limited amount of bid alternates. On the other hand, it is not a good option if you’re holding an open public bid for a new high school with multiple alternates and was designed to meet LEED Platinum certification. There isn’t some magic procurement method that works perfectly for every construction project out there. Procurement methods should be tailored to best fit the needs of the owner and the parameters of the project which is why we have things like CM-at-Risk, Design/Build and Request for Proposals in addition to the traditional sealed bid process.

So if there’s no conclusive evidence that reverse auction bidding saves money on construction projects then who benefits? That would be the third-party vendors who provide the software and facilitate the online reverse auctions. There are a host of companies that provide reverse auction services for both the public and private sector. There are a number of ways these companies charge for their service whether it be a per event charge, annual charge, or a percentage based on either the total amount of the bid or on the savings from the starting price to the final low bid amount.

More and more states and local governments are allowing reverse auction bidding for the procurement of supplies, equipment, materials and services but strictly prohibit their use for construction, engineering and architectural contracts. In Ohio, House Bill 246 was introduced to allow political subdivisions to utilize reverse auctions for the procurement of construction, engineering and architect services for public improvements. The bill has met strong opposition from those in the construction industry. Without empirical evidence on the overall effects of reverse auction bidding in the construction industry, the legal and ethical debate over its use rolls on.

4 Responses to “The Debate Over Reverse Auction Bidding”

  1. Alan June 25, 2013 at 9:01 AM #

    The fact the construction industry is so against it tell me everything I need to know. Go reverse auctions.

    • Kendall Jones July 2, 2013 at 7:29 AM #

      Thanks for the response Alan. I think part of the reason some in the industry are so against it is because it’s a foreign concept to many. It was born out of the retail industry’s method for acquiring commodities to sell in their stores. I think any alternative contracting method to the design-bid-build model will be met with some apprehension and skepticism until proven to be beneficial to all parties involved much like Design-Build and CM-at-Risk are fairly commonplace these days.

  2. Birmingham roof contractor quotes December 25, 2013 at 1:49 AM #

    Wonderful web site. Lots of useful info here. I am sending itt to several buddies ans also
    sharing in delicious. And naturally, thank you for your sweat!

  3. Gregory McDowell September 8, 2014 at 1:29 PM #

    Will implementation of reverse auction bidding really open the way for robot estimates too…

Leave a Reply