Reverse Auctions, by Corinne Maddox, CCM, CFM

Referring to reverse auctions, someone once commented, "We saved 65%...I was a hero until I was fired." This reflects the potential benefits but also the risks of reverse auctions. In a reverse auction, the buyer typically develops a scope of work and pre-qualifies companies to participate in a scheduled bidding session. Bids are submitted on-line and bidding occurs until all but one bidder has dropped out. The key to the success of a reverse auction is the scope of work. It must be very very well thought out and documented. Bidders will not include any elements not mentioned in the scope of work, no matter how obvious, and they will take advantage of all ambiguities to arrive at the lowest possible bid.

Most owner bid documents are subjective and full of opportunities to cut corners. This results in unacceptable quality and price increases. For example, on a recent reverse auction, the owner sought hourly rates for project managers for an estimated duration. A minimal specification of "senior project manager" was 5 years of minimum experience. This led bidders who would normally provide a qualified project manager with 15-20 years of similar experience to include an untrained, low paid person with 5 years of total work experience and no employment benefits. After award, changing to a more qualified person would increase the price. Ambiguity in the duration also allowed the opportunity for large price adjustments, and unstated support requirements allowed the opportunity to charge extra for cell phones, computers, software, supplies, etc. In general, subjective services are not good candidates for reverse auctions because they are difficult to define. The best candidates are basic commodities with an exact quantity and where quality is not critical. Even with a product like paper towels, it is very difficult to specify quality, quantity and conditions in a generic, precise manner. After award, owners should expect to learn of limitations, exceptions, and assumptions made by the bidder that affect the quality and price. That is how that company became the successful low bidder.