Webinar — The New U.S. Rules on Reverse Auctions: A Critical Assessment

Wednesday, September 11, 2024 – 9 am Eastern – 15:00 CET

With little fanfare – and after over 20 years of waiting – the United States government has finally issued its first government-wide rule on electronic reverse auctions, which was followed in late August by a proposed rule generally barring reverse auctions for complex construction services. Join a free GW Law Government Procurement Law Program hour-long webinar to discuss both rules (final and proposed) and their possible impact on public procurement markets, across the United States and around the world.

Panel Slides – Program Transcript

Panel

• Gian Luigi Albano is a senior manager with CONSIP, the Italian government’s centralized purchasing agency. He wrote his doctoral dissertation on auction theory, helped design a European Union-wide public auction mechanism on behalf of the Italian government, and will be teaching a course on auction theory at LUISS, a leading university in Rome.
• David Drabkin is the chair of the Procurement Roundtable, a group of leaders from the federal procurement community. He was previously the Senior Procurement Executive for the General Services Administration (GSA), and in that role he was a member of the FAR Councils which write federal procurement rules, and participated in early assessments of a possible FAR rule on reverse auctions.
• Chris Yukins, moderator, serves as the Lynn David Research Professor in Government Procurement Law at the George Washington University Law School’s Government Procurement Law Program. He has been speaking and writing on reverse auction issues in procurement for over 20 years, and helped draft the United Nations model procurement rule on reverse auctions.

Background

For centuries, governments have asked vendors to offer their lowest bids to meet a government requirement — a good or a service needed by the government. Under this traditional approach, vendors submit bids (often sealed so that other bidders couldn’t undercut them) and the lowest responsive bid wins the contract, if the vendor is responsible (qualified).

Electronic reverse auctions are the next step in the evolution of that sealed bidding process. In a reverse auction, vendors bid against each other repeatedly (“iteratively” or “dynamically”) to offer the lowest bid and win the contract. To avoid collusion and foster competition that bidding is typically done online, in an “electronic” reverse auction. The image below shows how a typical reverse auction unfolds:

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Electronic reverse auctions have been a common feature of advanced public procurement systems since the 1990s. In Brazil, for example, electronic reverse auctions are the most commonly used competitive method for the procurement of goods and non-consulting services by the Brazilian government. The United Nations Commission on International Trade Law (UNCITRAL) 2011 model law on public procurement in Chapter VI includes detailed rules on the use of reverse auctions. In the European Union, reverse auctions have been part of the procurement directives since 2004, and a 2013 study by the Organization for Economic Co-operation and Development (OECD) found that many industrialized nations were using electronic reverse auctions in public procurement. Several multilateral development banks (including the World Bank, which revamped its procurement framework in 2016) have published joint special instructions on how borrowers can use reverse auctions in procurement.

Governments around the world have enjoyed substantial savings thanks to using reverse auctions. In the U.S. government — even without a governmentwide rule — the Office of Federal Procurement Policy noted, per GAO’s 2014 report, that “the four agencies [GAO] studied (Army, Department of Homeland Security (DHS), Department of the Interior, and the Department of Veterans Affairs (VA)) reported approximately 12% in savings from purchases totaling more than $800 million during fiscal year (FY) 2012 for a range of commercial items . . . . The Department of Energy separately reported seeing an average savings of about 14% per contract awarded to provide core supplies and services for its National laboratories. These savings were generally calculated by comparing the agency’s independent government cost estimate to the closing price of the reverse auction.”

But in the U.S. government, there has been no governmentwide rule to bring electronic reverse auctions into the procurement mainstream — which GAO found has slowed the use of reverse auctions. Although commentators (including Professors Ralph Nash and John Cibinic (see below)) have called for two decades for a governmentwide rule on reverse auctions, and the Defense Logistics Agency had procedures on reverse auctions in place as early as 2009, a proposed FAR rule was not published until 2020 and the final government-wide rule under review here was not issued until July 2024 — almost four years later.

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Failing to define reverse auctions through a governmentwide rule hurts their effectiveness, as GAO noted in a 2013 report. The U.S. experience confirmed this, for the limited initiatives in reverse auctions in the federal government over the last twenty years have commonly failed. A 2018 study by the Government Accountability Office (GAO) found, for example, that often auctions had only one or only one round of bidding (see above) — a sure formula for failure in an auction, as studies internationally have shown. (Hanak, Marovic & Jajaca, at 144.) A governmentwide rule explaining how reverse auctions should be performed in the U.S. federal procurement system was overdue.

The final rule took effect on August 29, 2024 — coincidentally, the same day that the U.S. government published a proposed rule which generally bars reverse auctions for more complex construction services. Both the final rule (covering all reverse auctions) and the proposed rule (on construction services) are discussed below.

