VA puts reverse auctions on hiatus again to study value proposition

Wednesday - 12/11/2013, 6:45pm EST

Jason Miller, executive editor, Federal News Radio

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For the second time in the last two years, the Veterans Affairs Department decided to stop using reverse auctions to buy products and services.

The decision comes as lawmakers are growing more concerned about whether agencies are paying higher than necessary prices and not getting adequate competition from this increasingly popular procurement approach.

The exact reason behind VA's decision is unclear.

Jan Frye, the deputy assistant secretary in VA's office of acquisition, logistics and construction, told a joint hearing of the House Veterans Affairs and Small Business committees Wednesday that the department is conducting another review of this procurement approach.

"VA is evaluating the value proposition of reverse auctions. Specifically, the Veterans Health Administration is crunching the numbers in an effort to evaluate whether the dollar, time and process efficiencies estimated by the advocates of these tools are being realized," Frye said. "Efficiencies alone cannot be the only measure of value. The reverse auction process is also being evaluated to ensure compliance with regulation and policy."

Frye said VA also is aware of small business concerns, which was part of the reason VA decided to pause its use of reverse auctions in March 2012.

But since that initial pause, VA's use of reverse auctions has steadily increased. In 2011, VA conducted 2,261 reverse auctions and spent about $78 million. In 2012, VA held 7,587 reverse auctions worth $305 million. Of that, 79 percent of the awards went to small businesses.

In all, VA spent more than $17 billion on goods and services last year, so $305 million isn't a great deal of money, generally speaking.

Dramatic growth over last five years

But lawmakers and industry associations are growing concerned as agencies use reverse auctions more and more, and see the impact on small businesses.

The Government Accountability Office released a report earlier this week and testified at the hearing about what it found in looking at the top four agencies that used reversed auctions the most. Michele Mackin, a director of acquisition and sourcing management at GAO, said VA, the departments of Homeland Security, Interior and the Army accounted for 70 percent of all reverse auctions in 2012. Across the government, Mackin said the use of reverse auctions increased by 175 percent over the last five years and agencies spent more than $800 million through this tool.

This growth is part of the reason the two committees are reviewing the policies and laws guiding reverse auctions.

Additionally, this is the second time VA has suspended the use of reverse of auctions and that attracted the attention of legislators. Back in 2012, Frye said there were several reasons for the pause, including an outcry by small businesses.

"One of the things we noticed in March of 2012 when we put a moratorium in place was that the prices that were touted as savings or savings valued were being provided by the reverse auction firm, FedBid. We didn't think that was probably the way to go," Frye said. "So one of the things we required as we put a new policy in place and promulgated that policy was that for VA, or more specifically VHA contracting officers, were required to calculate those savings and document the file with regard to those savings."

Much of the hearing focused on VA's use of FedBid as a reverse auction provider, as well as GAO's findings.

Most of the time agencies pay a fee of 3 percent of the total price of the contract, which is capped at $10,000, to FedBid for the reverse auction services.

Both Mackin and lawmakers say the concerns over reverse auctions have little to nothing to do with FedBid. It's more about how agencies are using reverse auctions.

Missing real competition?

Mackin said her biggest concerns center on competition and presumed savings from reverse auctions.

"Regarding competition, we found two main buckets. What we call interactive bidding where multiple vendors are bidding against each other. This happened 65 percent of the time," Mackin said. "However, there is also what we call ineffective competition where only one vendor submitted a bid or multiple vendors submitted only one bid each. This happened about 35 percent of the time, and clearly there are concerns here about whether the benefits of competition is being realized."

Auditors also found FedBid's savings calculation could be faulty. Mackin said FedBid estimated a savings of $98 million in 2012 across the four agencies GAO analyzed.

"We have questions about the accuracy of these savings. For example, if there was no interactive bidding, agencies perhaps could have gotten a better price using other mechanisms," she said. "Also, the target price or government estimate may not be sound. For example, we found over 1,000 cases where the winning bid actually exceeded the government's estimate even with interactive bidding."