Reverse Auctions: Proposed Rule Poised to Strengthen Regulatory Framework

The DoD, NASA, and GSA have proposed new rules aimed at providing transparency for reverse auctions after GAO reports in 2013 and 2018 signaled the need for guidance on reverse auctions to achieve cost savings and reduce fees.  

As context, the FAR was amended in 1997 to allow for the use of reverse auctions. Six agencies conducted approximately 15,000 reverse auctions in 2016 alone. Reverse auctions, despite their wide use, are not without controversy. Application of fees, and inability to verify actual cost savings plague the use of reverse auctions.

Private companies have developed software and services which companies use to, hopefully, increase their chances in reverse auctions.

As a result, a new proposed rule is open for comments here.

What is a reverse auction? The proposed rule defines reverse auctions as “the process for obtaining pricing, usually supported by an electronic tool, where offerors see competing offerors’ price(s), without disclosure of the competing offerors’ identity, and have the opportunity to submit lower priced offers until the close of the auction.”

Since 2013, GAO reports have called for establishing a defined framework for the use of reverse auctions.

The new proposed rule provides changes, additions, and guidance to the use of reverse auctions. The new rule proposes adding a new FAR subpart 17.8, which includes the following:

  • Provides Governmentwide policy on when the use of reverse auctions may be appropriate, conducting reverse auctions, and utilizing reverse auction service providers, including the evaluation of fees;
  • Identifies when reverse auctions shall not be used;
  • Requires contracting officers to evaluate and document that the use of a reverse auction service provider is cost effective;
  • Requires agency acquisitions for reverse auction services to be competed amongst commercial reverse auction service providers, and for the resulting contract or agreement to be sufficiently documented and made available to agency contracting officers for future reference and verification needs;
  • Clarifies requirements for contracting officers when conducting a reverse auction or utilizing the services of a reverse auction service provider;
  • Requires the contracting officer’s contact information to be available to offerors; and
  • Provides guidance for situations in which only one offer is received in response to a reverse auction.

The proposed rule will also add new provisions allowing for the release of all offeror prices, but not the offeror identities. The FAR would now also include a provision allowing for reverse auctions in IDIQ contracts and BPA’s. Additionally, the proposed rule provides requirements for reverse auction service providers.

When can agencies use reverse auctions? The rule allows for use at or below the simplified acquisition threshold, and for commercial items. Looking at the proposed rule changes and additions, the process for deciding whether to use reverse auctions begins with internal market research. Reverse auctions may be used when the market research shows a competitive marketplace, multiple potential satisfactory offerors, and the subject of the solicitation encourages such a bidding process.

Reverse auctions cannot be used for design-build construction contracts, sealed bids, or acquiring personal protective equipment (better known as “PPE” which could be the acronym of the year for 2020).

The key provision takes aim at the use of reverse auction service providers. In facilitating reverse auctions, these providers are either paid directly by the government, or are paid a portion of the total contract award. Previously, little transparency has accompanied the use of reverse auction providers.  

GSA, NASA, and the DoD are announcing there is a new sheriff in town with these new proposed rules. Should these rules be adopted, when agencies use a third-party provider, transparency will be the order of the day. Commercial providers must compete the requirement, sufficiently detail the fee structure in the resultant contract or agreement, and detail its agreement in accordance with FAR 17.804(a). This begs the question, what were they doing before? These rules remind me of a pizza chain commercial which proudly announces they are now using real cheese. I am glad to hear I will be having real cheese, but what was I eating before?! Hidden fees within the use of reverse auctions will, hopefully, be on their way out with these new proposed rules.

Prior to these regulations, it appears these third-party providers were charging the government to use their services, while turning around and charging offerors to register and use their platforms. I tip my hat to the ingenuity, but when the goal is lowering costs, this structure does not pass the smell test.

In order to ensure these new rules are followed, the onus is being placed on the contracting officer who wants to use reverse auctions. The contracting officer must evaluate the service provider, only provide prices (no identities) to all offerors, allow offerors to revise down their prices until close, and allow offerors to withdraw prior to close. Additionally, the contracting officer shall ensure compliance by the service provider.

Once the reverse auction closes, the contracting officer is responsible for ensuring the reporting requirements are followed. One big responsibility given to the contracting officer: if only one offer is received, the contracting officer can either accept the offer or cancel the contract.

As with all new rules, unintended consequences surely lurk in the grey areas. This is a step in the right direction, attempting to regulate a seemingly unregulated corner of the government contracting arena. So far, only two comments have been submitted, and comments remain open until February 5, 2021.

Get your comments in, and we will keep an eye out for the language of the final rule.

Questions about this post? Email us or give us a call at 785-200-8919.

Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedInTwitter and Facebook.