VA halts reverse auctions, citing 'violations' of contract hierarchy

The Veterans Affairs Department ordered its Veterans Health Administration contracting offices to stop using reverse auctions until further notice, according to a recent memo from a senior official. The memo, provided to Federal Computer Week by an unnamed source, comes only months after the VA announced how much money the auctioning had saved the department.

Jan Frye, deputy assistant secretary for acquisition and logistics at the VA, wrote in the March 3 memo that reverse auctioning is disrupting the department’s supply chain and has caused a “ground swell” of complaints from VA suppliers. He also noted there have been at least one protest, potential increased costs, small-business program anomalies, and “violations of our VA contract hierarchy.”

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“We simply did not think through all of the unintended consequences of reverse auctions when we recently made the decision to allow their use,” he wrote.

In a reverse auction, companies are bidding to sell their products to the government and competition for an agency’s bid drives the price down. Competition is at the heart of a reverse auction. The VA has awarded more than $100 million in commodities sales through reverse auctions, and saved $7.1 million, according to FedBid, which hosts the auctions.

Based on the memo, which was sent out Saturday afternoon, Frye wrote he was concerned about over-reliance on FedBid. He has anecdotal evidence that contracting officers are turning the process over to FedBid without the appropriate oversight.

Frye told his officials to examine 25 random FedBid contracting files starting March 5. Once finished, he will release the results from the examinations to senior contracting officials.

Frye directed his order to the VHA because it uses the auctions most often.

According to industry sources, a VA official announced the decision this week at the department’s Supplier Relationship Transformation Conference in Denver.

VA officials did not respond to requests for comment on the memo or reverse auctions.

As it stands, VA officials will review their policies on reverse auctions, looking specifically at how the auctions can support the “corporate doctrine of just-in-time delivery by VA prime vendors,” the memo states.

“While I am not opposed in principle to reverse auctions, it is clear they are causing significant perturbations in the VA supply chain,” Frye wrote.

FedBid said on March 7 that it’s confident the VA will reinstate the reverse auction policy.

“We understand the interruption in contract usage by VA is for temporary review purposes,” said Lu Tupponce, FedBid’s chief administrative office and general counsel.

Tupponce said FedBid has created more opportunities for veteran-owned businesses to sell products to the federal government by leveling the field and promoting fair competition. Small businesses are awarded more than 80 percent of the dollars competed through FedBid’s reverse auctions.

The VA recently wrote about the money it has saved through reverse auctions.

“The Veteran’s Administration praised this service recently on its website touting millions of dollars in savings and how FedBid has expanded the department’s small business goals,” Tupponce said.

In the VA-written report, officials said they have saved $2 million in medical supplies for its hospitals since March 2011.

“In this kind of economic environment, two million dollars is not small change,” said Susan Taylor, deputy chief procurement officer for the Veterans Health Administration’s Office of Procurement and Logistics, in the report.

Further, 64 percent of the awards went to small businesses with veteran-owned small businesses getting half of those wins.

The report also notes that FedBid is free to the government and requires no software to use.

"Frye has unleashed a bit of a firestorm," said a source close to the situation.

The VA is saving money, but VA's long-time suppliers are unhappy. The source said the suppliers are not particularly accustomed to a lot of competition, and reverse auction stiffens competition.