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Submission For The Record of National Electrical Contractors AssociationNational Electrical Contractors Association

The National Electrical Contractors Association (NECA) appreciates the opportunity to submit a statement for the record ahead of the joint hearing entitled “Contracting Away Accountability – Reverse Auctions in Federal Agency Acquisitions.” NECA commends the Committees for holding a joint hearing conducting oversight over this important subject to examine the effects of this procurement tool and the negative effect its utilization will have in the procurement of construction services.

Over a decade ago, advances in high-speed internet computer technology led to the introductory use of a new method of construction contract bidding – the internet reverse auction. Under this technique bidders send relevant project data, specifications, projected construction timetables and price. Owners would ask bidders to later gather around computers at a set time and compete for work by further whittling down their bid against the other competitors. The lowest bid is posted for all bidders to see – but the name of the current lowest bidder is withheld. The bidding continues with additional rounds of bidding. After each round of bidding the new low price is posted for all bidders to see. This continues until the lowest price is reached, at which time the bidding is closed and the winner declared.

This scenario paints a clear picture of exactly why NECA and virtually every element of the construction industry has been united in its opposition to misguided attempts by federal agencies to treat construction as a commodity on grounds of efficiency or presumed cost savings -- in particular, the use of internet reverse auctions for the procurement of construction services. Construction projects are not commercial commodities, mass-produced in a factory. The differences between even seemingly identical projects can be enormous.

We strongly urge the Department of Veterans Affairs, as well as all of the federal construction agencies, to refrain from using internet reverse auctions or any other procurement tool that would treat construction as a commercial commodity. In fact, we urge Congress and the Administration to revise the Federal Acquisition Regulation (FAR) to expressly prohibit the use of reverse auctions for the procurement of construction-related services. This change in procurement policy would clearly establish that construction is not a commercial item, or commodity, and that Federal agencies shall not have the authority to procure construction-related services by reverse auction.

 

Reverse Auctions Do Not Serve the Interests of Owners or Construction Contractors Well

Reverse auctions have proven to be an unreliable procurement tool for the selection of construction contractors, specialty contractors, subcontractors, and suppliers. Software vendors promoting reverse auctions have not presented persuasive evidence that reverse auctions generate savings in the procurement of construction or provide benefits of “best value” outweighing currently recognized selection procedures for construction contractors. However, industry experience demonstrates that reverse auctions seldom provide benefits comparable to currently recognized selection procedures for construction contractors.

As we have previously stated, the procurement of construction services cannot be treated like procurement of mass-produced commodities. Unfortunately, that is what reverse auctions accomplish. Every construction project and contract is unique and requires special knowledge, skill and training. Each project design and location is comprised of unique conditions that have to be met in a specific climate and location. Reverse auctions do not allow consideration of those variables.

Electrical contractors spend substantial time, money and effort in preparing their bids. The price they submit is not arbitrary, but based upon the best prices they have been able to obtain from any subcontractors and suppliers they may utilize and their best estimate of the price at which they can bring in a project and still make a reasonable profit. Reverse auctions do not allow for consideration of those very important differences.

For the owner, reverse auctions never guarantee the lowest price. Vendors claim that reverse auctions significantly reduce the cost of construction and save substantial amounts of time.  In the context of construction, most of these claims have not been proven and the reverse auction processes do not lower the ultimate cost of construction. In reverse auctions, each bidder recognizes that he or she will have the option to provide successive bids as the auction progresses. As a result, a bidder has little incentive to offer its best and subsequently may never offer its lowest price. Ultimately, best-price sealed bidding is still the most effective way to obtain the highest quality construction at the lowest price. Sealed bidding ensures that competitors have only one opportunity to price the work, encouraging each bidder to present his or her best price.

Where price is not the sole determinant, owners increasingly have utilized processes focused on negotiation to expand communication between the owner and prospective contractors for the purpose of discussing selection criteria such as costs, past performance and unique needs. Unfortunately, reverse auctions do not allow for a contract to be awarded based on “best value,” but on driving the price to an absolute minimum and awarding the contract to the lowest bidder.  This is a poor use of taxpayers’ money. Reverse auctions actually deprive taxpayers the full benefits of fair competition, quality construction and consideration of life-cycle costs. Reducing one’s original bid price (as a contractor is forced to do when someone comes in with a lower bid during the reverse auction process) cheats the government by creating cost-value disparity in the finished product.  Reducing a bid price requires cutting costs in the areas of materials and/or labor, which is significant in determining a structure’s overall quality and value. Reverse auctions do not promote communication between the parties, they promote a dynamic in which parties repeatedly attempt to best each other’s prices. As a result, reverse auctions do not offer owners a good way to evaluate non-price factors.

