[House Hearing, 113 Congress] [From the U.S. Government Printing Office] CONTRACTING AWAY ACCOUNTABILITY - REVERSE AUCTIONS IN FEDERAL AGENCY ACQUISITIONS ======================================================================= JOINT HEARING with Small Business Committee Subcommittee on Contracting and Workforce before the SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS of the COMMITTEE ON VETERANS' AFFAIRS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION __________ WEDNESDAY, DECEMBER 11, 2013 __________ Serial No. 113-48 __________ Printed for the use of the Committee on Veterans' Affairs U.S. GOVERNMENT PRINTING OFFICE 85-873 WASHINGTON : 2014 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON VETERANS' AFFAIRS JEFF MILLER, Florida, Chairman DOUG LAMBORN, Colorado MICHAEL H. MICHAUD, Maine, Ranking GUS M. BILIRAKIS, Florida Minority Member DAVID P. ROE, Tennessee CORRINE BROWN, Florida BILL FLORES, Texas MARK TAKANO, California JEFF DENHAM, California JULIA BROWNLEY, California JON RUNYAN, New Jersey DINA TITUS, Nevada DAN BENISHEK, Michigan ANN KIRKPATRICK, Arizona TIM HUELSKAMP, Kansas RAUL RUIZ, California MARK E. AMODEI, Nevada GLORIA NEGRETE MCLEOD, California MIKE COFFMAN, Colorado ANN M. KUSTER, New Hampshire BRAD R. WENSTRUP, Ohio BETO O'ROURKE, Texas PAUL COOK, California TIMOTHY J. WALZ, Minnesota JACKIE WALORSKI, Indiana Jon Towers, Staff Director ______ SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS MIKE COFFMAN, Colorado, Chairman DOUG LAMBORN, Colorado ANN KIRKPATRICK, Arizona, Ranking DAVID P. ROE, Tennessee Minority Member TIM HUELSKAMP, Kansas MARK TAKANO, California DAN BENISHEK, Michigan ANN M. KUSTER, New Hampshire JACKIE WALORSKI, Indiana BETO O'ROURKE, Texas TIMOTHY J. WALZ, Minnesota Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Veterans' Affairs are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. C O N T E N T S __________ December 11, 2013 Page Contracting Away Accountability - Reverse Auctions In Federal Agency Acquisitions............................................ 1 OPENING STATEMENTS Hon. Richard Hanna, Small Business Committee..................... 1 Hon. Ann Kirkpatrick, Ranking Minority Member, Subcommittee on Oversight and Investigations................................... 2 Hon. Grace Meng, Small Business Committee........................ 3 Hon. Mike Coffman, Chairman, Subcommittee on Oversight and Investigations, Prepared Statement only........................ 35 WITNESSES Nigel Cary, President, Cox Construction Company.................. 4 Prepared Statement of Mr. Cary............................... 36 Louis J. Celli, Jr., Director, Legislative Division, The American Legion......................................................... 6 Prepared Statement of Mr. Celli, Jr.......................... 42 Michelle Mackin, Director, Acquisition and Sourcing Management, Government Accountability Office............................... 17 Prepared Statement of Ms. Mackin............................. 46 William Sisk, Deputy Commissioner, Federal Acquisition Service, General Services Administration................................ 18 Prepared Statement of Mr. Sisk............................... 52 Major L. Clark, III, Assistant Chief Counsel for Procurement, Office of Advocacy, Small Business Administration.............. 20 Prepared Statement of Mr. Clark.............................. 53 Jan Frye, Deputy Assistant Secretary, Office of Acquisitions and Logistics, Department of Veterans Affairs...................... 28 Prepared Statement of Mr. Frye............................... 56 Accompanied by: Mr. Philip Matkovsky, Assistant Deputy Under Secretary for Health for Administrative Operations, Veterans Health Administration STATEMENTS FOR THE RECORD FedBid, Inc...................................................... 57 NECA............................................................. 63 COFPAES.......................................................... 66 CONTRACTING AWAY ACCOUNTABILITY - REVERSE AUCTIONS IN FEDERAL AGENCY ACQUISITIONS Wednesday, December 11, 2013 U.S. House of Representatives, Committee on Veterans' Affairs, Subcommittee on Oversight and Investigations, Washington, D.C. The Subcommittees met, pursuant to notice, at 10:11 a.m., in Room 334, Cannon House Office Building, Hon. Richard Hanna [Chairman of the Subcommittee on Contracting and Workforce] presiding. Present from Subcommittee on Oversight and Investigations: Representatives Coffman, Roe, Kirkpatrick, O'Rourke, and Walz. Present from Subcommittee on Contracting and Workforce: Representatives Hanna, Bentivolio, Meng, and Chu. OPENING STATEMENT OF HON. RICHARD HANNA Mr. Hanna. I will call this to order this morning. Thank you all for being here. Obviously I am not Mr. Coffman. He is tied up in a Budget meeting and hopefully he will be here as soon as he possibly can. And I am going to read my own opening statement and then we will introduce our witnesses and go from there. This morning we are here to talk about reverse auctions, specifically when they make sense for taxpayers as well as when they do not. Reverse auctions can be a way to facilitate competition and increase small business participation, or they can be a barrier to entry for small businesses and a ways of evading meaningful competition. As I have said before no one type of contracting methodology is inherent good or bad. It is how government uses these tools that matter. In May my Subcommittee held a hearing that looked at the use of reverse auctions for construction services and the testimony we received convinced me that reverse auctions do not work for these contracts. Therefore, I introduced H.R. 2751, the Common Sense Construction Contracting Act of 2013, to restrict the use of reverse auctions for construction services. However, 90 percent of reverse auctions are for goods, not services. And today we are going to look at the other uses of reverse auctions. On Monday the Government Accountability Office released a report that suggests that reverse auctions are not being used properly for other types of goods and services. The GAO found that last year over one-third of reverse auctions conducted for agencies had no interactive bidding, the hallmark of reverse auctions. Yet agencies paid $3.9 million in fees for these auctions. Furthermore, they found that 24 percent of all reverse auctions were not awarded to the lowest vendor. And in 27 percent of the cases there was only one vendor bidding. This raises very serious questions about who is conducting reverse auctions, how they are conducted, and for what goods and services they are being used. Despite the fact that reverse auctions accounted for nearly $1 billion in contracts in year 2012, there is no Federal law or regulation that addresses that procurement methods. It seems we are making it up as we go along, and often it seems detrimental to small businesses. While 95 percent of reverse auctions are less than $150,000, the amount of small business act reserves exclusively for small business only reaches 86 percent of reverse auction awards. This has become so problematic that the Small Business Administration's chief counsel for advocacy has requested that the administration at a minimum provide a clear policy statement to the acquisition community that reverse auctions must comply with and the requirements that contracts within this simplified acquisition threshold are to be reserved exclusively for small businesses. I am hoping our witnesses today will help us understand the scope of the problem and what actions we need to take to ensure that reverse auctions are used in a responsible manner. Our procurement systems should be efficient, transparent, and promote competition. That includes small business. I continue to believe that part of the solution to our fiscal crisis is finding ways to improve competition, thereby reducing costs. Small businesses are crucial to being part of that solution since their participation increases competition, creates jobs, and encourages innovation. I look forward to your testimony today, and again I thank you for being here. And I yield to the Ranking Member Ms. Kirkpatrick. [The prepared statement of Hon. Richard Hanna appears in the Appendix] OPENING STATEMENT OF HON. ANN KIRKPATRICK Mrs. Kirkpatrick. Thank you, Mr. Chairman, for holding this hearing today. And I appreciate your vigilance on the matter that we are examining, the reverse auction process. It is important to provide oversight on programs and processes at the Department of Veterans Affairs to ensure the funding Congress makes available is being spent efficiently and effectively. I understand that the Government Accountability Office has recently released a report on reverse auctions where they looked at what agencies are buying, how agencies are conducting reverse auctions, and the extent to which the potential benefits of reverse auctions are being maximized. GAO generally found that agencies were not always aware of how fees are paid; agencies do not track the fees; competition and savings are not always maximized; interactive bidding was absent in over one- third of fiscal year 2012 reverse auctions; and there is a general lack of guidance and training on the reverse auction process. Mr. Chairman, I am concerned with the findings of the GAO. I am sure you would agree that lack of guidance, training, and oversight are very common themes that run throughout the majority of the report regardless of what GAO is looking at. While VA's testimony addresses some of the concerns, I am most interested to hear how they plan to move forward with reverse auctions and ensure that the process is efficient and effective. According to the VA the use of reverse auctions has increased from $78 million in fiscal year 2011 to $305 million in fiscal year 2012. Because of that increase over a short period of time, they need to get this right. Veterans expect VA to do better. Thank you, Mr. Chairman, for this opportunity, and I yield back the balance of my time. [The prepared statement of Hon. Ann Kirkpatrick appears in the Appendix] Mr. Hanna. And I yield to Grace Meng, the Ranking Member of the Small Business Committee. OPENING STATEMENT OF HON. GRACE MENG Ms. Meng. Thank you, Mr. Chairman. As the buyer of more than $500 million in goods and services each year, the U.S. government represents a major market for small businesses. For these firms obtaining a Federal contract can take a company to the next level, allowing it to grow stronger in experience and add more employees. By having more options to purchase from agencies can also benefit in terms of quality and price. As a result, it is critical that small businesses are not left behind when it comes to Federal contracts. Over the years a wide range of initiatives have been enacted to accomplish this. Goals have been established to measure agencies' small business contracting efforts while the SBA operates an array of programs to channel contracts to smaller companies. Among these are initiatives targeted at increasing opportunities for veterans, women, and minorities, which together have helped to direct more than $90 million in total contracting dollars to small firms. While this sounds like progress, more needs to be done. One such area that needs greater attention and oversight is emerging procurement methods. These techniques, such as multiple award contracts, web-based buying platforms, and strategic sourcing, are becoming more prevalent, and small businesses risk being left out. Today we are going to explore another such method, reverse auctions, and how agencies are using them, and whether or not they are benefiting the taxpayer and small firms. Reverse auctions seem to focus competitive forces on behalf of the taxpayer. By doing so, prices can be forced lower. Last year agencies reviewed in the GAO report we will be discussing today used this method to procure more than $800 million of goods and services, nearly double their amount from 2008. However, in part given to the rapid growth concerns have been raised across a wide range of issues, calling into question whether reverse auctions are saving money and providing opportunities for small firms. One such issue was raised during a hearing held earlier this year in this Small Business Subcommittee. By driving prices down these auctions may not be suitable for service contracts, such as construction, which often depend on overall value. Unfortunately service contracts continue to be awarded through this method, potentially shortchanging taxpayers and causing small contractors to miss out on opportunities. In its report, GAO has recently brought to light other issues. This includes a finding that more than one-third of auctions had only one bidder. One has to question the need for an auction when there are no competing bidders. Further concerns were raised that over half of auctions were used to procure items from preexisting contracts. In many cases this caused the government to pay fees, one to use the original contract and another for the reverse auction. I hope today's auction can shed further light on how these fee structures operate and if agencies are paying more than they should be. In theory reverse auctions have the potential to achieve real savings for the taxpayers, but in practice we are not there yet. A first step would be incorporating regulations in the FAR and issuing government-wide guidance as the GAO has recommended. This could help address many of the concerns that we will hear about today and help ensure that reverse auctions maximize the government's value while allowing small firms to fully participate. Like other sectors the procurement sector is