Assessing the Final Rule on Reverse Auctions Generally

What the Final Rule Contains

The final rule (guidance) on reverse auctions addresses the following:

• Coordinating with the OFPP Memorandum: The introductory comments to the final rule say that the final rule implements the 2015 Office of Federal Procurement Policy (OFPP) memorandum on reverse auctions. But as the discussion below shows, the final rule fails to address many critical issues that the OFPP memorandum covers, such as the use of data from reverse auctions and agencies’ potential savings. The final rule seems to contemplate, therefore, that the final rule should be read in conjunction with the OFPP memorandum. But because the OFPP memorandum was not subject to notice-and-comment, this “hybrid” structure may be more subject to court challenge, especially given the more piercing judicial review contemplated by the Supreme Court’s June 2024 decision in Loper Bright Enterprises (see below).
• Access to Reverse Auction Data: The final rule was revised to ensure access (as defined by the contracting officer) to reverse auction data held by a reverse auction service provider. Audit and enforcement officials had commented that they need access to that data for their reviews. As is discussed below, however, the final rule did not mandate that award data from a reverse auction be dispersed and used across the government.
• Disclosure of Lowest Bidder Price: The final rule allows agencies and requires reverse auctions services providers to disclose the lowest prices offered during an auction. The final rule also says that an agency may “reveal to all offerors the offered price(s),” so long as the agency does not reveal any offeror’s identity. FAR 52.217-10 and -11. Several commenting parties, however, were concerned that disclosing prices might make it easier for bidders to collude (see below).
• Limited Guidance on When to Use Reverse Auctions: The rulemakers emphasized that contracting officers should engage in market research before using reverse auctions, and the final rule says that reverse auctions can be appropriate when (1) a competitive marketplace exists, (2) multiple offerors could satisfy the agency’s requirements, and (3) the nature of the acquisition (e.g., clearly defined specifications for less complex requirements) lend themselves to an iterative bidding process. As is discussed below, however, this very broad guidance leaves many questions unanswered on when, in fact, reverse auctions should be used.
• Limited Guidance on Conducting a Reverse Auction: The final rule offers limited guidance for contracting officers when conducting a reverse auction. FAR 17.804. The contracting officer may not disclose the identities of bidders (aside from the awardee under the auction), must allow bidders to revise their prices continually downward during a reverse auction until it closes, and must allow a bidder to withdraw prior to the close of the auction. But this limited guidance left critical aspects of a reverse auction unaddressed, as is discussed below.
• Only a Contracting Officer May Exclude Bidders: The final rule overruled concerns from reverse auction service providers and said that only the contracting officer may exclude a bidder, even if the bidder has not paid its fee to the service provider. As is discussed below, however, the final rule did not address when an exclusion decision should be made.
• Reverse Auctions Integrated Into Other Contracting Methods: The final rule makes clear that contracting officials may use reverse auctions to award orders under a catalogue contract (known as “framework” agreements internationally, and an indefinite-delivery/indefinite-quantity (IDIQ) contract in the U.S. system). Thus these these contracting methods can be melded to achieve optimal outcomes. But reverse auctions may not be used for certain categories of goods (such as personal protective equipment) or services (such as architectural services, discussed below). FAR 17.803.
• Reverse Auction Service Providers and Bidders: The final rule sets guidelines for reverse auction service providers (which may be either private firms or a government agency, FAR 17.802(c)) in their relationships with bidders. Bidders must be allowed to register for free with the provider, and their proprietary information (including bids) must be protected from disclosure. Service providers may not have a conflict of interest, which means (among other things) that they may not bid in auctions they are supervising.
• If Only One Bidder: Under the final rule, if there is only one bidder in an auction the contracting officer may (a) accept the results of the auction (if the bid was fair and reasonably priced), or (b) cancel the auction. FAR 17.804(d).

As the discussion below reflects, the final rule also left a number of critical issues unaddressed.

No Encouragement to Use Reverse Auctions

Permission But Not Admonition to Use Reverse Auctions: The final rule says only that reverse auctions may be used. The Defense Logistics Agency, in contrast, says in its supplement to the FAR, DLAD 15.407-90, that a DLA “contracting officer must consider using reverse auctions in solicitations for competitive procurements valued above the micro-purchase threshold,” and “must document the contract file when competitive procurements do not use reverse auctions” above the simplified acquisition threshold (typically $250,000) (emphasis added). In the U.S. Army, if a purchasing unit has multiple standing blanket purchase agreements with vendors, the “use of reverse auctions to determine pricing among BPAs is the preferred method.” (AFARS 5113.303-2-90). The Army’s procurement guidance notes that reverse auctions can reduce acquisition cycle times and increase competition, driving prices down over time in a process that is “inclusive, transparent, and immediately advantageous to both government and industry.”

Limited Guidance on When To Use Reverse Auctions

Little Guidance in the Final Rule: The final rule is explicit on when reverse auctions should not be used, but offers little detail on when they should be used. Although one commentator complained that the language (FAR 17.803) regarding when to use reverse auctions in the proposed rule was ambiguous, the FAR Councils did not respond to that comment or materially change the regulatory language.

