AGC cautions on use of 'reverse auctioning'

Reverse auctions do not guarantee the lowest price for owners and may encourage imprudent bidding practices, according to AGC.
August 11, 2010

The Associated General Contractors of America is urging building owners to carefully consider the ramifications of purchasing construction goods and services via e-mail through a "reverse auction" procurement process before deciding whether to use this process.

"Because construction owners increasingly are weighing the use of reverse auctioning, we felt it was time to raise the level of discussion on this largely untested procurement system," says Stephen Sandherr, AGC chief executive officer. AGC wants "to provide a thoughtful discussion on — and examination of — the hype surrounding reverse auctions," he says.

E-commerce may offer the promise of increasing competition for construction contractors, enabling owners to reach a wider group of potential bidders and to improve the "speed to market" of projects. But reverse auctions do not guarantee the lowest price for owners and may encourage imprudent bidding practices, according to AGC.

Price alone is not the sole criterion for construction procurements, AGC notes. Schedule, safety, quality, responsiveness, and past performance are should also be considered. And when price-related factors are considered paramount, procurements are generally made through sealed bids, which AGC describes as "a time-tested method that ensures the integrity of the process."

Negotiated procurements allow a thorough evaluation of value. Sealed bidding assures that the successful bidder is responsive and responsible. Reverse auctioning may require competitors to disclose their prices to each other. Use of the process suggests there will be multiple rounds of bidding, with competitors focusing on each other's bids and then submitting still lower bids.

When owners contemplate more than one round of bidding, they typically give bidders adequate time to assess their strategies and to recalculate their costs, understanding that this leads to accurate and well-constituted bids that are material to the owners' requirements, AGC says.

For many companies, the promise of lower unit costs could be illusory, because expenses in other budget categories may actually increase, AGC says. The association believes that most of the claims of cost and time savings attributed to the use of reverse auctioning are unproven, and that the process may not lower the ultimate cost of construction.

When price is not the sole determinant, owners increasingly have utilized negotiation-based processes to foster communication between the owner and prospective contractors, recognizing the value of promoting collaboration among project team members, according to AGC.

While Federal procurement laws do not specifically address reverse bid auctions, current procurement statutes reflect a policy of non-disclosure of contractor price information. Pennsylvania and Kansas have enacted statutes that prohibit construction procurement through reverse auctions.

The Army Corps of Engineers is conducting a pilot study of the use of reverse auctioning, and is expected to issue a report on its findings next year.

         
 

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