evolving. Our job today is to oversee this change and make sure that it is not doing more hard than good. I want to thank all of the witnesses who have traveled here today for both their participation and insights into this very important topic. I would also like to submit a statement on the record from the Quality Construction Alliance. [The statement of Quality Construction Alliance appears on p. ] Ms. Meng. Thank you, and I yield back. [The prepared statement of Hon. Grace Meng appears in the Appendix] Mr. Hanna. Thank you, Ms. Meng. We have two witnesses on our first panel today. Mr. Nigel Cary, President of Cox Construction Company on behalf of the Association of General Contractors. Just quickly, you have five minutes. We will be a little lenient. When you see the yellow light go on you have a minute left. So thank you, you may begin, Mr. Cary. STATEMENTS OF MR. NIGEL CARY, PRESIDENT, COX CONSTRUCTION COMPANY; AND MR. LOUIS J. CELLI, JR., DIRECTOR, LEGISLATIVE DIVISION, THE AMERICAN LEGION STATEMENT OF NIGEL CARY Mr. Cary. Thank you for inviting the Associated General Contractors of America, AGC, of which I am a member, to testify. AGC represents over 25,000 construction contractors, suppliers, and service providers across the Nation. As you stated, my name is Nigel Cary. I am employed at Cox Construction Company and was President of the firm for 20 years. We are a Federal small business construction contracting firm based in Southern California that specializes in work for government agencies. Since Cox's founding in 1979 we have been awarded over 150 public projects ranging in size from $25,000 to $30 million. For our work we have won Construction Contractor of the Year awards from the U.S. Army Corps of Engineers four times. This success begins with the need to submit accurate and complete bids. Today I will discuss why my company and many other construction companies, both small and large businesses, do not participate in reverse auction procurements. Reverse auctions are a cost only competition suitable for the procurement of established manufactured goods that have little if any variation in their design, manufacture, or use. This definition is confirmed by GSA on their reverse auction Web site. Frequently asked question number one states GSA reverse auction is an efficient and cost effective platform for buying non- complex commodities and simple services. Construction, however, is a complex service that is project specific and inherently variable. Each contract is subject to unique requirements and conditions. No two construction projects are ever identical in their scope or execution. Thus from the outset construction services do not belong in the intended or stated use of Federal reverse auctions. Furthermore, contrary to their intended use reverse auctions do not guarantee the lowest price. Each bidder recognizes that they can provide successively lower bids as the auction progresses. As a result, a bidder has no incentive to reveal and subsequently may never offer its best and lowest price. Reverse auctions create an environment in which bid discipline is critical but difficult to maintain. As prices are lowered a construction contractor could be faced with having to seek better pricing from subcontractors and suppliers for 20 or more components of the project. With smaller staffs and resources, a small business may not be able to keep up with the fast pace of rapidly changing prices and may inadvertently underbid a project. The risk of pricing and judgment errors in the compressed auction timeframe is huge. For this reason my company, despite over 30 years of experience, will not participate in any reverse auction. Many other construction companies take the same position, that the risk does not justify participating. Thus the government is receiving bids from a reduced number of companies, limiting competition to the detriment of the Federal government and taxpayers. This should not be news to Federal agencies. Following a 2003 pilot study and report the U.S. Army Corps of Engineers, the largest and most experienced Federal construction agency, does not procure constructions services through reverse auctions. We find it unfortunate and misguided that each Federal agency learns the mistake of reverse auction procurement for construction on its own. This neither benefits the construction industry, small business, or the American taxpayer. As such, AGC holds that the only solution is for Congress to enact law that prohibits reverse auction procurement of construction services. AGC therefore supports H.R. 2751, the Common Sense Contracting Act of 2013, since this bill would prohibit Federal agencies from using reverse auctions for construction contracts suitable for award to small businesses. Thank you for this opportunity to provide the views of the construction industry in this important matter. [The prepared statement of Nigel Cary appears in the Appendix] Mr. Hanna. Thank you, sir. Mr. Louis Celli, Director of Legislative Division of the American Legion. Thank you for your service and thank you for being here, sir. STATEMENT OF LOUIS CELLI, JR. Mr. Celli. Thank you. As noted in all the opening remarks the American Legion also recognized that in 2012 more than one- third of the reverse auctions conducted by FedBid had no interactive bidding. Seventy-six percent of all auctions went to the lowest bidder. Government wide, 23 percent of reverse auction contracts were either the same price or more expensive than the established GSA price, and for the Veterans Health Administration that number was as high as 35 percent. In a significant amount of auctions there was only one bid and the agency still had to pay the three percent on top of the cost of the procurement, at a total cost to the government of $4 million for these one off awards which are becoming increasingly of concern to the Federal government. Chairman Hanna, Chairman Coffman, Ranking Member Kirkpatrick, Ranking Member Meng, and distinguished Members of these Committees, on behalf of Commander Dellinger and the 2.5 million members of the American Legion, I thank you for holding this hearing and thank you for inviting the American Legion to share our views and research with you regarding the government's use of reverse auctions. My complete testimony has been submitted for the record so I will briefly highlight some of our findings for you now. World War II veterans are known as the Greatest Generation. Not because of what they did during the War, but because of what they were able to accomplish after the War was over when they came home. As these veterans came home there were few jobs and even fewer opportunities. Companies that grew large from war production were impossible to compete with and were winning all post-War government contracts. Which is why Congress introduced the Small Business Act. The Small Business Act regulates how government interacts with and protects small businesses. Coming off the Great Depression of the thirties, the Small Business Act helped the United States get back on her feet and become the strongest economic superpower on the planet. Reverse auctions are not in the Federal acquisition regulation. They were not part of the Small Business Act. And as a matter of fact, all of the pending legislation considered before this Congress seeks to restrict the use of reverse auctions. The reasons for this are numerous. Yet the only real argument for using them is to drive down prices. Since small business accounts for almost 90 percent of all reverse auction bidders, it is the small businesses who are suffering the most. Reverse auction advocates claim that reverse auctions save contracting officers time by as much as eight hours per procurement. The American Legion is having a difficult time reconciling those numbers and those claims based on the work that is involved in purchasing a procurement off the GSA schedule with a credit card versus going through the reverse auction process to purchase that same GSA schedule, product, or service. The American Legion works with hundreds of veteran business owners and has consistently received negative reports regarding the reverse auction process. The most common comment we hear is that the process is unfair, deceptive, and fraught with cheaters. This is not a characterization by the American Legion as to the quality of reverse auction services, it is only offered as a perspective of what the overwhelming opinion is regarding reverse auctions in the veteran community. From our research we found that the number one problem with the reverse auction system is that it poises the Federal government to be a predatory position without highly skilled and highly ethical oversight mechanisms in place to ensure that the government is not being wrongly enriched by creating an overbearing procurement process, then places reverse auctions in a continued recipe for disaster. Another concern we have is the possibility of misappropriation of slush funded tax dollars. Congress appropriates money for specific purchases based on forecasts submitted by the administration and agencies. If these purchases are then procured below what is appropriated then any saved dollars should immediately be returned to the Treasury and not reprogrammed for wish list items that Congress did not appropriate funds for in the first place. When these processes boast savings, what actually happens to that money? If it does not go back into the Treasury then the American people are not benefiting from those savings and the professed savings are not ever actually realized. The only way to make sure that the process is fair, to guarantee that the Federal government is statutorily prohibited from purchasing goods or services through reverse auction process below what is deemed to be fair market value. It is up to you to protect small business. It is up to you to help this country wrest itself from the greatest economic depression since the 1930's. And it is up to you whether or not you decide to take charge and turn this generation of returning veterans into a generation that the Greatest Generation would be proud of. What are you going to do? Thank you again for inviting the American Legion to participate in this hearing, and I look forward to answering your questions. [The prepared statement of Louis Celli, Jr. appears in the Appendix] Mr. Hanna. Thank you. Thank you very much. Mr. Celli, thank you. What I get from both of your testimonies is basically there is no purpose, no good purpose in reverse auctions. We had somehow assumed that it might work with items that are commonplace, that are more or less commodities. But even with what you just said, even in that case, just to reiterate, we found that even items that there was a price listed, that oftentimes we are paying more than that in the reverse auction process. And in fact, just so I can hear it twice, we are actually paying a fee to do that, to accompany. That is your understanding, too? Mr. Celli. That is correct. In the extremely limited circumstances under which reverse auctions might be appropriate, is it worth supporting an entire procurement system based on those few circumstances? Mr. Hanna. I understand. And is there an overall benefit? And you think not? Mr. Celli. We think not. Mr. Hanna. Mr. Cary, what you said was very clear to me, having been in construction for 30 years myself. But in your case, I mean it is effectively, if I could sum it up, you view this as a race to the bottom in terms of the way the process unfolds because there are so many elements to bidding on a construction process that you simply cannot click away at a computer and lower your own price. You wind up with perhaps the least qualified, that company that is most desperate, or looking for cash flow, or whatever it is. The time and the way the whole process engages, contractors, you are not able to get, almost by definition, you are unable to get a qualified response every time there is a new bid. Do you want to speak to that, if you consider that accurate? Mr. Cary. Yes, that would be accurate. You know, the way the construction industry works, as a general contractor we are reliant on a large number of subcontractors and suppliers who have to provide pricing for every project, project specific pricing. To be trying to reach out to, and I picked a number of 20, suppliers or subcontractors, you know, even on a small job, it is just virtually impossible. Because they are all going to start at their highest price. They are not going to give you their best price straight out knowing that they have an opportunity to get more than their best price. Mr. Hanna. So this is kind of an example of something that looks good, sort of smells okay, but just in the real world it is not practical? Mr. Cary. Exactly. In the real world this would not work and is just not practical. Mr. Hanna. Mm-hmm. You may have subcontractors of 20 or 30 different trades, electricians, plumbers, whatever they are, and they are not sitting in that room with you lowering your price to compete with someone from another state, perhaps another country, I do not know, probably not, who may not know what they are doing. Or may not be---- Mr. Cary. That is correct. So the opportunity for making mistakes, or for somebody to, you know, underbid a project on the false pretense that, well, Company A can do it so I can do it for $1,000 less. Mr. Hanna. So there can be a fundamental disconnect between value, outcome, and the process? Mr. Cary. Well the reverse auction process totally ignores value, which is where most Federal procurement is now looking at, is best value procurement. Which is a combination of price and prior