The final rule further merely notes that reverse auctions may be appropriate “when market research indicates that . . . (1) A competitive marketplace exists . . . ; (2) Multiple offerors can satisfy the agency’s requirement; and (3) The nature of the supplies and/or services being acquired (e.g., clearly defined specifications, less complex requirements) encourages an iterative bidding process . . .).” Those criteria, however, apply to a vast range of procurements, and do not highlight the economic dynamics which help predict when a reverse auction can be used successfully.

The final rule says that reverse auctions shall not be used for (a) design-build construction contracts; (b) architect-engineer services under FAR 36.601; (c) sealed-bidding procedures under FAR Part 14; or (d) personal protective equipment (see also DFARS 217.7801 (ban on use of reverse auctions where item failure could result in combat casualties)).

The final rule noted that the FAR Councils had opened a separate FAR case (FAR Case 2023-003, “Prohibition on the Use of Reverse Auctions for Complex, Specialized, or Substantial Design and Construction Services”) to assess when reverse auctions can be used for certain construction contracts, in accordance with the Construction Consensus Procurement Act of 2021 (Pub. L. 117-28, July 26, 2021), which called for special rulemaking. That FAR case resulted in the proposed rule narrowly focused on construction services rule, discussed below, which was issued on the same day that the final, general rule took effect.

U.S. Army Guidance Is Much More Detailed: Unlike the final FAR rule, the U.S. Army’s AFARS guidance on reverse auctions offers much more detail on when reverse auctions should be used to “deliver more value than the use of other available procurement methods.” The U.S. Army guidance says that reverse auctions are especially appropriate where there is:

• Healthy price competition: This element of the Army guidance is economically logical, because where there is no price competition — for example, in a highly regulated market, such as the telecommunications or aviation markets before deregulation — a reverse auction may make little sense.
• A well-defined requirement: The Army guidance says that reverse auctions should be used when the agency has a “well-defined requirement.” Normally, a cornerstone economic (and legal) principle of public procurement is that a bidder must know how the government will weigh quality and price in making its award decision; if bidders cannot, competition will fail, for bidders will abandon the market or (in the case of a reverse auction) possibly simply proffer one (high) bid and stop bidding. By using a well-defined requirement to define quality requirements clearly, the agency opens the door to aggressive price competition among bidders, bidding down towards their individual marginal costs of production — the goal of a classic reverse auction.
• Bulk commodity type procurements (such as IT equipment, spare parts): The Army guidance — unlike the FAR final rule — points to commodities as an ideal target for reverse auctions, echoing the Office of Federal Procurement Policy’s 2015 guidance.
• Procurements in which there is a well-defined supplier base: The Army’s suggestion that reverse auctions be used only where there is a well-defined supplier base is prudent, because if the supplier base is unstable — if critical suppliers may leave the market, for example, if forced to compete through reverse auctions — a reverse auction may not be appropriate.
• Procurements where the award evaluation criteria is not subject to interpretation (i.e. lowest price versus multiple criteria for tradeoffs and subjective judgments): This guidance from the Army also makes sense, because unpredictable subjectivity in the award may undo the reverse auction (see above).

Limited Guidance on How To Design an Auction

The final rule offers very little guidance on how to structure a reverse auction. Although the new guidance in FAR Subpart 17.8 is intended to ensure that competition is promoted “to the maximum extent practicable,” see, e.g., FAR 13.104, and studies (see Resources, below) have repeatedly shown that how an auction is designed — how it is begun and ended, for example — is critical to maximize the government’s gains, the final rule is largely silent on how reverse auctions should be structured.

Alabama, for example, provides far more detail than the new federal rule on how electronic reverse auctions are to be run under that state’s procurement system. Colorado does as well, in its detailed procedural requirements for school districts using reverse auctions. Finally, Section 11-35-1529 of the South Carolina procurement code, on “competitive online bidding,” directs how to structure reverse auctions, including how auctions should be opened and closed.

The Army’s Federal Acquisition Regulation Supplement requires that the “ground rules for the auction” be established beforehand when the Army uses a service provider, “particularly when the bidding will start and stop.”

