Internet Reverse Auctions: Problematic for Contractors and Owners

By Marian J. Marshall

If a manufacturer needed to purchase 100,000 pounds of cement at a reasonable price, it might decide to use a process called "reverse bidding" on the Internet. This is a readily accessible technique that is becoming more and more popular around the country as retailers try to cut costs for bulk commodities. While reverse bidding, also called reverse auctions, may be the most transparent way to buy goods at a discount rate, its benefits for services such as construction are much more questionable.

Reverse auctions are an Internet-based method of bidding for goods and services that make the lowest bids known to all potential bidders. When reverse auctions are used for the procurement of construction services, pre-qualified bidders, whose identities are kept confidential, are invited to participate in the reverse auction. The bidders submit initial prices, which are given a ranking, and all participants are informed of their ranking relative to other bids. Bidders can resubmit lower prices as many times as they wish up until the specified closing time. Once the auction is closed, all bidders are notified of the final bid rankings and the dollar value of the winning bid.

Free markets are beneficial for the purchase of raw materials and manufactured goods but, in my view, the process of reverse auctions on the Internet is a little like bid shopping and, as such, isn't as practical for the construction process. In fact, numerous studies have found that reverse auctions can actually jeopardize project quality and rarely result in reduced costs.

Unlike during a sealed bidding process, online bidders don't always reveal their lowest bid immediately and in some cases, if the contractor is anxious to get the work, he may decide to cut some corners in order to achieve the lowest bid. So instead of placing the emphasis on the best contractor, reverse auctions tend to focus entirely on the lowest price. This can ultimately become a fast-paced game of errors and omissions, increasing risk and impacting the safe operation of the job.

From October 2002 until September 2003, the U.S. Army Corps of Engineers conducted a pilot program to evaluate the use of reverse auctioning. Through this pilot program, they found that reverse auctions have no valid method to measure savings, they are labor intensive, and show no real "return on investment." The results also showed that construction services have far too many variables ? they are normally one-of-a-kind projects under one-of-a-kind conditions ? and therefore should not be used with reverse auctioning.

Proponents of reverse auction bidding claim owners can save millions of dollars and that quality concerns can be protected in contract documents. But as they say in business, most of the time you get what you pay for. So if you've paid the lowest possible price, you're bound to jeopardize quality.

I've spoken to a number of MCAA members about reverse auction bidding, and they are not fans of the procedure. Still other colleagues throughout the industry are skeptical as to its savings.

At the moment, given all the negative stories I've heard, it's likely that MCAA and the American Subcontractors Association (ASA) ? and possibly a handful of other construction trade groups ? will join forces to pursue legislation to outlaw this practice for construction. MCAA believes strongly that procurement methods should be designed to promote quality and value, not diminish them.

If any of you have had an experience using the reverse auction bidding process for a construction project, I'd appreciate hearing about it. I'm trying to collect as much information about the issue as I possibly can. Any comments you'd care to share with me on this subject are most welcome and appreciated. I can be contacted at mjmarshall@masoncontractors.org or by calling (703) 671-4468.