experience, or specific experience that you bring to the table for that project. Reverse auction process would completely ignore that. Mr. Hanna. I am going to yield to Ranking Member Kirkpatrick. Thank you. Mrs. Kirkpatrick. Thank you, Mr. Chairman. Mr. Cary, it is clear that you do not think the reverse auction process should be used for construction. Do you see a place for it in other procurement process outside of construction? Mr. Cary. I thought I did until I started reading these reports, yes. I really cannot speak to that. I am only familiar with the construction industry and our processes. And yes, certainly on the face of it it seems like a great idea. But as I read the reports that have been put out here, there is a lot of problems. And I think it was probably time to put a hold on this process until it can be thought through and really managed properly if it is to continue. Mrs. Kirkpatrick. I am curious about a statement in your written testimony. On page five you say that the process is detrimental to the relationship between the buyer and the supplier. Can you elaborate a little bit on that? What you see happening there? Mr. Cary. Yes. That is referring back to the best value proposition of construction. Where, you know, federally, on the Federal side and pretty much exclusively in the private sector a construction contract is awarded on the basis of best value, where the contractor brings his services, his team, his experience as well as his price. And it may not necessarily be the best price that provides the best value to the customer, in this case the government agency who is buying that service. Mrs. Kirkpatrick. When did you first interact with the VISN, with the VA Integrated Services Division? And can you describe what your experience was with them? Mr. Cary. I am speaking for AGC, yeah. Mrs. Kirkpatrick. Yes. Mr. Cary. We have not been able to really interact with the VISN. We are talking to their headquarters of procurement for the VA here in Washington, and they are receptive to talking to us, and we are trying to arrange a meeting with them in January to follow up. But it is unclear to us at this point how much control they have over the VISNs and whether their policy would get down to that level or those regional offices. Mrs. Kirkpatrick. Okay, thank you. Mr. Cary. We hope to resolve that. Mrs. Kirkpatrick. Okay, thank you. Thank you. I hope you will keep the Committee posted on that progress. Mr. Celli, does the American Legion have an official position on reverse auction process? Mr. Celli. While we do not have a specific resolution that specifically addresses reverse auctions, we do have a position with regard to the way veteran contractors are treated in the marketplace, which completely covers the scope and dynamic aspect of reverse auctions, in which we are opposed. Mrs. Kirkpatrick. Would it be possible for you to provide that to the Committee? Mr. Celli. It is mentioned in my written testimony and there is a link in my testimony which will take you right to that as well. Mrs. Kirkpatrick. Okay. To that process? Mr. Celli. But I can send a copy over as well. Mrs. Kirkpatrick. Okay. Thank you. You know, the VA has suspended the use of the reverse auction process. What do you think is the best next step for the VA to take? Mr. Celli. Me? Mrs. Kirkpatrick. Yes, Mr. Celli, yes. Mr. Celli. No problem. Well just suspending the process to begin with is the right step to take. If they do plan to reinstitute the reverse auction process I think there is an extremely large amount of oversight that needs to happen. And it needs to be done with a focus on being fair to the small business and not being in an overbearing manner, squeezing them down to their last dime. And it also needs to reflect upon established pricing models that are already accepted throughout GSA. Mrs. Kirkpatrick. Would your opinion about reverse auctions change if as Ranking Member Meng talked about there was a standard or something put in the FAR that would give guidance on how they are to be used? Mr. Celli. You know, I just think that we are putting too much effort behind a procurement vehicle that really is not necessary. I think that GSA was primarily established to provide the best possible price to the government and fair market value. So if you already have that program in place, what would be the need then to institute yet another tool to try to accomplish that same goal? And in addition use the GSA vehicle as a means to use that new tool? It does not really make a lot of sense. Mrs. Kirkpatrick. Okay. I thank the panel for being here and I yield back. Mr. Hanna. I yield to Chairman Coffman. Mr. Coffman. Thank you, Mr. Chairman. And I just want to thank you for your leadership on this issue, Mr. Chairman, and Ranking Member as well from both the Small Business Committee as well as the Veterans' Committee. Mr. Cary, how has the fact that OFPP has not provided any guidance on reverse auctions affected how they are implemented? Mr. Cary. We see that as a big problem. Because agencies as you get down regionally, you know, to the smaller levels are going out, seeing no guidance on this, and really nothing from stopping them to do it, using reverse auctions in situations where they are just not appropriate, and for complex services that they do not fit the definition of reverse auctions to begin with and they create something that is very difficult for people to propose on and compete in. Mr. Coffman. Do you think that in terms of VA's procurement is there anything that they do in terms of procurement that would fit this current reverse auction system? Mr. Cary. Speaking outside my expertise, I would assume simply procurement of materials, supplies would fit. But again, that is not my expertise. So I am looking at that from the outside thinking that that is what would work. Mr. Coffman. Okay. Mr. Celli, how does the Legion's Small Business Task Force view reverse auctions? Mr. Celli. Overwhelmingly the American Legion Small Business Task Force is against small auctions and extreme---- Mr. Coffman. Reverse auctions? Mr. Celli. Reverse auctions, sorry. And extremely distraught by them. Overwhelmingly, without fail. We could not find one business owner who thought that reverse auctions, even business owners that are in our Small Business Task Force that have been successful using them do not think that they are a good use of their time, their effort, their money, or a good value for the government. Mr. Coffman. Okay. Thank you, Mr. Chairman. I yield back. Mr. Hanna. I yield to Ms. Meng. Ms. Meng. Thank you. Mr. Cary, each construction offers its own unique set of factors that will help determine the cost of each project. For example, a company constructing a building in my district in New York will not face the same conditions as a firm that has a project in Florida. Do you believe that the reverse auction process allows the agencies to consider the variables that construction projects face? Mr. Cary. No, we do not. Again, being purely price based it does not take into consideration the experience of the company proposing and the team that it would bring to that project. And those are really vital components in the award of an overall best value award for any construction project. Ms. Meng. Thank you. Mr. Celli, with the unemployment rate still hovering around seven percent, it is vital that we use tool that spur job creation. In your testimony you discuss concern that reverse auctions will lead to decreased employment opportunities for veterans. Can you please explain why this would occur? Mr. Celli. We would be happy to. The reverse auction process is probably perfect for that single entrepreneur sitting in the basement in front of a computer passing goods and services from the distributor directly to the Federal government. That does not promote any type of overhead. So the businesses that thrive are the businesses that are able to hire more personnel, hire more veterans, and grow their businesses to such a degree that they can offer a greater scope of products. So if the government is going to continue to try to beat small businesses down to their last dollar the result is not going to be small business growth. It is going to be decline and therefore they are going to hire less veterans. Ms. Meng. What are some examples or procurement methods you believe would allow small businesses to grow and hire more veterans? Mr. Celli. You know, the procurement processes that are in place. And make no mistake about it, there is no simple way to procure goods and services for the Federal government. You know, it is an extremely legally difficult process. But those businesses that are able to get through those hurdles to get a GSA schedule, to successfully bid on a project, those are businesses that have been proven that they have a strong business and a good handle on the procurement process and an understanding of the way the laws of the Federal government work, specifically with regard to the Federal Acquisition Regulation. So you know, the Federal government already has some very successful tools that they are using. We have not found the reverse auction process promotes that. As a matter of fact what it does is it then opens up competition to businesses that have not been tested, that have not been through that process. And it possibly opens up the Federal government to businesses that cannot perform. Ms. Meng. In your opinion what is the number one challenge and example of problems that your members are personally facing when it comes to the process? Mr. Celli. The reverse auction process? Ms. Meng. Yes. Mr. Celli. Specifically that the reverse auction process can when it is a common item drive the final winning price to below market value, and in many cases to below the actual cost of the item for that vendor. That is the single most, the single largest complaint that we receive and the single largest challenge. And we see that in many cases disrupting the relationship between the distributor and the manufacturer. If it is an open competition and I am a distributor for XYZ Corp. and I am an authorized reseller, I buy it from the manufacturer at $10, I have to sell it at at least $10.01 in order to make a profit. But if the manufacturer is able to compete in that same process they can easily sell it for $9.99, at which point I cannot even compete. And if I do, if I compete at the thought process that I am going to use this as loss leader just to get some government attention and maybe sell consumables that support that product later at a higher price, it really becomes a shell game. Ms. Meng. Thank you. I yield back. Mr. Hanna. I yield to Mr. Roe. Mr. Roe. I thank the Chairman for yielding. I apologize for being a couple of minutes late. We got some bad intel and started off in the Rayburn Building this morning hunting for this meeting, so I apologize for that. And Mr. Chairman, I would like to submit for the record the statement of the National Electrical Contractors Association, if I could. Mr. Hanna. Without objection. Mr. Roe. I thank the Chairman. [The statement of National Electrical Contractors Association appears on p. ] Mr. Roe. Let me I guess help understand for me a little bit better. I love Ebay. And I am trying to understand, and I love buying guitars. So I will bid on some guitars and sometimes you will see one out there that the price is not right and you will get no bids. And what I am trying to figure out, and I do understand there are products out there that you purchase that have almost no margin, I get that, and that is a tough business to be in when you are in a very low margin business. And I guess what I am trying to understand is, in FedBid the concept I like because it allows you to find the, as you pointed out, the best product at the lowest price which is what we should be trying to do. But it is not working. A third of the bids, when I read the material this morning, only are a single source bidder, just one bidder. And Ebay you can turn down if you do not meet a certain value, and I am trying to understand what we can do. If you do not hit the price that the seller is willing to sell it for, I mean, obviously you could buy a $4,000 guitar for $2, I would buy as many of them as I could get. But the seller is going to say, ``This is worth that, and I am not selling it below that.'' Is that something you could do in FedBid? And just for you all, Mr. Cary you also, how, why is this not working? Because my instincts tell me, shoot, it works phenomenal on Ebay. You can find out around the world what something is worth. You can get the value of it. It might not be what the seller thinks the value is worth but what the market will pay for that particular item. Why is that not working? Mr. Celli. Well Dr. Roe, I think that you brought up an excellent analogy. And Ebay, if you remember, those of us who were around when Ebay first started, it became almost a fever to bid. And at the beginning of Ebay what you ended up with was a lot of folks who overbid for products that they ended up overspending for because they got involved in that emotional fever bid. So---- Mr. Roe. I have a wife, though. And that usually reduces that fever a little bit. Mr. Celli. There are, you know, Ebay has over the years now become a much more commonplace to purchase new and used goods. But with Ebay there are safeguards in place because the seller, as you mentioned, can start a bid at a particular price, or mention that they will not go below a certain price. And with the reverse auction process that same, it is new, it looks like a window of opportunity for businesses that were not previously in the Federal procurement arena. They