Reverse Auctions, by Corinne Maddox, CCM, CFM
Referring to reverse auctions, someone once commented, "We saved 65%...I was a hero until I
was fired." This reflects the potential benefits but also the risks of reverse auctions. In a reverse
auction, the buyer typically develops a scope of work and pre-qualifies companies to participate in
a scheduled bidding session. Bids are submitted on-line and bidding occurs until all but one
bidder has dropped out. The key to the success of a reverse auction is the scope of work. It must
be very very well thought out and documented. Bidders will not include any elements not
mentioned in the scope of work, no matter how obvious, and they will take advantage of all
ambiguities to arrive at the lowest possible bid.
Most owner bid documents are subjective and full of opportunities to cut corners. This results in
unacceptable quality and price increases. For example, on a recent reverse auction, the owner
sought hourly rates for project managers for an estimated duration. A minimal specification of
"senior project manager" was 5 years of minimum experience. This led bidders who would
normally provide a qualified project manager with 15-20 years of similar experience to include an
untrained, low paid person with 5 years of total work experience and no employment benefits.
After award, changing to a more qualified person would increase the price. Ambiguity in the
duration also allowed the opportunity for large price adjustments, and unstated support
requirements allowed the opportunity to charge extra for cell phones, computers, software,
supplies, etc. In general, subjective services are not good candidates for reverse auctions
because they are difficult to define. The best candidates are basic commodities with an exact
quantity and where quality is not critical. Even with a product like paper towels, it is very difficult to
specify quality, quantity and conditions in a generic, precise manner. After award, owners should
expect to learn of limitations, exceptions, and assumptions made by the bidder that affect the
quality and price. That is how that company became the successful low bidder.