VA rips FedBid, questions value of reverse auctions

FedBid's claims of sizable savings generated by the reverse auctions the firm provides for federal contractors are overblown and misleading, according to the Department of Veterans Affairs' Office of Inspector General.

Furthermore, Maureen Regan, counselor to VA's IG, told FCW that reverse auctions can unduly complicate the contracting process and limit competition by squeezing out potential vendors.

Regan's comments came just days after a pair of scathing reports from VA's OIG, one of which castigated Susan Taylor, deputy chief procurement officer at the Veterans Health Administration, for allegedly engaging "in conduct prejudicial to the government when she pressured contracting staff under her authority to give preference to and award a task order for reverse auction services to FedBid Inc."

What Regan told FCW echoed a second IG report that says reverse auctions can inadvertently derail federal efforts to properly record contract documentation. The report states that only 16 of the 236 contract files reviewed in the study met the department's documentation requirements.

More significant, however, was the assertion by the OIG that the main purpose of reverse auctions -- to save money -- can be negated by multiple factors, including FedBid's fees and the Industrial Funding Fee customers paid to cover the General Services Administration's operation of the Federal Supply Schedules program.

Furthermore, the formula that reverse auction providers use to calculate savings -- subtracting the final award price from the "independent government cost estimate" -- was not reliable, the OIG argued, in part because of frequent mismatches between that independent estimate (which is required by VA policy) and the target price set by agency contracting officers. In addition, contract prices represent funds obligated at the time a contract was awarded, but many purchases were not fully funded at that time, resulting in inflation of the reported savings.

In response to the report on Taylor, FedBid said the OIG had not disputed that FedBid's marketplace stimulates competition, which results in lower prices.

That is technically true, said Regan, who manages the OIG's Office of Contract Review. But that's because the report on Taylor focused on her alleged misconduct and did not address logistical issues with reverse auctions. Those concerns were addressed in the other study.

When contacted about Regan's assertions, a FedBid spokesperson told FCW that, "while we continue to believe that FedBid has acted appropriately, we take the Department of Veterans Affairs' Inspector General report very seriously. As a result, we are closely reviewing any potential concerns outlined in the report and will take appropriate steps necessary to ensure that FedBid continues to operate with the highest standards of integrity and transparency while providing the utmost value to our customers."

"We are enormously proud of the role that FedBid is playing, and will continue to play, in facilitating millions in cost savings for U.S. taxpayers," the spokesperson said in an emailed statement -- noting that "last year alone," the FedBid marketplace "enabled an estimated $160 million in savings for the government and taxpayers."

FedBid also said that estimated cost savings are based on data provided by customers, and all savings numbers are calculated after its fee -- which can range from 0-3 percent and is capped at $10,000 -- is applied. The company receives a fee only if the reverse auction results in a contract being awarded.

Regan, however, asserted that reverse auctions contain other costs, including GSA's Industrial Funding Fee, that might not be readily apparent to agencies.

The federal contracting schedules offer baseline pricing that agencies can use to negotiate lower costs, she said, adding that "it's not uncommon to get price reductions on schedule items," often by conducting a limited competition among schedule vendors. Regan said the OIG has had complaints from vendors, including a substantial number from health care supply companies, that FedBid's reverse auctions set up a "pay-to-play" system that is cost-prohibitive.

At the same time, other reverse auction vehicles might be getting short shrift. Regan said GSA offers services that comply with federal contract documentation requirements and include items on federal schedules.

Regan recommends that agencies "look at contracts and how people are buying things" before committing to the approach. "Reverse auctions were something of a fad in the 1990s," she said. "Everyone decided at the time they weren't really worth it."

Note: This article was updated on Oct. 6 to incorporate comments from FedBid that were not available at the time of initial publication.