may not completely understand what their responsibilities are once they win that procurement. There, as Mr. Cary points out, the more complex procurements are much more difficult to put into the reverse auction process because there are far more nuances that may need to be discussed before the winning bid is selected. And if you were buying only ballpoint pens it might be easier, but then there is already a mechanism to do that. Mr. Roe. Is the sealed, what I am familiar with as a public official, as a local official, is the sealed bid process. Where you go in, you see what the specification, just like in the contracting business, Mr. Cary I know you are. You see the specifications in any particular, whether you are building a bridge or a building or whatever. And the lowest bidder who meets those specifications wins the bid. And you do, as you all have pointed out, you do learn who the good people are. Pretty soon you figure out who the good people are, and the people who meet those specifications time after time after time. And I have not necessarily always accepted the lowest bid, but the best bid. So sometimes the lowest bid, I mean, you know, the old adage would you like to go into space on the lowest bid? I think a lot of times we do not do that and we do it for a reason, because our experience tells us that the lowest bid may not be the best bid. Is that a process that could work? Where you just have a sealed bid, Friday afternoon at 1:00, you open the bids, the lowest bidder that meets the specifications gets the contract? Mr. Cary. That would be the traditional way of procuring construction services, yes. It has worked for years. Today it has evolved more to best value. Most agencies are now using best value, where it is either a combination of your price and your experience for the project, or technically acceptable low price. Where the bidders are in a word screened, if they reach a certain technical bar then those bids are considered and the low price of the bidders who were deemed above that bar is accepted. Those work very well. Agencies use them. You know, over the last ten to 20 years litigation in construction has vastly decreased. And I think the government is receiving a lot better value for its construction today than it used to. So there are established processes that work, yes. Mr. Roe. Okay, thank you. I yield back. Mr. Hanna. Ms. Chu? Ms. Chu. Yes, thank you. Mr. Cary, you talked about specific examples of where the reverse auction does not work. In particular types of contracts where it just does not come down to a simple commodity, commercial item, or maintenance. You talked about the VA Northern California Healthcare Systems and the Carl Vinson VA Medical Center in Dublin, Georgia. Could you elaborate on those examples to show how it does not work? Mr. Cary. Yes, certainly. You know, not having bid on the projects I cannot get into all the details. But looking at the description and knowing what is involved in a construction project, those were clearly major projects, renovations in existing, working hospital facilities, that require a large number of services provided by subcontractors and suppliers. Technically complex procurements where the experience of the proposers, you know, needs to be considered alongside the price. You do not want the low price coming in, as was stated, building a rocket to go to the moon. You know, you are going to look at the experience of that contractor. You want someone who is familiar with infectious disease control, safety requirements inside a working medical facility. There is a lot more to it than just the low price. Ms. Chu. In fact you said for the VA medical center it was supposed to be a simple repair or alteration of structure but it was a complete roof replacement. Mr. Cary. There is a big problem that I did not mention in my oral testimony today of misinterpretation, yes. And this, when you look at the GSA schedule also they have a Schedule 56 that allows some construction services. The big problem is that when you get down to the regional or the local level, those services can be easily misinterpreted and expanded to what is really a full on construction project, not a simple supply or service. Ms. Chu. Right. Mr. Celli, you did a survey of your members regarding reverse auctions and they were overwhelmingly negative. Can you say who participated in the survey and what was the overwhelming kind of specific thing that they had to say? Mr. Celli. I can. I do not have the names right here in front of me but I can certainly provide that to your staff afterward because the businesses have agreed to share their stories with you, so we are happy to do that. And with all the members, as a matter of fact. Overwhelmingly again, you know, there is a huge mistrust in the system. They do not know who they are bidding against or if they are even bidding against a person. We find out later that the FedBid system in particular is specifically designed in such a way that it can be programmed to bid against nobody. It can be programmed by the buyer to automatically lower the bid until it gets to a certain level, which is a little big disingenuous in the bid process. There are some other concerns about legal bidders, bidders who are providing gray market products versus authentic products. So there are a lot of question within the community about the legitimacy of the bid process. Ms. Chu. You also had some recommendations for government if it is going to continue to use reverse auctions. What are some of those recommendations? Mr. Celli. Well first and foremost there needs to be a safety mechanism in place that does not allow government to purchase an item or a service below market value. There is really no justification for that. It is a slippery slope for a small business to get into. They may be willing to risk it at the cost or in the hopes that they will ultimately get more business from the Federal government later, but it is not a good practice for the Federal government to prey on small businesses in that way. So the first safeguard I would say is to make sure that good market research is being conducted to establish what the minimal acceptable price would be. The other would be to just completely get rid of the leader lag indicators, as mentioned by Mr. Cary a few minutes ago, almost as a sealed bid process. If that is going to be your bid, then that is your bid. And professionals who are in this arena know what they can afford to bid and that is what their bid is going to be. More outreach training, I think that if they do plan to continue this more outreach training for small businesses I think is critical. And collect the fees directly from the buyer, not the seller. That is another disingenuous practice. When you tack three percent onto the final price from the buyer, show the buyer a three percent increased price, deliver those funds then to the small business when it is the buyer's responsibility to pay that fee and then go to collect that three percent from the small business. Why does a small business have to be burdened with paying the fees of the buyer if it is the buyer's responsibility to pay the fees? Ms. Chu. Thank you. I yield back. Mr. Hanna. Mr. Bentivolio? Mr. Bentivolio. Thank you, Mr. Chairman. I am going over this and it, you know, I represent a constituency that likes to pay less. They want spending cuts. And it seems to me that a way to do it is take the lowest bidder. And market value really is based on the market. If the market is willing to sell it at one price, I am willing to buy it at that price, that creates the market, right? Do we agree? Mr. Celli. No, I actually do not agree. Not necessarily. Mr. Bentivolio. Okay. Mr. Celli. And the reason that I disagree is because when you throw outliers into the equation you then distort and warp what the true market value actually for most people when you have one or two that are willing to subvert their own pricing structures simply to get into the market. And again, it poises the Federal government as a more overbearing monopolistic type of buyer. And that is not the responsibility of government. Mr. Bentivolio. Okay. And I understand and I agree with you. So how does, Mr. Cary, can you elaborate on how the private sector deals with this? Because they want to maximize profits, but at the same time they also want performance, right? Mr. Cary. Yes. Mr. Bentivolio. And that is the big question. Because in my district, you know, I have people who are, they can build a better product, or the same product, meeting government regulations or specifications, but are not necessarily getting the contract. And then it is that contract in some cases is going to the lowest bidder, who cannot perform. And subsequently comes back to the original bidder that can make the product at a fair price and make a fair profit, and the government now has to pay more for it because they have to expedite and pay a, what do you want to call it? Extra fee for having it done in quicker time. So how does the private sector deal with those kind of issues? Mr. Cary. Well actually addressing the Federal side of it on the construction business, again, the established procurement methods of best value or technical acceptable low price screen the contractors who are bidding on the project and take those factors into consideration. There are other factors, their experience, their capabilities for this project, their likelihood of success. One of the screens that the Corps of Engineers and the Navy both frequently use is called your likelihood of success, and where they rank those contractors. They then either weigh that with the price or put those contractors into a pool of acceptable contractors and take the low price. But again to your other point, the contractors also present their best price one time. You are not hedging that against where other people are pricing their product. You get those best prices the first time around. And the government knows it has got the best prices. Under the reverse auction process we do not see where that best price is necessarily ever reached. Mr. Bentivolio. Because they keep underbidding? Do I understand---- Mr. Cary. Or they never bid down to the best price. The opposite problem of what seems to be happening more on the manufactured goods side of the table, in construction everybody is going to give you the price they would love to get so they can retire next year. But, and if nobody else comes down to the price that they could really do it for, you know, and make a fair small profit, they are going to take it for the higher price. Mr. Bentivolio. Very good. Thank you. Mr. Cary. Does that make sense? We see often, and it has been related to me by companies who have participated in reverse auctions, that their winning bid or their winning price was not the price that they would have bid it if it had been a sealed bid. It was higher because the price never came down to their best price. Mr. Bentivolio. Very good. Thank you very much, I appreciate it. I yield back. Mr. Cary. Sorry for the long explanation. Mr. Bentivolio. No, that's fine. Great. You did great. Thanks. Mr. Hanna. Thank you both. If there are no other questions for this panel, I want to thank you for your time and your testimony and for traveling such long distances. And I invite our second panel to be seated. Thank you. We will hear in a moment from Ms. Michelle Mackin, Director, Acquisition and Sourcing Management, Government Accountability Office; Mr. William Sisk, Deputy Commissioner, Federal Acquisition Service, General Services Administration; and Mr. Major Clark, Assistance Chief Counsel for Procurement Policy, Office of Advocacy, Small Business Administration. Ms. Mackin, you may begin. STATEMENTS OF MS. MICHELLE MACKIN, DIRECTOR, ACQUISITION AND SOURCING MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE; MR. WILLIAM SISK, DEPUTY COMMISSIONER, FEDERAL ACQUISITION SERVICE, GENERAL SERVICES ADMINISTRATION; AND MR. MAJOR L. CLARK, III, ASSISTANT CHIEF COUNSEL FOR PROCUREMENT, OFFICE OF ADVOCACY, SMALL BUSINESS ADMINISTRATION STATEMENT OF MICHELLE MACKIN Ms. Mackin. Chairmen Coffman and Hanna, Ranking Members Kirkpatrick and Meng, and Members of the Subcommittees, thank you for having me here this morning to discuss reverse auctions. My statement today is based on a report we issued just two days ago and our work focused on the four agencies that had about 70 percent of the reverse auction activity in 2012. These were the Departments of Veterans Affairs, Homeland Security, the Interior, and the Army. First I would like to discuss trends. And you will see from the chart that clearly trends are on the rise here. [Chart.] Ms. Mackin. Over the past five years there has been 175 percent increase in use of reverse auctions for these four agencies, with over $800 million in contract awards in 2012. In general reverse auctions are used for simpler supplies and services, predominantly IT and medical products and equipment. Importantly, however, some agencies are planning to use reverse auctions for more complex items and more complex contracts that can last up to five years. Secondly, I will address some areas of confusion we found regarding how reverse auctions work. There is a perception that the auctions always go to the lowest bidder. But we found that almost a quarter of the 2012 auctions did not go to the lowest bidder. Another concern we had was about the extent to which small businesses are getting reverse auction awards. And we found that most of the contracts did go to small businesses. They received over 80 percent of the dollars in 2012. And then regarding fees. A company called FedBid ran almost