 

Reverse Auctions Upend Well Established Bidding Practices

Reverse auctions create an environment in which bid discipline is critical, yet difficult to maintain. The competitors have to deal with multiple rounds of bidding, all in quick succession. The process may move too quickly for competitors to accurately reassess either their costs or the way they would actually do the work. If competitors act rashly and bid imprudently, the results may be detrimental to everyone, including the owner. Imprudent bidding may lead to performance and financial problems for owners and successful bidders, which may have the effect of increasing the ultimate cost of construction as well as the cost of operating and maintaining the structure. Some contractors who have learned to “game” reverse auctions inflate their initial bids to allow room to move their price downward. Should other bidders do the same, owners may actually end up paying more than they would have under a sealed bid system. In fact, responsible estimating practices dissolve during the reverse auction process and drives out the most responsible bidders in favor of those who are willing to cut corners and/or squeeze subcontractors to get at a lower price.

It is clear that the sealed bidding process ensures that the successful bidder is both responsive and responsible. The sealed bid procurement process was established to ensure integrity in the award of construction contracts where price is the sole determinant. In a sealed bid, each bid is evaluated through the use of objective criteria that measure responsiveness of the bid to the owner’s articulated requirements and the responsibility of the bidder and ensuring fairness and value for the owner. Reverse auctions ignore and upend this paradigm. The pressure and pace of the auction environment removes any assurance that initial and subsequent bids are responsive and material to the owner’s articulated requirements. These auctions expose owners to the real possibility that they may award contracts to what would otherwise be non-responsive bidders.  In addition, reverse auctions ignore the protections of the sealed bid procurement’s laws, regulations and years of precedent that address these critical factors and ensure the integrity of the process.

 

Federal Policy Has Not Supported Reverse Auctions for Construction Services

While reverse auctions may demonstrate some value to the government in the purchase of commodities, no public or private studies have presented persuasive evidence that reverse auctions will generate savings in the procurement of construction when compared to currently recognized selection procedures for construction contractors. Upon the advent of the use of reverse auctions, the federal government took careful and decisive action to study this critical issue. First, the Office of Federal Procurement Policy issued a policy memorandum on July 3, 2003 recognizing that construction services cannot be equated to commodities or manufactured goods when it acknowledged, “new construction projects and complex alterations and repairs…involve a high degree of variability.” The policy went on to state unequivocally that “FAR Part 12, which addresses the acquisition of commercial items…should rarely, if ever, be used for new construction acquisitions or non-routine alteration and repair services.” Second, the Department of Defense tasked the U.S. Army Corps of Engineers (USACE) to examine the use of reverse auctions. A subsequent report issued by USACE in 2004 found that there was no proof that reverse auctions provide any significant or marginal edge in savings over the sealed bid process for construction services for the following reasons:

  • There was no proof that a consistent, reliable and valid measurement method for projecting savings could be established from reverse auctioning;
  • Absent any specific price history for an identical project under identical conditions,  there was no practical way to measure or compare any projected savings by reverse auctions over sealed bidding; and,
  • There was no proof reverse auctions provided any significant or marginal savings in comparison to the government estimate.

Finally, NECA argues that the use of reverse auctions with respect to construction services may violate procurement laws at the federal and state level. The FAR, as well as other current procurement statutes reflect a clear policy of not disclosing contractor price information. This is especially true once one realizes that price disclosure is a core characteristic of the reverse auction process and violates current federal procurement law.

 

Concluding Remarks

It is for these reasons we reiterate our recommendation that Congress and the Administration take action and implement what we believe is an appropriate and responsible solution that will meet the acquisition needs of the federal government. The federal agencies need flexibility in the acquisition process and should have all tools available to them to allow for optimized savings. While reverse auctions can be a tool in the acquisition toolbox for mass produced commodities, it is clear that they should not be utilized for the acquisition of construction services. Congress and the Administration should finally codify this policy recommendation and we hope you will support this change. Lastly, we appreciate the time the Committees have taken to examine this complex issue and offer our assistance and expertise to help this process move forward.