VA resumes reverse auctions, but questions linger

The Veterans Affairs Department has lifted its ban on reverse auctions with new rules in place, but the questions that led to the temporary moratorium still haven't been answered completely.

Contracting officers now have to document in a contract file the government cost estimate for the purchase and how that number was calculated. Contracting officers have to detail how much it cost VA to hold the auction, including the fee the auction host receives.

Jan Frye, deputy assistant secretary at VA’s Office of Acquisition and Logistics, imposed the moratorium in March and then lifted it with an internal memo a month later, with the new guidelines spelled out. But he still has unanswered questions, he said.

“We are telling them to show the math on the dollars the VA saved,” Frye said. The documentation, the cost estimate and the fee “will add some credibility to the dollars that were being bragged about in savings.”

Frye said he’s not against reverse auctions. His concern was that VA wasn’t keeping track of the details to prove the acquisition approach’s savings. VA officials could not support the $7 million in savings it reportedly had saved. The auction house furnished the savings figures.

Frye also noted that reverse auctions are suitable only for procurements where the lowest price technically acceptable criterion is the only one that matters. “Selection criteria beyond LPTA would indicate that the requirements are too complicated to ensure that cost savings and acceptable quality would be obtained through the reverse auction method,” he wrote in the memo detailing the new rules.

VA uses prime vendors from its “Just-in-Time” compliance system for pharmaceuticals and similar supplies, but reverse auctions may be causing some deeper problems. It’s challenged VA’s philosophy on purchasing and exposed VA’s lack of knowledge about the details around auctions.

The Just-In-Time system relies on supplies and products from prime contractors that provide what VA needs and distributes them to VA hospitals. The program allowed VA to shut down numerous depots and rely on the preapproved vendors.

But reverse auctions may be affecting that program and its suppliers. Frye,  who said VA is conducting “thousands and thousands of these open-market buys,”  questioned whether the auctions defeat the purpose of the Just-In-Time system.

“I want to know how reverse auctions dovetail with our supply chain,” he said in a keynote at the April 26 Coalition for Government Procurement 2012 Spring Conference. “That’s what I wanted to know, and I haven’t got the bottom of that yet.”

Experts and auctioneers say VA’s concerns are not typical of other agencies.

David Wyld, management professor at Southeastern Louisiana University, said the decision to ban the reverse auctions appear to have been “an isolated, VA-only situation.” Other agencies, such as the Defense Department and Homeland Security Department, had demonstrated less uncertainty about the procurement method than VA, he said.

“I’ve seen no hesitation in those agencies to use reverse auctions,” Wyld said.

In federal agencies, reverse auction adoption has mostly been a bottom-up approach rather than a top-down mandate, Wyld said, with procurement officers using them to help them to “do more without more.”

The auctions could save an agency between 5 percent and 30 percent in costs, but the real benefit is they give small businesses who previously haven’t dealt with federal contracting a chance to take part of the action, he said.

Col. Scott Svabek, commander and principal assistant responsible for Contracting Healthcare Acquisition Activity at the United States Army Medical Command, said reverse auctioning is a fairly new idea in the field of Army contracting. However, the policy Army Medicine has adopted is specifically crafted to monitor use of supplies and equipment that have a high probability of bidders by more than one vendor and the product is commercially available, he said.

Overall, Svabek said, his agency has recognized the advantages of using reverse auctioning.

“We advocate its use, as we do any and all tools that allow our procurement officials to execute contracts efficiently and effectively,” he said, adding the Army is currently not reevaluating its reverse auction policy but might look to assess its effectiveness after the current fiscal year ends.

FedBid, the reverse auction service provider, said the situation was unique to VA because it was dealing with an old policy it needed to update. Other agencies have had improved savings and competition, including more awards to small businesses, said Lu Tupponce, chief administrative officer and general counsel of FedBid.

In its first year, the Veterans Health Administration had “an exponential growth in the number of awards for simple medical supplies going to service-disabled, veteran-owned small businesses,” Tupponce said.