all of the government reverse auctions in 2012. FedBid's fee for conducting the auctions is capped at three percent of the winning bid and it cannot exceed $10,000. As you will see in the chart as an example of how the fee works, in this case the winning vendor's lowest bid was $10,000. FedBid added its three percent fee and the government paid the final contract award price that included the fee. The vendor then remits the fee back to FedBid. In some cases we found that FedBid received no fee and this happened about 20 percent of the time for the 2012 auctions. We also found cases where agencies are paying two sets of fees, one to FedBid to conduct the auction and another to use an existing contract such a GSA or VA schedule contract. But our main source of concern was that agencies were simply not aware of the fees they are paying to use these auctions. And finally I would like to turn to the two key intents of reverse auctions, competition and savings. Regarding competition we found two main buckets. What we call interactive bidding where multiple vendors are bidding against one another and this happened about 65 percent of the time. However, there is also what we call ineffective competition where only one vendor submitted a bid or multiple vendors submitted only one bid each. This happened about 35 percent of the time and clearly there are concerns here about if the benefits of competition are being realized. And finally FedBid calculates the savings for the agencies based on the delta between the government's cost estimate, or the target price, and the final contract price, which of course includes FedBid's fee. In this example the agency's target price or government estimate was $11,000 and the calculated savings on this particular auction was $185 after accounting for FedBid's fee. In total FedBid calculated $98 million in savings for the four agencies in 2012 but we have questions about the accuracy of these savings. For example, if there was no interactive bidding perhaps agencies could have gotten a better price using other mechanisms. Also the target price or government estimate may not be sound. For example, we found over 1,000 cases where the winning bid actually exceeded the government's estimate even with interactive bidding. In conclusion, as we discuss in our report we believe government-wide guidance and regulations are needed to help ensure that reverse auctions achieve the intended benefits. We made recommendations along these lines to the Office of Federal Procurement Policy and they did agree with the recommendations. Mr. Chairmen, Ranking Members, this concludes my statement and I would be happy to answer any questions. [The prepared statement of Michelle Mackin appears in the Appendix] Mr. Hanna. Thank you. Mr. Sisk, you may begin. STATEMENT OF WILLIAM SISK Mr. Sisk. Good morning Chairman Coffman, Chairman Hanna, Ranking Member Kirkpatrick, Ranking Member Meng, and Members of the Subcommittees for Veterans' Affairs Oversight and Investigations and Small Business Contracting and Workforce, my name is Bill Sisk and I am the Deputy Commissioner of the General Services Administration's Federal Acquisition Service. I appreciate the opportunity to appear here today to discuss GSA's recently launched reverse auction platform. This effort is one of a continuing series of actions that the Federal Acquisition Service has undertaken in support of GSA's mission to deliver the best value in acquisition and technology services to government and the American people. Based on data since its inception, GSA's reverse auction platform is one tool that with proper training and use can provide savings to agencies, help them achieve small business goals, and provide visibility into spending data that over time can help agencies make better acquisition decisions. GSA's reverse auction platform was put into operation July 1, 2013 and is designed to be an efficient and cost effective platform for buying non-complex commodities and simple services. This initiative's focus is to drive down the total cost of acquisitions and increase savings to customers and taxpayers. GSA's reverse auction platform is an e-tool available to our government partners to use to facilitate the requests for and submission of quotes or offers for products and services through GSA multiple award schedules and blanket purchase agreements, or BPAs, Veterans Administration schedules, and Department of Navy BPAs against GSA schedule contracts. GSA leveraged existing eBuy and GSA auctions.gov IT infrastructure resources, which reduced development costs and provides users a familiar look and feel when using the reverse auction Web site. The GSA reverse auction tool is non-mandatory and available to agencies to consider as they develop acquisition strategies. Additionally, by leveraging GSA schedule contracts and their unique ability to provide a broader array of vendors and small business set aside capability, GSA's reverse auction platform improves the government's ability to maintain small business participation through broad competitions and set asides to promote agencies' meeting small business goals in a cost effective way. There are a variety of potential benefits to agencies of this platform, including that it displays realtime pricing, provides customers with level three spend data or historical pricing data, interfaces with existing systems to verify that contracts are still valid under the GSA multiple award schedules program, assist in meeting small business goals, and facilitates compliance with competition requirements. While agencies may realize these benefits, it is also important that the reverse auction platform be used appropriately. GSA provides training on the reverse auction platform regularly to both the buyer and vendor communities. GSA offers on average four training sessions per week in a variety of forums. To date over 50 sessions have been conducted and over 2,000 individuals trained on the platform. Additionally, frequently asked questions and answers are available on the site as a resource for users. The data so far has demonstrated savings in price, good competition from vendors, and support for small businesses. To date, several Federal agencies, including GSA, have utilized the platform for 485 auctions, realizing about 6.7 percent savings on average, with an average of three vendors participating per auction. 85.53 percent of the total awards and 87.18 percent of the total value of all contracts have been made to small businesses. As the GSA reverse auction platform continues to mature and evolve with more training and education provided, GSA predicts an increase in the use of the platform based on the initial interest in the platform and the overall interest by agencies in using reverse auction procurement solutions. Additionally we predict future spend data may provide insight for potential strategic sourcing opportunities. As we move forward we welcome insights from Congress, from industry, and from other partners, Federal agencies, on additional ways to improve the platform and ensure it is used appropriately. During this time of continued budget uncertainty and ongoing fiscal pressure, GSA has launched the reverse auction platform in the hopes that it will be used by our partners to maximize savings in terms of both driving competition among vendors to achieve cost savings and by cutting processing times so that agencies can achieve resource savings as well. This tool is one offering by GSA to deliver better value and savings to our partners and ultimately the American taxpayer. Thank you again for the opportunity to testify and I am happy to answer any questions you may have. [The prepared statement of William Sisk appears in the Appendix] Mr. Hanna. Thank you, Mr. Sisk. Major Clark? STATEMENT OF MAJOR L. CLARK, III Mr. Clark. Good morning, Chairman Hanna, Ranking Member Meng, Members of the Small Business Contracting and Workforce Subcommittee, as well as Chairman Coffman and Ranking Kirkpatrick and Members of the Veterans' Affairs Subcommittee on Oversight and Investigations. I am honored to be here today to present testimony to you on behalf of the Office of Advocacy of the U.S. Small Business Administration, more specifically on behalf of Chief Counsel Dr. Winslow Sargeant. Dr. Sargeant would like me to thank you for the support that you have provided this office and looks forward to a continued partnership with you as we mutually strive to improve the economic climate for our small business stakeholders. Let me make it very clear that the Office of Advocacy is not in opposition to reverse auctions in the Federal marketplace. Today we are advocating for clear reverse auction guidance from the Office of Federal Procurement Policy. Mr. Chairman, my name is Major Clark. I am the Assistant Chief Counsel for Procurement Policy for the Office of Advocacy. And while my professional career includes both public and private sector experience, I previously served as the staff director for the House Small Business Committee under the chairmanship of the Hon. Parren J. Mitchell of Maryland. So thank you for having me back for this session. I ask that this written testimony and two attachments be included as part of the official transcript of this hearing. Just as a brief segue, in 1976 Congress created the Office of Advocacy pursuant to Public Law 94-305 to represent the views of small entities. Advocacy advances the interests and concerns of small businesses before you, the Congress, the White House, Federal agencies, Federal courts, and policy makers. The Office of Advocacy is an independent office within the Small Business Administration. So the views expressed by our office do not necessarily reflect the views of SBA or the administration. We work with Federal agencies in the rule making process to implement the requirements of the Regulatory Flexibility Act. The RFA requires Federal agencies to consider the effects of their proposed rules on small businesses and other small entities, including small governments and small nonprofits. And it is really pursuant to the above statutory authority that the Office of Advocacy has been involved in the monitoring of reverse auction activities in the Federal marketplace since 2006. There are actually two letters that I asked to be included as part of the written testimony. The first one is on February 27, 2008 the Office of Advocacy sent a letter to Administrator Denett of the Office of Federal Procurement Policy with the recommendation from small stakeholders to better define the reverse auction process. And again, I ask that that attachment be included as part of the record for this proceeding. The second attachment is a more recent letter to Administrator Lesley Field of the Office of Federal Procurement Policy dated January 21, 2012 and this letter is from Dr. Sargeant of the Office of Advocacy. And again this letter expresses the concerns as conveyed to us regarding some of the negative impacts of reverse auctions on small businesses and asking that the Office of Federal Procurement Policy come out with clearer more defined guidelines so that our small business stakeholders would clearly be able to understand the process as they attempt to play in the Federal acquisition marketplace. Now in addition to those two letters, the Office of Advocacy held a procurement round table in Seattle, Washington in which a small business stakeholder very vividly expressed to us the problems she experienced with the reverse auction process. And some of those things are stated in the testimony. And in addition to that we also have been part of a process with the Office of Federal Procurement Policy in which small business stakeholders have presented their concerns to this office. So we are concerned with clear guidance. We think the guidance should clearly place a definition on what constitutes reverse auction. We think the guidance should also include a very clear understanding of how FAR Part 19 applies to these particular parts. And we also think that the guidance should include a very clear understanding of the cost parameters that small businesses incur with this particular process. And these are the concerns that have been expressed to us by our small business stakeholders. Mr. Chairman, this concludes the testimony. I would be happy to answer any questions that you may have. [The prepared statement of Major L. Clark, III appears in the Appendix] Mr. Hanna. Thank you. Without objection everything you mentioned will be added to the record. Ms. Mackin, in your testimony you mention that non-complex procurements, assuming for the moment that that might be a construction contract or something like that, do not necessarily work well. Would you like to elaborate on that? Because as you know that is what we heard from the previous testimony. Ms. Mackin. Actually it is the, a lot of what we found that was bought in 2012 was IT products, specific types of medical equipment and so forth. And traditionally that has kind of been considered appropriate, if you will, for a reverse auction. I did look at our data and for VA specifically about five percent of their reverse auction activity was for construction related contracts in 2012. And as you know there is a whole range of codes that can relate to construction. So from alterations, and so forth, to perhaps more complex items. Mr. Hanna. Well actually I mentioned that wrong, incorrectly. It is complex do not work well, but thank you for answering the question. Do you, FedBid earned $13.4 million in fees in 2012 for reverse auction work by the four agencies GAO reviewed. I understand that GAO found cases where agencies were paid fees even