Reverse Auction Bidding
The Target retail store chain has become infatuated with a bidding procedure described as a reverse auction. It goes like this.
After defining the scope of work, the general contractor or construction manager on the project invites selected subs to participate. However, the GC/CM has no say over subcontractor pricing. Subcontracts get awarded solely on the basis of the low bid in a subsequent reverse auction. Here is how a Target project in the Phoenix area got bid via reverse auction using the Internet.
Subs used normal estimating procedures to prepare their bids. At an appointed bid time, the owner operated a Web site with passwords provided to prequalified bidders. The owner initiated the online reverse auction with a starting bid price based on previous projects of its kind.
The subcontractors then submitted bids at progressively lower increments of at least 1 percent. The bid time was limited to 30 minutes. However, if a bid was placed within the last two minutes of the 30-minute window, a three-minute time extension was added. This allowed the other bidders an opportunity to re-bid the job. Time extensions continued until no more bids were placed within a three-minute period.
The Fly In The SoupThis is a transparent form of bid shopping. Bidders can see competing prices, although they don’t know who is placing the bids (only the owner knows who’s who). Thus, pressure builds to keep sharpening the pencil. Bottom feeders, who in a blind bid situation might underbid competitors by 15-20 percent, can instead keep shaving their price in 1 percent increments until all sensible contractors give up.
They would likely leave less money on the table this way — and thus perpetuate their wretched existence longer than they could in the blind bid world. This is perhaps the ugliest aspect of the reverse auction.
But one mechanical contractor who’s participated in the Phoenix bidding and is no big fan of the reverse auction, points out that it’s not entirely negative. According to Mark Giebelhaus of Marlin Mechanical Corp. in Phoenix, a positive aspect is that because the GC can’t control the bidding process, it’s in his interest to be choosy about the subs he invites to participate.
That’s because the owner has already committed to the GC and doesn’t hold him responsible for the subs’ pricing, but most certainly will for their performance. Giebelhaus noted that in the Target reverse auction his company participated in (and won), only three plumbing subs were involved, compared with 15-20 that might normally chase such work in an open bidding process.
The dynamics of the Phoenix bid saw only five bids ventured in the first 30 minutes as the three plumbing contractors played their cards close to the vest. Then came a flood of 22 bids in 37 minutes of time extension. Marlin hit its bottom line number (the lowest they were prepared to quote for this particular job) at one hour and four minutes into the bid. Nobody went any lower, and they landed the job at a price they could live with, although barely.
In this case, all’s well that ends well. Nonetheless, Giebelhaus is not real enthused about the procedure. It worked out OK this time because the owner had selected a quality GC, who in turn selected quality subs to participate. Also, the opening bid price established by the owner was not unreasonable. Turn any of those factors around, and the wisest course might be to walk away from the auction.
“It was an interesting experience,” said Giebelhaus. “However, I think it would be more fair to subs if they each merely submitted what amounted to a sealed bid on the Web site, with low bidder the winner.
“Would we do it again? Probably with this GC, but probably not with most other GCs.”
Maybe the real lesson is, given a quality GC and high-caliber competition, almost any bidding process can work out OK. But as the saying goes, when you wrestle with pigs in the mud, the pigs love it and you end up getting dirty!
Giebelhaus admitted to being ideologically uncomfortable with any bid shopping program. The underlying purpose of a reverse auction is to compel contractors to sharpen their pencil points until they resemble hypodermic needles.
Meantime, contractor coalitions that include MCAA affiliates in Minnesota, Texas and California have lobbied successfully to restrict reverse auctions in their jurisdictions. Other states are working on similar restrictions.
Also, legislation has been introduced in Congress once again to prevent bid shopping. H.R. 1348, introduced by Rep. Paul Kanjorski (D-Pa.), includes provisions for eliminating reverse auctions for federal construction.