The Defense Logistics Agency’s guidance on reverse auctions (DLAD 15.407-90, Notes L09 Reverse Auction (Oct 2016) and L10 Competing Individual Delivery Orders Through Reverse Auctions (Oct 2016)) provides detailed instructions to contracting officials on how to structure a reverse auction, including:

• Notification to bidders
• Use of a reverse auction in conjunction with other competitive methods
• Price information to be disclosed to bidders during the auction
• In reverse auctions for delivery orders under a standing contract (L10): the contracting officer’s discretion to declare whether all prices or only the lowest (“lead”) price will be disclosed during the auction
• How final auction prices will be treated, and how the auction may be reopened
• Conditions for vendors to participate in the reverse auction
• How to deal with two bids that are tie (equal) offers
• What the contracting officer will do if a vendor cannot access the auction
• Contracting officer’s authority to extend the auction
• Training for offerors

Nearly a decade ago, in December 2014, the National Defense Authorization Act (NDAA) for Fiscal Year 2015, Pub. L. No. 113-291, Section 872, Congress laid out requirements for reverse auctions that were to be — but ultimately were not — published by the Defense Department. According to GAO’s 2018 report, at page 11, note 12, the DFARS Case 2015-D010 was canceled in favor of the reverse auction guidance to be published under FAR Case 2015-038 — the very same FAR case which ultimately resulted in the final rule under discussion here, published in July 2024. The guidance called for by Congress in 2014 was thus delayed for almost 10 years.

Among other things, the 2014 legislation said that new Defense Department regulations were to ensure that:

• All “reverse auctions provide offerors with the ability to submit revised bids throughout the course of the auction,” and
• If a reverse auction is to be conducted by a third party, “inherently governmental functions are not [to be] performed by private contractor,” and any “past performance or financial responsibility information created by the third party is [to be] made available to offerors.”

None of these statutory requirements were addressed in the recently published final rule.

The Winner’s Curse

The final rule does not address the “winner’s curse,” i.e., unrealistically low pricing. One common problem with reverse auctions is that a vendor, caught up in fevered bidding, may bid too low (typically at a price below its marginal cost of production). This is known as the “bidder’s curse.” This raises performance risks for the buyer, as the vendor may default on an unprofitable contract.

When an international working group at the United Nations revamped the UNCITRAL model law to accommodate electronic reverse auctions, the working group was careful to ensure that the model law also addressed how agencies should handle the accompanying risk of unrealistically low bids (which are commonly known as “abnormally low” tenders outside the United States). The World Bank has published detailed guidance on how to assess “abnormally low” bids.

In U.S. federal procurement the risk of abnormally low pricing is known as the risk of “unrealistically” low bidding. In the U.S. federal system, in contrast to other procurement regimes, the Government Accountability Office has long left issues of price realism largely to agencies’ discretion, and the FAR says very little about how agencies should assess or treat abnormally low pricing. E.g., FAR 15.404-1(d); DynCorp International LLC, Comp. Gen. No. B-407762.3 (June 7, 2013). This means that there is a lack of guidance to agencies on the performance risks posed by unrealistically low bidding due to reverse auctions, and the final FAR rule does not provide any guidance on this issue.

Bidders’ Prices Disclosed During Auction

The final rule allows disclosure of reverse auction bidders’ prices (but not their identities) during an auction; if a service provider hosts the auction, bidders’ successively lower bids must be disclosed. But disclosing prices during an auction may increase the risks of collusion among bidders.

Several commentators to the proposed rule urged that the final rule not call for disclosing prices during an auction. The Coalition for Government Procurement warned that requiring “that pricing . . . shared with other offerors may increase the risk of protest in cases where an agency selects an offer other than the lowest price,” and can “increase protest risk by unintentionally disclosing competitive information in smaller/limited markets.” Unison Marketplace, an experienced provider of reverse auction services to the federal government, urged in its detailed comments that the final rule should should “allow for, and not mandate that contracting officers disclose offerors’ pricing to all offerors,” because mandating disclosure “increases protest risk, and the potential for offeror collusion when displaying all pricing to all offerors throughout an auction.” The FAR Councils did not address this risk of collusion in the final rule.

Notably, the Defense Logistics Agency reverse auction approach generally allows each bidder to see only the “lead” (or lowest) price (DLA Procurement Note L09, in DLAD 15.407-90) (see above).

When the Awardee Will Be Found Qualified (Responsible)

The final rule leaves it to contracting officials — not the reverse auctions services provider — to determine if vendors are to be excluded from an auction. The question is when.

Under the final rule, the identity of the winning bidder will be disclosed after award (FAR 17.804), presumably after the bidding is concluded, the bidding information has been delivered to the government, and the contracting officer has determined that the winning bidder is responsible (FAR 17.802).

In contrast to the federal rule which appears to assume that qualification will be assessed after the reverse auction, California allows for a qualification (responsibility) assessment before bidding begins. This avoids the “moral hazard” that a contracting official faces when assessing qualification after the reverse auction concludes, because at that point the official has an incentive to cut transaction costs and simply accept the lowest bidder, even if that bidder presents potential qualification issues. Utah has gone farther and made prequalification a regular first step in the process, before the reverse auction begins.

