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Hon. Mike Coffman

The Honorable Mike Coffman, Subcommittee on Oversight and Investigations

Good morning.  I would like to welcome everyone to today’s joint hearing titled “Contracting Away Accountability – Reverse Auctions in Federal Agency Acquisitions.”

I am pleased to host Chairman Richard Hanna and his fellow members of the Subcommittee on Contracting and Workforce for the House Committee on Small Business, for this joint hearing.

Reverse auctions are a contracting process used by the Federal government since the late 1990s theoretically to promote competition in the acquisition of goods and services.   In a reverse auction, a buyer solicits bids from multiple sellers, in contrast to a standard auction where a seller solicits bids from multiple bidders. 

Over the course of a two year investigation by my subcommittee, it became readily apparent that the use of reverse auctions by the VA has been problematic casting doubt on the extent of competition and the claims of cost savings.  In a report issued two days ago, the Government Accountability Office (GAO) substantiated deficiencies with reverse auctions as used by VA.  The House Committee on Small Business Subcommittee on Contracting and Workforce has similar issues more broadly with reverse auctions as a procurement method at other Federal agencies. 

It is important to note that this hearing is the product of a lengthy investigation into the inappropriate use of reverse auctions by federal agencies.  We will refer to a reverse auction provider named FedBid throughout the hearing due to its use by many federal agencies and repeated reference in the GAO report, but our focus will be entirely on problems within the government, not with the operations of a private contractor. 

VA’s sole reverse auction contractor is FedBid.  In choosing FedBid to conduct its reverse auctions, VA did not solicit offers from any other contractors, contradicting the spirit of the Competition in Contracting Act of 1984, which requires that agencies fully compete contracts except in limited circumstances.  Of the $828 million in federal agency reverse auctions awarded in FY 2012, GAO reported that 99% were conducted by the same contractor, FedBid, and VA awarded the greatest dollar value of these – over $200 million. 

VA has signed three contracts with FedBid, each contract containing an action obligation of just one dollar.  FedBid’s real compensation comes from the fee (up to 3 percent) it adds onto the final award price of vendor contracts.  Accordingly, some advocates have concluded from this arrangement that FedBid’s service is free to the government.  However, it is obvious that when FedBid’s fee is tacked onto the final award price of a contract, the seller is effectively passing on the fee to the government. 

Of the $1.7 billion in federal and commercial auctions conducted by FedBid in FY 2013, FedBid claims to have saved its customers $159 million – savings of about 8.5 percent, including fees.  GAO has cautioned that all information related to fees and savings is provided by FedBid itself.  According to FedBid, it calculates its savings against the government’s estimated target price.  Unfortunately, this calculation assumes the government is thoroughly researching its cost estimates, when for commercial items, the government frequently just reviews list prices.  As such, for commercial items, simply relying on published list prices is unlikely to result in the best price since volume discounts are frequently available. Significantly, until April 2012, VA did not attempt any independent assessment of those savings, although guidance issued by VA now requires independent confirmation. 

In theory, reverse auctions are intended to promote competition.  However, in practice, this competition is too often absent. According to GAO, in FY 2012, over one-third of reverse auctions conducted by FedBid for federal agencies had no interactive bidding, where vendors engage in multiple rounds of bidding against each other to drive prices lower.  In 27 percent of auctions, there was only one bidder.  Further, in eight percent there were multiple bidders but only one round of offers.   Agencies paid $3.9 million in fees for these procurement services.  Perhaps even more problematic is the fact that for over 3,600 reverse auctions, $1.7 million in fees was paid even though only one offer was received from one bidder – thus the government paid extra to award a sole source contract. 

Another issue raised is whether VA contract specialists have delegated inherently governmental functions to FedBid.  According to the FAR, an action should be undertaken only by a federal employee if it could “[b]ind the United States to take or not to take some action by contract,” “[d]etermine, protect, and advance United States . . . interests by contract management,” or “[e]xert ultimate control over the acquisition, use, or disposition” of property or funds.  While FedBid does not itself award contracts, it is in a position of exerting significant influence on who gets the award.  For example, some vendors have complained that when they have posed a question to a VA contract specialist, they are being refused and referred to FedBid instead.  In this regard, it is also significant that FedBid keeps independent past performance records on vendors which it shares with the government, including information regarding the creditworthiness of vendors, but does not share this information with the vendors.  In some cases, it appears that the only function of the VA contractor is to sign off on an actual award. 

VA has begun reconsidering the circumstances in which it conducts reverse auction.  In fact, in March 2012, Jan Frye, VA Deputy Assistant Secretary for the Office of Acquisitions and Logistics, suspended all use of FedBid due to a “‘ground swell’ of complaints from VA suppliers, . . . at least one protest, potential increased costs, small-business program anomalies, and ‘violations of our VA contract hierarchy.”  The suspension in 2012 lasted only one month, because use of reverse auctions was reinstated due to significant political pressure. We have just been notified that VA’s use of reverse auctions again has been suspended.

Clearly, the use of reverse auctions is a matter of procurement policy sorely in need of additional guidance.  GAO has made recommendations in this regard that OMB has indicated agreement. However, follow through is necessary. 

Two additional points should be included.  Reverse auctions may be appropriate for best price but not best value contract awards.  Second, the Army Corps of Engineers has repeatedly found the use of reverse auctions for construction-related contracts and services to be improper.  Given the VA’s horrible track record with regard to major construction projects, I wholeheartedly agree that VA should not do anything to make matters worse.