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House Bill Jeopardizes Small Business “Reverse Auctions”

by Sarah Schauerte

Reverse auctions may be prohibited for many small business procurements under a provision of the National Defense Authorization Act of 2015, which was passed by the House of Representatives this summer.

In contracting, many government agencies use “reverse auctions – ” where the lowest bid wins, rather than the highest. Theoretically, this saves money for taxpayers by encouraging businesses to offer the lowest possible price. However, this practice also makes a good deal of money for FedBid, which collects fees from the winning bidders who, in turn, pass those costs to the government.

Reverse auctions, while favored by some, have attracted some detractors in recent years. These individuals argue that reverse auctions prompt companies to submit unrealistically low bids to outmaneuver business rivals. Also, awarding contractors based on price alone means that the government may end up with inferior products or services. Further, the GAO has warned that reverse auctions are less transparent than traditional contracting practices.

Under the new NDAA, reverse auctions would be disallowed when the government seeks to award a “covered contract,” so long as the contract is suitable for small businesses or is set aside under a small business preference program such as SDVOSB or HubZone. The NDAA defines a “covered contract” as including a contract “for services, including design and construction services” and a contract “for goods, in which the technical qualifications of the offeror constitute part of the basis of the award.” This definition is so broad that it applies to a large number of government contracts.

In the event a contract is “covered,” reverse auctions may not be used if the contract “is suitable for award to a small business concern,” or if the contract is awarded as an 8(a), WOSB, HUBZone, or SDVOSB-set asides (including those set aside under the VA’s Veterans First Contracting Program). Even for “covered contract” awarded on an unrestricted basis, the NDAA states that the agency cannot award a covered contract using a reverse auction “if only one offer is received or if offerors do not have the ability to submit revised bids throughout the course of the auction.”

This House-passed NDAA would greatly limit the use of reverse auctions in small business contracting. The Senate is currently considering its own version of the 2015 NDAA, which does not appear to contain similar restrictions. Because both houses of Congress must eventually pass a piece of identical legislation for it to become law, this means that reverse auctions may be safe for the time being.

For relevant, entertaining viewing, click this, which links to the classic Schoolhouse Rock video of how a bill becomes a law. You’ve watched it before in Civics or Government class, and it’s worth spending another three minutes to relive.

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