Service Providers and Source Selection Concerns

The final rule addressed concerns regarding the use of private providers of reverse auction services, but left some issues open. The 2018 report from GAO expressed concern that contracting officials using reverse auction providers “did not fully understand how fees were set,” and that without “better information, contracting officials may be offsetting potential savings by paying more in fees than necessary for the level of services required.” Accordingly, the final FAR rule offers detailed guidance on how reverse auction services providers should be selected and retained. The final rule ensures that vendors will be able to register, at no cost, for an agency reverse auction conducted by a service provider. The final rule recognizes that the service providers are acting on the government’s behalf gathering sensitive bid-and-proposal information from vendors. In its comments on the proposed rule, the GSA Office of Inspector General noted that “reverse auction service providers are highly technical facilitators of the reverse auction process and guardians of the resulting data.” The Coalition for Government Procurement (an industry group) also urged in its comments that the service providers be allowed to retain auction data, as did the Justice Department’s Antitrust Division and Office of Inspector General.

The final rule raises procurement integrity protections for that information (both source selection information from the agency and bid-and-proposal information from the bidders) (FAR 52.217-10). The final guidance does not, however, detail the source selection issues that may arise with service providers — due, for example, to the reverse auction providers’ unique access to non-public information on when an agency might launch a reverse auction. (Compare the multilateral development banks’ guidance on reverse auctions, which in section 5.3 bars premature disclosure of materials on an upcoming reverse auction.)

No Reference to Alternative Approaches

The final FAR rule focuses on classic “English” reverse auctions (lowest price wins), without noting the diversity of solutions in reverse auctions, both across the private marketplace and around the world. The final rule does not consider that reverse auctions are structured differently in some public procurement systems. For example, article 35 of the European Union’s primary procurement directive (2014/24/EU) allows quality scoring to be integrated into Member States’ reverse auctions; similarly, Oregon allows non-price factors to be scored as part a reverse auction. Another approach would be a “Vickrey” reverse auction (awardee is paid second-best price), which one commentator recommended but was not addressed in the final rule.

Nor does the final rule recognize that reverse auctions are regularly used in the private sector, and that the federal government may in the future want to harness those private auctions, much as GSA’s “commercial platforms” initiative has allowed the government to harness the purchasing power of private commercial platforms such as Amazon. Notably, the Commonwealth of Virginia allows public bodies in the state (1) to purchase through reverse auctions, and (2) to buy needed items at public auctions in the private sector, including online auctions.

Silent on Sharing Outcomes Across Government

The final rule is silent on sharing reverse auction data across government. The Office of Federal Procurement Policy’s 2015 guidance noted that sharing information on prices paid information in reverse auctions can have “important benefits,” such as helping “agencies formulate more accurate government cost estimates, which, in turn, helps to ensure fair and reasonable pricing,” and in looking for “more competitive prices for similar items on existing contracts.” Nothing in the final rule or its prefatory materials, however, suggests that reverse auction outcomes should be shared among agencies.

No Assessment of Costs and Benefits

The FAR Councils offered no cost/benefit analysis for the final rule, which could be critical to benchmark progress. As the FAR drafters noted, “Executive Orders (E.O.s) 12866 (as amended by E.O. 14094) and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity).” In particular, “E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.” These Executive Orders call for transparency in rulemaking, including a published cost/benefit analysis; the Office of Management and Budget publishes guidelines for preparing a cost/benefit analysis in OMB Circular A-4.

The FAR Councils concluded, however, that the reverse auction rule was “not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993.” Under Section 6 of the Order, as the Environmental Protection Agency has explained, per E.O. 14094 a “significant” regulatory action is one that has “an annual effect on the economy of $200 million or greater.” (See GW Regulatory Studies Center summary.) Because $200 million represents only roughly 1/4 of 1 percent of annual federal procurement spending, and savings from reverse auctions have been reported as high as 12-14%, observers may argue that even if reverse auctions are used in very limited fashion they are likely to have more than a “significant” ($200 million) impact, and a cost/benefit analysis is necessary under the Executive Orders.

A cost/benefit analysis could encourage consideration of many of the issues outlined above, for it could bring rulemakers to consider, for example, how strongly (if at all) the rules should press for use of reverse auctions, what types of goods and services might be best suited for reverse auctions, how reverse auctions should be structured to optimize results, etc. Under OMB Circular A-4, rulemakers also could consider opportunity costs, such as the costs of not having an effective reverse auction rule in place. The cost/benefit analysis could include predictions on the likely use of reverse auctions, and so would offer benchmarks for assessing federal agencies’ adoption of reverse auctions.

The Loper Bright Effect

The Supreme Court’s June 2024 decision in Loper Bright Industries v. Raimondo opened agency regulations to a much more probing judicial review (see GW Law’s webinar and accompanying materials). Interested parties affected by the final rule — a bidder, for example, prejudiced by the rule’s discussion of the mechanics of a reverse auction — may attempt to challenge the final rule. In light of that risk, the FAR Councils may decide to return to the reverse auction rule to strengthen it (perhaps in conjunction with the pending FAR case on the use of reverse auctions for construction contracts (see above)), to incorporate the extensive lessons learned about reverse auctions over the past two decades in order to achieve best value in federal procurement.