though there were no savings. Clearly FedBid, you could argue, did their work. But what about that and the fact that there are many cases where they actually paid more than the posted or GAO quoted price? How can you rationalize that? And why do averages matter, as Mr. Sisk said when you get three or four bidders, when we know that there was only one bidder, there may have been only one bidder on a whole host of projects, hundreds as we know. And so averages do not, are not really relevant in my mind. I guess the question is how do you justify paying three percent out when you actually end up paying more at the end, and do you? Ms. Mackin. Frankly we have concerns about some of these scenarios. If agencies paid FedBid's fee but got no savings from that particular reverse auction, that is a concern. And the scenario where that happens is for example the agency contracting officer establishes the government estimate for example, picks a schedule price for a certain vendor. That vendor submits a bid and actually gives the government a discount. But that discount is eaten away because the agency still pays FedBid's three percent fee. So that is not a good situation in our view. The other main concern we would have is the one bid scenarios, which happened, as was mentioned, over a third of the time. In those cases we really think going straight to the schedules or using other mechanisms would probably result in a better price. Mr. Hanna. Mm-hmm. So you would agree with Major Clark that rules that, rules need to be much better defined, or defined at all in this case? Ms. Mackin. Absolutely. We think there need to be cross references in the FAR so contracting officers know how to use these reverse auctions. And so the vendor community can be clear as well about how they should be working. Mr. Hanna. I think we are about to put a slide up. Thank you. [Slide.] Mr. Hanna. This is the Web site. It shows that FedBid is a contracting office of the Department of the Army. It is confusing at best, but we can all agree that that is not accurate? This is from Fed Biz Ops. So maybe it is just a technical thing that needs to be corrected but clearly it is not part of the Department of the Army. Ms. Mackin. It is not part of the Department of the Army. Mr. Hanna. You may want to look at that. I am going to yield to Ranking Member Fitzpatrick, thank you. Mrs. Kirkpatrick. Kirkpatrick. Mr. Hanna. Kirkpatrick. Mrs. Kirkpatrick. Thank you. Ms. Mackin, you heard Mr. Cary in the first panel say that he did not think that reverse auctions were appropriate for construction services. But you say that they were only used five percent of the time. Can you tell the Committee what your opinion would be going forward in terms of using reverse auctions for construction services? Ms. Mackin. I think it really goes back to the requirements, which of course come from the buying agency. And this I believe would not apply only to construction but for anything that could be considered more complex. If the requirements are not clearly stated and represented to the vendor community you cannot be sure you are going to get what you paid for. I know there is a lot of concern about construction per se, and maybe that is something that OFPP could address when they issue the guidance that we have recommended. Mrs. Kirkpatrick. It seems that getting the target price is really essential to the savings. What recommendations do you have about what would fine tune that process so we can get a better target price? Ms. Mackin. Well as I mentioned the target price is the contracting officer's government cost estimate. And you know, it is not just the reverse auction issue. This is more of a general contracting concern we see in a lot of our work across the Federal government, is how sound is the market research? How robust is the market research? If they are just contacting one vendor and getting a quote and using that as the target price, that may not be adequate depending on what is being procured. Mrs. Kirkpatrick. Do you think guidelines addressing the target price should be included in whatever guidelines are generated to improve the reverse auction process? Ms. Mackin. I think that would be very helpful. And you know, probably the main concern I would have is what do you do when you only get one bid in a reverse auction? Do you proceed as we saw and just award the contract at that price? Or do you maybe reconsider that maybe a reverse auction is not the best bet here for various reasons? Mrs. Kirkpatrick. I have a concern that in your testimony that the agencies are not tracking this process. What needs to be put in place so that they can track? Why is that happening? Ms. Mackin. Yes, we were frankly a bit surprised to find that agencies did not know how much they were paying FedBid in fees. They did not know much in duplicative fees, for lack of a better word, they were paying when they were using a schedule contract, for example, through a reverse auction. And so some agencies, and VA is one of them, have taken steps to get that information. So now on a case by case situation contracting officers at VA are documenting how much they paid in fees. And sometimes it is a loss, if you will, when the target price is exceeded. But at least they are getting that information. I do not think any agency, however, is looking at it from a macro point of view, in total how much are we paying to use reverse auctions and is it always the best way to go? Mrs. Kirkpatrick. So maybe that is also something that should be put into the guidelines. We saw that they were doing that at the macro level. Would you agree with that? Ms. Mackin. Yes, absolutely. Mrs. Kirkpatrick. Now if you had to prioritize your top three next steps for the Committee, what would that be? Ms. Mackin. Well I think, you know, the key thing here is putting something into the FAR, and obviously the VAR, and all the different agency regulations. And OFPP has taken some steps to do so over the past ten years, but it has never actually materialized into the regulation. So I think that is critical. But even before that happens, because that could take some time, some government wide guidance, best practices, when does this make sense, when does it not make sense, I think would be very helpful. Each agency has guidance but they are not always the same and I think that is part of the concern from the vendor community. Mrs. Kirkpatrick. Major Clark, would you agree with Ms. Mackin's top priorities in terms of making this process better? Mr. Clark. In general, I would agree. I am not necessarily sure at this point in time as to whether or not the guidance needs to actually be put into the FAR. I do think that the Office of Federal Procurement Policy needs to come out with some very clear guide points, guidelines for the acquisition community. I am still not totally convinced that they need to be put into the FAR at this point because the whole process of reverse auction as an acquisition tool is continuing to evolve. Much of the testimony here this morning, including the very recent GAO report, as well as the testimony from GSA, clearly indicates to me that there is this evolution which has been occurring since 2006, when we first got involved in the Office of Advocacy. So I am not totally convinced that it needs to be put into the FAR at this point in time. But clearly yes, I agree that there needs to be clear guidelines coming out of Office Federal Procurement Policy. Mrs. Kirkpatrick. Thank you, panel, for answering my questions. And I yield back. Mr. Hanna. Thank you. Chairman Coffman? Mr. Coffman. Thank you, Mr. Chairman. I want to ask you all to comment on this. It seems to me maybe under the narrowest of circumstances the reverse auction process would work. But I remember when I was State Treasurer for Colorado and I initiated a program where I would sell these tax and revenue anticipation notes, and you know, we would do it electronically, and everybody could see the bid process as it was ongoing, the window that it would be open. And so the objective was clearly to get the lowest rate we could in those for the benefit of the taxpayers of Colorado. But that was, I mean, it was so simple that, you know, there were no variables other than the interest rate. But the amount of money was the amount of money that we were going to put out in these tax and revenue anticipation notes. And so here you have a lot of variables in terms of certainly you know what the quantity is but there's a lot of qualitative measures. How do you account for those in a reverse auction process? Ms. Mackin, why do we not start with you? Ms. Mackin. Well I think again it goes back to the agency contracting officer. They are really the lynchpin to making sure this works properly. And so in their solicitation, in their requirements which are then posted on the reverse auction site, they need to make those variables very clear. And if it does not seem appropriate for a reverse auction because it does seem like it is getting too complex, maybe they need to reconsider. That is one concern we have. Some agencies are perhaps not mandating use but strongly encouraging reverse auctions to be used. And I think it needs to be more considered depending on what is being procured. Mr. Coffman. Yes? Mr. Sisk. Ultimately I think it is up to the warranted contracting officer that makes the decision. Our objective at GSA is to provide an e-tool that gives them the option for commodities and very simple services to go out to the vendor community that is available through multiple award schedules to get the best price for the taxpayers. But ultimately it is up to the warranted contracting officer to make the decision. Mr. Coffman. Mr. Clark? Mr. Clark. I would agree that it is up to the warranted contracting officer to make that decision. I would however continue to place a caveat that that decision has to be couched within the context of the existing FAR and statutory provisions that deal with small business. And again, I am specifically referring to FAR Part 19 that deals with awarding and reserving contracts for small businesses at certain dollar thresholds. And I would hope that the warranted contracting officer would actually take this into consideration when that decision is being made. But that is the benchmark of everything as we see it, and that is, you know, how are they complying with the various small business provisions? Mr. Coffman. Okay. Ms. Mackin, on March 5, 2012, FedBid informed O and I that they trained, they had trained 2,100 VHA contracting personnel in the use of reverse auctions. In lieu of OFPP's lack of guidance, does this concern GAO? Ms. Mackin. We did hear from different agencies that FedBid was doing training, and that that did increase in the fourth quarter when of course spending tends to go up. It depends on what the training was. If it is just the mechanics of how to use this reverse auction tool, that is one thing. But I think that, again to avoid crossing into that inherently governmental realm, the agency contracting officer needs to be completely in charge of writing the solicitation, determining the pool of vendors that will compete for the reverse auction, and making the final award determination. Mr. Coffman. Ms. Mackin, according to VHA Health News article a government employee brought the reverse auction process, ``with her when she transferred to VA from another agency.'' According to her, ``it is free to the government. Everybody wins.'' Is that an accurate statement? Ms. Mackin. I would not characterize it as free to the government. As was discussed in some cases the government is paying a fee and not getting any savings as a result. So again, it really goes back to the government agencies tracking this information and knowing what they are paying and what the cost benefits are of using this tool. Mr. Coffman. Thank you, Mr. Chairman. I yield back. Mr. Hanna. Thank you. Ms. Chu? Meng? I'm sorry. Ms. Meng. Thank you. A question for Mr. Sisk, GSA schedule contracts are negotiated with the intent of achieving the contractor's most favored customer pricing, the vendor's best possible price for the goods or services. However, schedule holders routinely offer lower prices than their contract price when competing in reverse auctions. How are vendors allowed to offer conflicting prices? Mr. Sisk. Well the multiple award schedule price that has been determined to be fair and reasonable, you can always negotiate down from there. And so that is permissible within the multiple awards schedule program, for vendors to offer a cheaper price. Ms. Meng. Do you think it should raise a red flag as to the ability of the vendors to fulfill a requirement when their bid is below the most favored customer pricing? Mr. Sisk. Our mission is to always get the best price that we can for the government. Sometimes vendors get a better price from their distributor. Sometimes they have been able to lower their overhead. And so the schedules price that is established when we negotiate that contract initially is that the price is fair and reasonable to put sort of a ceiling price in place. But again, if we have competition amongst the schedules holders and we can get a better price for the government, then that is our goal. Ms. Meng. And your agency recently unveiled its own system for conducting reverse auctions. There are those that have voiced concerns about the current systems out there and the ability of vendors to use them. How does it compare to those that are available through private sector contractors? Mr. Sisk. A couple of things that are a little bit different about our program. First, it is run by a government agency so we have