Reverse all auctions, full steam ahead

There is one main theme here, and a case study that gave rise to it. The main theme is the light shown on the so-called "reverse auction" fad. 

The business about the FedBid business is just to add a bit of salacious spice to the otherwise drab story line. Most procurement story lines are drab. But that doesn't diminish their importance, as this blawg hopes to point out.

First, the juicy bits:

Air Force moves to debar FedBid

On Jan. 26, the Air Force suspended and moved to debar FedBid from providing reverse auctions for federal agencies contracts, on the grounds that there was "adequate evidence" of a "lack of business honesty or integrity" at the company.

Most recently, the company split its federal auction and commercial operations into separate companies. FedBid founder and former chief executive Ali Saadat is now head of the private sector business, but remains chairman of the FedBid board, while Jordan was named CEO of the federal side.

Saadat was also suspended by the Air Force while the service considers whether to debar the company.

In the immediate wake of the report, the company's board of directors appointed a special committee to determine any response or actions the company should take related to the report. That committee retained the law firm Arnold & Porter as outside counsel to conduct an independent review of company employees' actions. That review is said to have found "no legal wrongdoing by FedBid or its employees," though it did raise some concerns about how the company's internal culture dealt with third-party relationships.

So far, this is not that juicy. Just how juicy is a "cultural" problem, anyway? Blaming the culture means no one is at fault. Can't convict a culture, can we?

So, read on.

The real dirt:

FedBid barred from new government contracts after watchdog report

The federal government has barred a fast-growing Northern Virginia contractor with deep ties to the Washington establishment from winning new work because of “conduct indicating a lack of business honesty or integrity.”

Last year, the company was the subject of an investigation by the Veterans Affairs inspector general, which found that an agency contracting official helped steer a contract to the company. When a more senior VA official became concerned about the contract and put a hold on it, FedBid mounted an aggressive campaign to have the moratorium overturned, the IG found. It concluded that FedBid executives were part of an effort to discredit the VA official who put the hold on the contract and to “unduly influence VA decision makers.”

“Need to assassinate his character and discredit him,” read an e-mail from a top executive in 2012, according to the IG. The firm also vowed to “unleash the hounds” and “take off the gloves” in its “storm the castle” campaign to win back the business.

The theme -- Reverse Auctions:

Continuing with the WaPo story immediately above:

FedBid has built a thriving business over the past decade helping the government hold what are known as reverse auctions. Through FedBid Web sites, federal contracting officials post solicitations for items such as office supplies, computer equipment or furniture. Companies submit bids for the work and are told through the site whether they are the lowest bidder. If they aren’t the lowest bidder, they can try again with a reduced price, which ultimately should save taxpayer money.

The government’s reliance on reverse auctions has recently exploded, with FedBid leading the way. The company said that from 2007 to last year, the federal government made 131,623 awards through FedBid, totaling $8.2 billion, which represented nearly $1 billion in savings. In 2013 alone, FedBid said, $1.8 billion in government contracts were awarded through its system.

VA rips FedBid, questions value of reverse auctions

FedBid's claims of sizable savings generated by the reverse auctions the firm provides for federal contractors are overblown and misleading, according to the Department of Veterans Affairs' Office of Inspector General. Furthermore, Maureen Regan, counselor to VA's IG, told FCW that reverse auctions can unduly complicate the contracting process and limit competition by squeezing out potential vendors.

What Regan told FCW echoed a second IG report that says reverse auctions can inadvertently derail federal efforts to properly record contract documentation.

More significant, however, was the assertion by the OIG that the main purpose of reverse auctions -- to save money -- can be negated by multiple factors, including FedBid's fees and the Industrial Funding Fee customers paid to cover the General Services Administration's operation of the Federal Supply Schedules program.

Furthermore, the formula that reverse auction providers use to calculate savings -- subtracting the final award price from the "independent government cost estimate" -- was not reliable, the OIG argued, in part because of frequent mismatches between that independent estimate (which is required by VA policy) and the target price set by agency contracting officers. In addition, contract prices represent funds obligated at the time a contract was awarded, but many purchases were not fully funded at that time, resulting in inflation of the reported savings.

"We are enormously proud of the role that FedBid is playing, and will continue to play, in facilitating millions in cost savings for U.S. taxpayers," a FedBid spokesperson said in an emailed statement -- noting that "last year alone," the FedBid marketplace "enabled an estimated $160 million in savings for the government and taxpayers."

Regan, however, asserted that reverse auctions contain other costs, including GSA's Industrial Funding Fee, that might not be readily apparent to agencies.

The federal contracting schedules offer baseline pricing that agencies can use to negotiate lower costs, she said, adding that "it's not uncommon to get price reductions on schedule items," often by conducting a limited competition among schedule vendors. Regan said the OIG has had complaints from vendors, including a substantial number from health care supply companies, that FedBid's reverse auctions set up a "pay-to-play" system that is cost-prohibitive.

At the same time, other reverse auction vehicles might be getting short shrift. Regan said GSA offers services that comply with federal contract documentation requirements and include items on federal schedules.

Regan recommends that agencies "look at contracts and how people are buying things" before committing to the approach. "Reverse auctions were something of a fad in the 1990s," she said. "Everyone decided at the time they weren't really worth it."

Review of the Veterans Health Administration’s Use of Reverse Auction Acquisitions (RAs)

We found that priority sources such as the FSS (Federal Supply Schedule) are not utilized as required by VA policy and VHA’s SOP (Standard Operating Procedure) for all RAs.  Further, when RAs are used for FS S purchases, VHA is paying the Industrial Funding Fee (IFF) in addition to the FedBid RA fee when FedBid’s RA fee is not waived by FedBid. 

We found instances where the CO would identify an FSS source for the required products; however the Invitation for Bid (IFB) would subsequently be issued for open market bids. These situations occurred without any documentation in the contract file to justify the use of other than priority sources. In addition, if the awardee is an FSS vendor, these sales may be considered non-FSS sales which deprive the Government of the IFF.

We found that the reported claimed savings, computed by subtracting the final award price from the target price, was not reliable in determining the success of using RAs for several reasons. 

First, although the target price set by the CO should be equal to the Independent Government Estimate (IGE) as stated in VA policy and the implementing VHA SOP, we found that the target price was not always equal to the IGE, and that the basis for the target price was often not documented within the contract file.

Second, we found that the award price represented funds obligated at award and that many buys were not fully funded at the time of award, thereby inflating the reported savings. Lastly, we found that the target price could be changed by the CO during an active RA via a reposting of the IFB. Such changes were not always documented and justified within the eCMS contract file.

We also determined that COs run the risk of acquiring gray market items through RAs, because sellers are only required to self-certify that they are authorized distributors of the procured items. We found VHA was procuring items from unauthorized distributors through the use of RAs.