Assessing the Proposed Rule on Reverse Auctions and Construction

On August 29, 2024 — the same day the final rule (described above) covering all reverse auctions, took effect — the FAR Councils published a proposed rule which would bar reverse auctions for complex construction services. While the proposed rule addresses a relatively narrow market in construction, as is discussed below the proposed rule could have a broader, collateral impact on all reverse auctions because it defines key terms (such as the definition of a reverse auction). Comments on the proposed rule are due by October 28, 2024.

Background on the Proposed Rule: Enabling Legislation

The proposed rule would revise the Federal Acquisition Regulation to implement section 2 of the Construction Consensus Procurement Improvement Act of 2021 (Public Law No. 117-28), which prohibits the use of reverse auctions (when the contract exceeds the simplified acquisition threshold (SAT), typically $250,000) for “complex, specialized, or substantial design and construction services,” which include: site planning and design; architectural and engineering services (as defined in 40 U.S.C. 1102); interior design; performance of substantial construction work for facility, infrastructure, and environmental restoration projects; and construction or substantial alteration of public buildings or public works.

The proposed rule is grounded in the Construction Procurement Improvement Act of 2021, very brief legislation which focused solely on this issue of barring reverse auctions for complex construction services. Unlike most procurement reform before Congress, this legislation was not made part of the annual defense authorization bill. Instead, the legislation was introduced in January 2021 and became law by July 2021; the legislation moved rapidly through Congress with bipartisan support and almost no discussion or debate.

The Act included key findings by Congress. Congress noted that in “contrast to a traditional auction in which the buyers bid up the price, sellers bid down the price in a reverse auction.” Congress further noted that reverse auctions, “while providing value for the vast majority of Federal acquisitions, including certain construction related acquisitions, are limited in value for complex, specialized, or substantial design and construction services.”

The Act also defined reverse auctions, for purposes of the Act, to mean “with respect to any procurement by an executive agency, a real-time auction generally conducted through an electronic medium among two or more offerors who compete by submitting bids for a supply or service contract, or a delivery order, task order, or purchase order under the contract, with the ability to submit revised lower bids at any time before the closing of the auction.” As is discussed below, the proposed rule gave more detail to this definition, and would appear to apply to all reverse auctions.

Like the final rule covering reverse auctions more generally (discussed above), this proposed rule focusing on construction services was delayed. Although the statute called for a final rule on construction services within nine months, the proposed rule took over three years to publish. This type of delay — which is common in procurement rulemaking — may raise issues under the Supreme Court’s decision in Loper Bright (discussed above), because by delaying the implementing rule the agencies arguably are, in effect, blocking Congress’ clear intent. Applying the less deferential standards of Loper Bright, in future cases the courts may say that it is Congress’ stated intent, not the agencies’ delay, which should guide the law.

Proposed Rule: Definition of Reverse Auctions

Per the enabling statute, the proposed rule would refine the brand-new definition of reverse auctions. The final rule covering reverse auctions in general — which, as noted, took effect on the same day the proposed rule was published — revised Federal Acquisition Regulation (FAR) 2.101 to include the following relatively sparse definition of reverse auctions (with emphasis added):

Reverse auction means the process for obtaining pricing, usually supported by an electronic tool, in which 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.

While sparse, this definition under the general rule includes a problem: it assumes that bidders in a reverse auction will be able to see their competitors’ prices. As was discussed above, this raises risks of bidder collusion.

The proposed rule would revise this brand-new definition, as follows:

Reverse auction means a real-time auction generally conducted through an electronic medium among two or more offerors who compete by submitting bids for an award of a supply contract, service contract, purchase order, or blanket purchase agreement, or for an award of an order under a contract or blanket purchase agreement, with the ability to submit revised lower bids at any time before the closing of the auction (section 2 of the Construction Consensus Procurement Improvement Act of 2021 (Pub. L. 117-28)).

Notably, the proposed rule’s revised definition, in keeping with the definition in the 2021 legislation, does not say that bidders may see other bidders’ prices during a reverse auction. At the same time, however, the proposed rule would not change the just-published language of FAR 52.217-12 (under the general rule), which requires reverse auction service providers to allow “offerors to see the successive lowest price(s) offered in the auction.” The question remains open, therefore — at least regarding reverse auctions hosted by service providers — whether bidders will be able to see each others’ prices, and thus potentially to collude (see discussion above).

Proposed Rule: Construction Services Contracts Below the SAT

The proposed rule bars reverse auctions for complex construction services, which it defines in accordance with the 2021 statute. The prohibition applies only above the simplified acquisition threshold (SAT), and the rulemakers acknowledged that for “awards at or below the SAT, the use of reverse auctions to obtain pricing may be appropriate.” They cautioned, however, that contracting officials must carefully assess any use of reverse auctions for contracts below the SAT value.

