More than a decade ago, Bill Gates certainly foresaw the future by saying “The Internet is becoming the town square for the global village of tomorrow.” Accordingly, a particular kind of electronic procedure used for public purchase of goods and/or services has become one of the major centers of interest. Reverse auctions (“RA”) system raised indeed both curiosity and enthusiasm because of its unique way of proceeding. Unlike a regular auction system like eBay where auctioneers must raise their price in order to acquire a certain good from a seller, in a reverse auction system, the procuring entity that organizes the auction is the buyer and sets an opening price and the companies then compete against each other in order to lower the price of their goods or services, the winner being the bidder who promises to charge the lowest price.
The use of reverse auctions has increased dramatically over the years at both federal and states levels but they are not implemented equally throughout the United States. At the State level, the regulation of reverse auctions is left at the discretion of the States as per the U.S. Constitution. Consequently, several states don’t have a regulation dealing with reverse auctions (around 20 out of 50) but it does not mean that they don’t use reverse auctions in practice (e.g.: Pennsylvania does not have a regulation and saved $7 million by using reverse auctions for electricity in 2000).
At the Federal Level, the use of Reverse Auctions permitted 28.9% savings on the purchase of goods by the Navy. However, there is a clear lack of guidance as the Federal Acquisition Regulation does not address reverse auctions. Such auctions were at first prohibited by the Federal Acquisition Regulation, especially in the field of competitive negotiations, but since the prohibition was erased by a 1997 rewrite of the FAR, nothing further was added about reverse auctions. Moreover, there is no definition of the term “reverse auction” in the FAR although a failed attempt was made in the Defense Authorization Act for FY 2006.
At the State level, reverse auctions are usually well defined such as in Colorado: “Competitive reverse auction means a computer aided bidding process through which a pre-established group of vendors may post bids for a defined period of time and may change their bids as desired during the bid period.” Among the 30 State regulations addressing reverse auctions, there are several common elements of definitions:
i. The use of Internet. Some states have online interactive systems such as « BIDS » in Colorado or « RIVIP » in Rhode Island. The Internet brings many benefits as compared to a traditional physical auction. An online reverse auction is considered cheaper and more efficient since the auctioneers can receive immediate feedback on their bids and it permits international auctioneers to take part to the process since they don’t have to move to the place where the auction takes place. Furthermore, in a traditional auction, bidders face each other while Internet permits the bidders to be anonymous.
ii. What is being procured? Most states use reverse auctions for the purchase of goods and services excluding systematically construction contracts. Some states use RA exclusively for goods in general excluding services. Some states are even more precise by using RA for a certain type of goods: commodities such as printers or office furniture where there is a “low item differentiation” and thus a lower risk on the final product. The exclusion of services can be justified by the fact that services may be more complex to acquire and the preparatory work must be very detailed so that everything is laid out in the invitation for bids. Finally some states allow RA for services but they exclude “professional services” which can be defined for instance as “services provided (…) by a person or business, acting as an independent contractor, qualified by education, experience, and technical ability” (Illinois Procurement Code).
iii. A competition between vendors on a real-time basis;
iv. The bidders prices are disclosed so each bidder can see what their competitors’ prices are;
v. Bidders remain anonymous in order to avoid communication between them and possible fraudulent agreements on prices.
Thus, a harmonized definition can be drawn from these common elements given by the different state regulations.