government contracting officers looking at what is available through that program. It is also based on the platforms that we have available for our E-Buy system, which is a system for government contracting officers to go out and get quotes from schedule holders. So they can use their same sign in information to get into our reverse auctions platform as well. So it is another tool that is available for them. In addition to that we also have visibility over all the prices paid through the system and so we hope that that information can help us educate government contracting officers in a better way going forward to get the best price for the taxpayers. Ms. Meng. Mr. Clark, in recent legislation Congress added a type of bid listing protection in limited circumstances for subcontractors who are used by prime contractors in their bid proposal. What the language does, it requires that the name subcontractor cannot be replaced with the contracting officer's approval. And if it does happen subcontractor's who are replaced without cause can now complain to the contracting officer. Do you agree that it would be good to implement major subcontractor bid listings for all Federal contracts if it would protect subcontractors from post-award substitution without cause? Mr. Clark. Would you mind repeating that for me, please? Ms. Meng. Do you agree that it would be helpful to implement major subcontractor bid listings for all Federal contracts if it would protect subcontractors from post-award substitutions without cause? Mr. Clark. The answer to your question is yes, the Office of Advocacy has over a period of years expressed concern with the process in which small business subcontractors have had to endure in the Federal marketplace. So if this provision actually provides that level of protection, just one more level of protection that our small businesses need, that type of protection is much needed. Ms. Meng. Thank you. I yield back. Mr. Hanna. Dr. Roe? Mr. Roe. I thank the Chairman for yielding. And also, I failed to mention thank you for holding this hearing today. Also, just a couple of quick questions. One, do you think that the FedBid reverse auction should continue in its current form? And if not, what would you replace it with? Ms. Mackin. I guess from our point of view there is not a problem per se with how FedBid is conducting these auctions. The issue is really with how the government agencies are using them and what information they have, and more importantly do not have, about competition, about the fees they are paying, and about what is appropriate to go through an auction. Mr. Roe. I think the, and Ms. Mackin I am going to stay with you for just a second, and Mr. Sisk, I want him to chime in also on that question. But I think you made a very important point and so did Mr. Clark about the simplicity. In other words if you are bidding out, with my medical background, tape, IV solutions, gauze, you know, those kinds of things, splints, whatever, that's pretty simple stuff. I mean, you know what it is, you know you have got to have it, and you want to get the lowest price. It makes absolute sense. But when you are bidding out complex, like a construction project, that seems an inappropriate use to, for me, for a reverse, let me give you just an example of what happened yesterday with the VA. And the question is why would the VA award a contract for autopsy services December 10th on a reverse auction. I mean, I do not guess at that point it matters to the patient but it might to the information you get that you get the best, most qualified person. To me that is a very complex problem to deal with, would you agree with that? Ms. Mackin. I would agree it sounds complex. I would just add that 90 percent of the auctions in 2012 were for products, but ten percent were for services. And I think when you get into the realm of services it can get complex fairly quickly. Mr. Roe. I think maybe that is something, and I think basically Mr. Clark pointed out the parameters should be really narrow. And I think Mr. Sisk also what you have done, is you have some very narrow parameters in what you are using reverse auction for. But I can certainly see where it would work. But when you then expand it to something as complex as an autopsy, that does not seem appropriate to me. Mr. Sisk? Mr. Sisk. Thank you. Certainly when we set up or tool it was envisioned to be for commodities and for very simple services, for multiple award schedule vendors to compete for the business. And we set the system up with our existing resources based, you know, funded out of our industrial funding fee. But it is for, you know, commodities and very simple services, yes. Mr. Roe. I yield back, Mr. Chairman. Mr. Hanna. Thank you. Thank you for your testimony today. I appreciate your time and energy, and the travel, although most of your are local folks, I assume. And I invite Mr. Coffman to take his place as Chairman, and he will introduce the third panel. Mr. Coffman. [Presiding.] I thank the panel for stepping forward. On this panel is Mr. Jan Frye, Deputy Assistant Secretary, Office of Acquisition and Logistics, Department of Veterans Affairs. Mr. Frye is accompanied today by Mr. Philip Matkovsky, Assistant Deputy Under Secretary for Health for Administrative Operations, Veterans Health Administration. Mr. Frye, you are now recognized for five minutes. STATEMENT OF MR. JAN FRYE, DEPUTY ASSISTANT SECRETARY, OFFICE OF ACQUISITIONS AND LOGISTICS, DEPARTMENT OF VETERANS' AFFAIRS; ACCOMPANIED BY MR. PHILIP MATKOVSKY, ASSISTANT DEPUTY UNDER SECRETARY FOR HEALTH FOR ADMINISTRATION OPERATIONS, VETERANS HEALTH ADMINISTRATION STATEMENT OF JAN FRYE Mr. Frye. Good morning, Chairman Coffman, Chairman Hanna, Ranking Member Kirkpatrick, and Ranking Member Meng, and distinguished Members of the Committees, we are pleased to appear here this morning to discuss VA's process for establishing and maintaining accountability in its use of reverse auctions. I am accompanied today by Mr. Philip Matkovsky, Assistant Deputy Under Secretary for Health for Administrative Operations. Reverse auctions currently represent less than five percent of VA's simplified acquisition transactions. VA supports the use of reverse auction tools when appropriate. When used properly they can result in both time and dollar savings, benefiting both the department and the American taxpayers. As the senior procurement executive I have policy and oversight responsibilities for the department's procurement activities. My office has issued policy outlining appropriate use of reverse auction tools and performed compliance reviews on reverse auction transactions. Since VA's procurement activities operate under a decentralized organization structure, implementation and executive of reverse auctions falls to the heads of contracting activities for the various administrations and staff offices. VHA's HCA has also conducted oversight reviews of reverse auction transactions, which resulted in similar findings to those performed by my office. The non-compliant issues identified in these reviews are the same as those found when reviewing other contracting methods. With a few years of experience behind us and the data associated with these transactions available for analysis, VA is evaluating the value proposing of reverse auctions. Specifically VHA is crunching the numbers in an effort to evaluate whether the dollar, time, and process efficiencies estimated by the advocates of these tools are being realized. Efficiencies alone cannot be the only measure of value. The reverse auction process is also being evaluated to ensure compliance with regulation and policy. VA is aware of the concerns voiced by some small businesses about reverse auction service providers. Meeting small business goals are a priority for the department. This is evidence in the results. In fiscal year 2012 VA conducted 7,587 reverse auctions representing approximately $305 million in total dollar volume. Seventy-nine percent of that total went to small businesses. The department has exceeded goals for small businesses since fiscal year 2010 with the total reaching from 35 to 37 percent of total obligations. In fiscal year 2013 alone over $6.5 billion was committed to small business. VA continues to monitor the efficacy of reverse auctions and adjust our policies and processes to be in line with the results of our reviews and business outcomes. Through this monitoring process VA will refine its use of reverse auctions and enable it to identify when to use it more effectively. As a result of these actions VA established and is maintaining a culture of accountability with regard to the reverse auction process. I appreciate the opportunity to testify today and I am happy to answer any questions the Committee may have. [The prepared statement of Jan Frye appears in the Appendix] Mr. Coffman. Thank you, Mr. Frye. Mr. Matkovsky, are you and VHA required to follow the reverse auction policies and guidance released by Jan Frye as VA's senior procurement executive? Mr. Matkovsky. Yes sir, we are. Mr. Coffman. Okay. Mr. Matkovsky, the employee who brought the reverse auction process to VA stated in an email that VA pays nothing for reverse auctions. But, ``a fee of up to three percent is paid by the firm winning the bid and is included in their bid price.'' Now does that not indicate that up to three percent will be added to the contract and therefore VA pays up to three percent for the use of reverse auctions? Mr. Matkovsky. I think it is a two-part answer, sir, if I may. The annual fee we pay to the firm that hosts that reverse auctions is $1. The reverse auction process itself, as I understand it, the bidders will have a published price. Contained in that price is the fee to the reverse auction contractor. So when in effect we find that final price it contains the fee. To say that we do not pay a price for that is technically inaccurate. The price for that reverse auction is built into the price we see. Mr. Coffman. All right. Mr. Frye, did anyone ever bother to validate reverse auctions when they were introduced to VA? Mr. Frye. Could you repeat that again? I am sorry. Mr. Coffman. Did anyone ever bother to validate reverse auctions when they were introduced to VA? Mr. Frye. With regard to prices paid, savings? Mr. Coffman. Savings. Mr. Frye. One of the things that we noticed in 2012 when we put a moratorium in place, in March of 2012 to be exact, was that the prices that were touted as savings, or the savings values, were being provided by the reverse auction firm, FedBid. We did not think that was probably the way to go and so one of the things that we required as we put a new policy in place and promulgated that policy was that for VA or specifically VHA contracting officers were then required to calculate the savings and to document the file with regard to those savings. Mr. Coffman. Okay. Why does VHA not take advantage of reverse auctions conducted by VA, like those of the technology acquisition center? Mr. Frye. Well first of all, Chairman, the technology acquisition center has run very few reverse auctions. They have run several and the reports that I have received are that they have saved some money, there have been some cost avoidances. But they have done it on a very small basis, very small scale. VHA made the conscious decision to use a third-party provider. They could have gone another route but it was their decision to use a third-party provider to assist them instead of running in house reverse auctions. Mr. Coffman. So Mr. Matkovsky, let me refer back to you again, to explain to me why you went with FedBid? It does not make sense. Mr. Matkovsky. At the time we did not have another alternative, and believe a competitive procurement was initiated. There were four invitations to submit, I think there were two bidders, and there were a couple of different models available at the time. One of them was a purchase outright of the licenses and would involve a large capital expense on the front end. Another alternative, as Mr. Frye alludes, would be to have an in house capability to set up that infrastructure. We did not have that at the time in VA. And then there was software as a service, which was the offer from FedBid. It offered very small capital outlays, one dollar. And effectively you are using a service that is hosted externally. It appeared risk averse at the time. Mr. Coffman. Three percent seems excessive, at this point. Mr. Matkovsky. Correct. So that is one of the things I think has been alluded. We have done an internal review again, based on some of the internal reviews, we saw the GAO report. And one of the things we looked at was can we quantify the nature of the return, and does that three percent make it unattractive for us to use this? And until we can feel comfortable with that, we have asked to pause these. There are some existing procurements that will be completed. We have asked to add no new ones to our reverse auction process. Mr. Coffman. Mr. Hanna? Mr. Hanna. So FedBid, no one bids against FedBid, they are out there three percent, you either hire them or you do not. And Mr. Frye, it seems patently obvious, what you said is that it does not necessarily make sense. And that you may not always earn their money and you may not always need them, if that is fair. You have heard the testimony up to this point from everyone. Most of it has been fairly negative overall. Do you believe either of you that you are capable of doing what was done through Fedbid on your own, by yourselves? Mr. Frye. Well I think we are. Maybe not at the scale that FedBid is able to offer. If we were to do it at the scale that is currently being