Conclusion: Proposed Rule Needs Work to Address General Rule’s Gaps

While many of the issues regarding the general rule, discussed above, cannot be addressed in a rule focused solely on construction services — the construction services rule probably cannot, for example, resolve how reverse auctions should be designed generally, or when bidders’ qualifications should be addressed in reverse auctions outside the construction sector — the construction services rule could be used to resolve at least some of the serious problems with the general rule discussed above:

• Encouragement to Use Reverse Auctions: In the legislation calling for the construction services rule, Congress specifically found that reverse auctions provide “value for the vast majority of Federal acquisitions.” Like the final rule covering reverse auctions in general, the proposed rule fails to follow up on Congress’ observation that reverse auctions could provide value in the “vast majority” of federal procurements.
• Guidance on When to Use Reverse Auctions: Unlike the Army, the Defense Logistics Agency and many other governments and institutions, the FAR Councils have failed to provide real guidance on when reverse auctions should be used for construction services — although the proposed rule concedes that reverse auctions may be appropriate in construction services acquisitions below the simplified acquisition threshold. The only guidance is in the general rule, at FAR 17.802, which says merely that reverse auctions may be appropriate when there is a competitive marketplace, multiple offerors are available, and the nature of the goods or services being acquired (e.g., with clearly defined specifications and less complex requirements) encourages an “iterative” bidding process. This sparse guidance both under-encourages reverse auctions (unlike the DLA rule, for example, it does not presumptively call for contracting officers to consider reverse auctions) and over-encourages reverse auctions (which may be inappropriate, for example, even in competitive, non-complex markets if a reverse auction could shatter a delicate supply chain).
• Guidance on How to Design Reverse Auctions: Like the general rule — and unlike the Defense Logistics Agency and many other governments and institutions, discussed above — the proposed rule does not provide any guidance on how to design reverse auctions, though it notes that reverse auctions may be appropriate for smaller construction services procurements. This leaves open questions of how to address the risks of unrealistically (abnormally) low bids (the “bidder’s curse”), the risks of collusion if bidders can see each others’ bids during an auction, and the risks if contracting officials defer responsibility (qualification) decisions until the end of a reverse auction, when officials will face institutional pressures simply to accept the lowest bidder.
• Guidance on Alternative Auction Structures: The proposed rule barring reverse auctions for construction services is in keeping with other governments, such as in Canada and the United Kingdom, where serious concerns have been raised about the use of reverse auctions for construction works. Then-Representative Carolyn Maloney (D-NY), a sponsor of the legislation that underlay the proposed rule, made clear in her comments on introducing the bill that while reverse auctions may be useful in other commercial markets, reverse auctions can be “problematic” for complex design and construction services, because while “the lowest price is often the goal for standardized goods and services, it is not the only factor that should be considered for these unique projects.” Quality, Rep. Maloney emphasized, “is also an important evaluation factor, especially for complex services, like design-build contracts for major public buildings or works.” The specter of low-price reverse auctions for construction services thus clearly drove the legislation and its implementing rule. What the proposed rule (and the final, general rule) did not recognize, however, is that reverse auctions can be structured to take quality into account, for example by considering bidders’ relative quality first, and then factoring those quality ratings into a price-based auction. In the European Union, although recital (67) to EU Procurement Directive 2014/24/EU (the most commonly used procurement directive) cautions that “electronic auctions are typically not suitable for certain public works contracts and certain public service contracts having as their subject matter intellectual performances, such as the design of works,” Article 35, paragraphs 3 and 6 of the directive otherwise allow for these types of quality-and-price reverse auctions.
• Assessment of Costs and Benefits: Like the general rule, the proposed rule asserts that it is not a “significant” rule and so no cost-benefit analysis is required as part of the rulemaking process. The proposed rule concedes, however, that the federal government “does not currently collect data on the number of awards that utilized a reverse auction” — which means that any assessment of the potential impact of the rule is necessarily speculative. As with the final rule discussed above, a cost-benefit analysis would allow the government to assess and benchmark the potential prospective savings (and costs) of reverse auctions, and perhaps to acknowledge the substantial savings lost by not having rules in place to govern reverse auctions for the last 20 years.

Resources

Federal Rules

Proposed Rule Covering All Reverse Auctions: Federal Acquisition Regulation: Reverse Auction Guidance, 85 Fed. Reg. 78815 (Dec. 7, 2020).

Final Rule Covering All Reverse Auctions: Federal Acquisition Regulation: Reverse Auction Guidance, 89 Fed. Reg. 61327 (July 30, 2024), effective August 29, 2024. For the revised Federal Acquisition Regulation see FAR Subpart 17.8, Reverse Auctions, which in FAR 17.805 cross-references the standard contract clauses used for reverse auctions at FAR 52.217-10 through -12.

Proposed Rule Barring Reverse Auctions for Complex Construction Services: Federal Acquisition Regulation: Prohibition on the Use of Reverse Auctions for Complex, Specialized, or Substantial Design and Construction Services, 89 Fed. Reg. 70157 (Aug. 29, 2024).

