In reverse actions, also knows as "online auctions," " e-sourcing," and "e-procurement," buyers use the Web to drive prices down. If this concept is new to you, it might sound weird. An auction might be held after a company goes bankrupt and sells off its possessions, including desks and computers. Where does "reverse" come into play?
Let's say a manufacturer must buy 50,000 pounds of sand every week. The sand must meet specifications, but it’s really a commodity. The company uses a reverse auction to select a sand supplier, inviting bidders that include companies it normally buys from and other suppliers, perhaps foreign ones, to compete online.
Business publications laud such e-sourcing for helping buyers uncover previously unused supply sources and for driving costs down. For more details go to www.freemarkets.com—a leading purveyor of reverse auctions––and www.buyers.gov links you to a "Re-verse Auction User’s Guide" with a primer on how federal buyers can use this service.
How they work
Reverse auctions often use a minimum decrement. Ay it’s $5,000. If a standing bid is $30,000, the next bid would have to be $25,000 or less. There can be a time limit— sometimes only 90 minutes. Bidders have a time limit of up to three minutes to submit a bid lower than the one on the table.
Auctions go into "overtime" when a losing bidder beats the lowest bid submitted within the time limit. Other bidders can also extend the "overtime" session by going even lower. In some cases, reverse auctions reportedly can be extended by as much as an hour with a succession of bidders each lowering the price submitted minutes earlier.
Here’s a quick review of the facts on re-verse auctions in your business:
• The United Kingdom’s Electrical Contractors Association has lately issued strong public denunciations of this approach to buying construction services.
• Major companies buy this way. General Electric reportedly conducts as many as 2,000 reverse auctions a week. Emerson Electric’s goal is to buy 60 percent of its $5 billion in material annually via auction.
• Governments have, too. In a case made famous two years ago in a Building Design & Construction magazine report, a state government telecommunications contract was bid via reverse auction—with the final price coming in stunningly low.
• The Associated General Contractors (AGC) discussed reverse auctions at its mid-year meeting in September, according to a report in Engineering News-Record. "If a reverse auction is going to be used, we need to preserve the integrity of the bid process and pre-vent the bid-shopping aspects."
• AGC’s Greater Detroit Chapter has formed an industry committee on online auctions.
It doesn’t always work well
The process does not always work. A NECA-member contractor in Michigan—where the auto manufacturers have been reverse auction leaders—said the problem isn’t the technology, but bid arrangements. Some contractors now refuse to participate, he reports . Further, the auto companies, having had poor experiences with reverse auctions, may now be moving away from them.
" Construction is just too hard," he said.
"The problem comes because the documents (concerning a project) are just not clear. In bidding a construction job off-line, we and every other contractor will typically put in alternates and exceptions.
"That same thing is happening with re-verse auctions. What they have found out is that the ‘number’ they get in the reverse auction for a construction project means nothing," The Michigan contractor added. "They bring in the low bidder, and it turns out he’s got some qualifications on that bid including substitutions and alternates."
Electrical distributors have reported the same thing. One distributor, anonymously quoted recently in TED magazine, noted that an auction held by a major electrical materials buyer "tied up one of our people for two weeks." For several weeks after the bid was held, nothing happened. Why? "In our opinion, they weren’t well-prepared to hold this auction," the distributor said. "As a result, they ended up getting bad data."
AGC’s Detroit committee included in a recent meeting seven recommendations on reverse auctions automakers. No. 1 is "Contractors should know in advance the scope of the work— what’s included and what’s not." That’s fairly revealing advice.
No. 3: "Online bidding can serve as a screening process. Award the bid based on the hard copy presented afterward. The sharing of real intellectual capital has to be offline."
Then there ’s No. 7: "Allow more than three minutes for a bidder to respond to the most recent low bid."
Since it established "the low bid" as a way to buy its services, the construction industry can’t be surprised that some customers have sought to see just how low contractors will go. Note also that contractors that agree to re-verse auction contracts—and those that buy construction through this process—seem to get what they pay for. And perhaps are also paying for what they get. EC
SALIMANDO is a Vienna, Va.-based freelance writer and frequent contributor to ELECTRICAL CONTRACTOR. He can be reached at firstname.lastname@example.org.