Public Reports

Government Accountability Office (GAO), Report No. GAO-14-108, Reverse Auctions: Guidance is Needed to Maximize Competition and Achieve Cost Savings (Dec. 2013)

Government Accountability Office, Report No. GAO-18-446, Reverse Actions: Additional Guidance Could Help Increase Benefits and Reduce Fees (July 2018)

Office of Federal Procurement Policy Memorandum, “Effective Use of Reverse Auctions” (June 1, 2015)

Organisation for Economic Co-Operation and Development, Improving Effective Public Procurement: Fighting Collusion and Corruption: Background Note, DAF/COMP/LACF(2012)15 (Sept. 2012)

Organisation for Economic Co-operation and Development (OECD), Government at a Glance (2013)

Articles

Lawrence M. Ausubel & Peter Cramton, “Dynamic Auctions in Procurement” (assessing alternative models for reverse auctions), in Handbook of Procurement (Nicola Dimitri, Gustavo Piga & Giancarlo Spagnolo, eds., Cambridge University Press, 2006).

Stewart Beall, Phillip L. Carter, Thomas Germer, Thomas Hendrick, Sandy Jap, Lutz Kaufmann & Debbie Maciejewski, The Role of Reverse Auctions in Strategic Sourcing (2003) (lessons learned in the use of reverse auctions in industry)

Alexandre Borges de Oliveira, Abdoulaye Fabregas & Mihaly Fazekas, Auction Length and Prices: Evidence from Random Auction Closing in Brazil (World Bank 2022)

Nicolas Fugger, Elena Katok & Achim Wambach, Collusion in Dynamic Buyer-Determined Reverse Auctions, 62 Management Science 518 (Feb. 2016), http://dx.doi.org/10.1287/mnsc.2014.2142.

Tomas Hanak, Ivan Marovic & Niksa Jajac, Effect of Electronic Reverse Auctions on Competition and Abnormally Low Bids in Public Construction Procurement, Tehnicki vjesnik – Technical Gazette 25(S1) (May 2018), DOI:10.17559/TV-20160212144243.

James Nagle, A History of Government Contracting (3d ed. 2012) (history of U.S. federal procurement), available at https://scholarship.law.gwu.edu/history_gov_contracting/.

Ralph C. Nash & John Cibinic, Online Procurement Services: Reverse Auctions Too, 18 No. 7 Nash & Cibinic Rep. ¶ 29 (July 2004) (calling for governmentwide guidance).

National Association of State Procurement Officials (NASPO), Five Things You Should Know About Reverse Auctions (2019)

Ohad Soudry, Promoting economy: electronic reverse auctions under the EC directives on public procurement, Journal of Public Procurement, Vol. 4 No. 3, pp. 340-374. https://doi.org/10.1108/JOPP-04-03-2004-B002.

Shaw Pittman, Federal E-Commerce: Reverse Auctions (Sept. 2000) (“The drafters of the FAR now indicate that they will examine what regulations on reverse auctions need to be crafted.”)

Ken Steiglitz, “Chapter One. English and Vickrey Auctions” in Snipers, Shills, and Sharks: eBay and Human Behavior (Princeton University Press 2007)

Daniel B. Volk, “A Principles-Oriented Approach to Regulating Reverse Auctions,” 37 Pub. Cont. L.J. 127 (2007) (noting, at page 135, that federal reverse auctions often proceeded in two stages: a price auction which, when complete, would not bind the agency, which could still purchase from a higher-quality, higher-priced bidder), available at http://www.jstor.org/stable/25755444

Don Wallace, Christopher Yukins & Jason Matechak, Uncitral Model Law: Reforming Electronic Procurement, Reverse Auctions, and Framework Contracts, available at https://ssrn.com/abstract=711401

E.G. Wolfstetter, Outsourcing via reverse auction with a built-in menu of change orders. Bulletin of Economic Research, 75, 202–208. https://doi.org/10.1111/boer.12350

David Wyld, Current Research on Reverse Auctions: Part II — Implementation Issues Associated with Putting Competitive Bidding to Work, 2 Int’l J. Managing Value & Supply Chains 1 (Dec. 2011) (page 6: “in a full visibility auction [where vendors can see each others’ prices during the auction], there is a perception among suppliers that the process is more susceptible to bidding collusion”).

Xiaodan Zhang, Ivan Ka Wai Lai, Jin Fu and Huajun Tang, Hazard Analysis of Bidder Collusion in Reverse Auctions Based on Petri Nets, in IEEE Access, vol. 8, pp. 89546-89561, 2020, doi: 10.1109/ACCESS.2020.2989346.

Christopher Yukins & Don Wallace, UNCITRAL Considers Electronic Reverse Auctions, as Comparative Public Procurement Comes of Age in the U.S. (2006).