used, for instance by VHA, we would have to build that capability within our workforce. But it could be done. It would not be done at no cost at all. There would be some overhead cost, and there would be some stand up cost, and perhaps some costs for software licensing and that type of thing. But it could certainly be done and it could be scaled, but it would cost something to scale it. Mr. Hanna. And you are using them currently for construction services? Mr. Matkovsky. Before I answer the question sir, Mr. Chairman, on the construction, on additional item. We use reverse auctions with the General Services Administration as well for our energy procurements. So natural gas, electricity, etcetera, we use other than FedBid for some of our reverse auction purchases. I just wanted to clarify that. For construction we use them for what we consider our local, not complex construction services. Those would be typically roof repair, replacement of flooring, etcetera. But not where you would consider a design/build contract for a stand alone facility, for an operating room, or something of that sort. Mr. Hanna. So for commodities, oil, gas, electricity, it works okay for you, even with the three percent you say. And for simple, basic construction repair, maintenance, those kinds of things, it has worked okay for you? Mr. Matkovsky. Reasonably okay. I mean, the few examples we have, we have a starting price that we estimated a target of roughly $700,000. Starting bids came in at over $1 million, and the final award price was under $250,000. I would actually agree with some of the prior testimony and feedback from some of the panel. That you want to make sure that you have a pool of qualified contractors for construction. And in some areas where we have used it, it has been where you have a multiple award contract already in place, so you have taken care of the technical competency and you are using the auction process to drive down price. Mr. Hanna. And have you seen circumstances where you have one or none---- Mr. Matkovsky. We have. Mr. Hanna. And how do you approach that? What do you say when you see a single bidder on a project that you may know there are many providers that did not apply through this program? Mr. Matkovsky. Well even in the case of some of the utility contracts, we will see a single bidder come in, but the price per unit of energy that we are purchasing is lower than our initial estimate. And we find it to be nonetheless a fair and reasonable price. Mr. Hanna. Do you feel comfortable rejecting a price that you think is not fair and reasonable if there is only a single bidder? Mr. Matkovsky. I believe the contracting officer is comfortable rejecting the price if they get a single and only one bidder. If they are starting sometimes from an existing contract, they may know the schedule price and see the reduction in the as quoted price. Mr. Hanna. And so part of the take away of what I hear from you is that in complex cases it is not practical? Unless maybe as you said you have an existing overriding general contractor or something like that? Mr. Matkovsky. Personal opinion, as a general rule, I think that this is less appropriate for highly complex technical proposals where you have to do considerable trade off analyses. Mr. Hanna. Thank you. I yield back. Mr. Coffman. Ranking Member Ann Kirkpatrick, Arizona? Mrs. Kirkpatrick. Thank you, Mr. Chairman. Thank you, Mr. Frye, for your testimony and your appearance today before the Committee. My first line of inquiry is back to construction. I know that has only been five percent of your use of the reverse auctions. But it appears to me there was a significant use increase from fiscal year 2011 to fiscal year 2012. Can you explain that increase? Mr. Frye. Actually, I will defer to Mr. Matkovsky on that since it is an operational question. Mrs. Kirkpatrick. Okay. Mr. Matkovsky. It had only started in fiscal year 2011 as a pilot process. And then in fiscal year 2012, it had extended use into most of our operating locations. That is really the driver behind that change. Mrs. Kirkpatrick. You heard our first panel. Mr. Cary said that he does not think that reverse auctions should be used at all in procuring construction services. Would you agree with that? Mr. Matkovsky. Once again, I think that if you are able to establish the technical competency of the bidder pool, and it is for lower complexity items, I think it can make sense. I would agree with Mr. Cary, that for higher complexity, major construction projects, it does not make sense. Price, lowest price, technically acceptable, is not the evaluation factor you want to apply to a major complex construction project. Mrs. Kirkpatrick. Thank you. And back to you, Mr. Frye. What prompted the 2012 moratorium on the use of the reverse auctions? Was that an internal decision? Mr. Frye. That was an internal decision. There were a number of issues. Perhaps you have seen the issues that I enumerated in my memo to the procurement workforce. Amongst those were perturbations in our supply chain. We have a supply chain in the VA. The underlying principle is a just in time system. This just in time system is supported by large strategic contracts. Using open market contracts, in this thousands of them, is perpendicular to that system. We want to continue to use, and as a matter of fact we have been directed by the Secretary, to expand the use of these large strategic contracts. So that was one of the factors that prompted us to put a moratorium in place and halt so that we could recalibrate. There were other issues as well. Frankly, and I think it was brought up today in some of the testimony, we really want to look at our suppliers. We want the best and brightest to serve the VA. We serve veterans. We provide health care. And we want the best suppliers there. Naturally we want the best value, we want a good price. We do not want to beat our suppliers down to the point where they cannot sustain low margins. And we were getting some input from a number of suppliers, especially small businesses, telling us that we were beating them down to the point where they could not make an appropriate profit. I do not believe that there are many firms that will survive in the long run if they do not operate where marginal cost equals marginal revenue. In other words, I do not think there are firms out there that are going to offer a price below their break even point and stay in business. So I am not sure that happened. But we did hear on many occasions that we were effectively beating them down. And for that reason some of our better suppliers were departing and did not wish to serve the VA. So that was a concern as well. Mrs. Kirkpatrick. Thank you very much, and I yield back. Mr. Coffman. Thank you. Congresswoman Meng? Ms. Meng. Thank you. When setting a target price in a reverse auction contracting officers base the number on the government's cost estimate or market research. Are purchases made through the reverse auction process being used to set market research pricing standards for future purchases of like items? If so, how does that conflict with schedule holders of similar items? Mr. Frye. Well let me make sure, and I think I understand your question. It is absolutely incumbent upon the contracting officer working with the requiring activity, the organization that needs the product, to develop a target price or an independent government estimate. And that independent government estimate is of course critical when you purport savings. And in many cases we find that we have faulty independent government estimates. That is a function of time in many cases. The requiring activity or the contracting officer in many cases are rushed to get requirements in place and probably do not do, as a matter of fact do not do in many cases, a sufficient job in developing the government's estimate. I think in the future we have to get better at that. We have been working in that not only in the VA but across the government for many, many years. You will see in non-complex buys, buys for commodities, that we sometimes do not hit the mark for the independent government. And you will see in complex buys we often do not hit the mark for the independent government estimate. So someone said earlier in testimony here that the independent government estimate is the key because that is the baseline we use to declare whether we have saved any money or not. So if we have got a faulty baseline, our declared savings are not accurate. Ms. Meng. And in general the lack of guidance in the reverse auction process has caused some to question the fairness of the system. Vendors are especially concerned with the fact that even after they go through the process the contracting officer is not required to select the lowest bidder for award. How are your agencies ensuring that the process is fair and transparent? Mr. Frye. I would respond to that by saying that the contracting officer is always responsible for source selection, except in major, high dollar programs. But in everything we do using reverse auctions the contracting officer is the source selection authority. They are required to determine the winner. They are required to declare a fair and reasonable price. They are declared to document the file accordingly. So I have heard these allegations that this third party, in this case FedBid, was actually awarding the contracts. That is not the case because the contracting officer is the person who executes the contract, signs the face of the contract, and obligates the government. Ms. Meng. Thank you. I yield back. Mr. Coffman. Thank you. Our thanks to the panel. You are now excused. I would like to recognize Chairman Hanna for his closing remarks. Mr. Hanna. Thank you, Chairman Coffman, and thank you to all our witnesses today. As we have heard, the way reverse auctions are currently structured does not promote competition as we intend and would like within the Federal procurement area. My bill, H.R. 2751, takes a critical step to solve some of these unfair competitive issues. I look forward to working with my colleagues on the Veterans' Affairs Committee on ways to further develop and expand this bill. And again, I thank you all for being here, and yield back. Mr. Coffman. Thank you, Mr. Hanna. It is important to note that this hearing was the product of a lengthy investigation into the inappropriate use of reverse auctions by Federal agencies. We referred to a reverse auction provider named FedBid throughout the hearing due to its use by many Federal agencies and repeated reference in the GAO report. But our focus was entirely on problems within the government, not with the operations of a private contractor. VA has begun reconsidering the circumstances in which it conducts reverse auctions. In March, 2012 Jan Frye, VA Deputy Assistant Secretary for the Office of Acquisition and Logistics, suspended all use of FedBid due to a ``groundswell of complaints from VA suppliers, at least one protest potentially increased cost, small business programs anomalies, and violations of our VA contract hierarchy.'' The suspension in 2012 lasted only one month because use of reverse auctions was reinstated due to significant political pressure. We have been notified today that VA's use of reverse auctions again has been suspended. Clearly the use of reverse auctions is a matter of procurement policy sorely in need of additional guidance. GAO has made recommendations in this regard, and OMB has indicated agreement. However, follow through is necessary. Unfortunately given VA's persistent failure to independently validate the use of reverse auctions, I hope that VA does not do anything to make matters worse. I ask unanimous consent that all Members have five legislative days to revise and extend their remarks and include extraneous material. Without objection, so ordered. I would like to once again thank all of our witnesses and audience members for joining in today's conversation. With that, this meeting is adjourned. [Whereupon, at 12:10 p.m., the Subcommittees were adjourned.] A P P E N D I X ---------- Prepared Statement of Hon. Mike Coffman, Chairman Good morning. I would like to welcome everyone to today's joint hearing titled ``Contracting Away Accountability - Reverse Auctions in Federal Agency Acquisitions.'' I am pleased to host Chairman Richard Hanna and his fellow Members of the Subcommittee on Contracting and Workforce for the House Committee on Small Business, for this joint hearing. Reverse auctions are a contracting process used by the Federal government since the late 1990s theoretically to promote competition in the acquisition of goods and services. In a reverse auction, a buyer solicits bids from multiple sellers, in contrast to a standard auction where a seller solicits bids from multiple bidders. Over the course of a two year investigation by my Subcommittee, it became readily apparent that the use of reverse auctions by the VA has been problematic casting doubt on the extent of competition and the claims of cost savings. In a report issued two days ago, the Government Accountability Office (GAO) substantiated deficiencies with reverse auctions as used by VA. The House Committee on Small Business Subcommittee on Contracting and Workforce has similar issues more broadly with reverse auctions as a procurement method at other Federal agencies. It is important to note that this hearing is the product of a lengthy investigation into the inappropriate use of reverse auctions by Federal agencies. We will refer to a reverse auction provider named FedBid throughout the hearing due to its use by many Federal agencies and repeated reference in the GAO report, but our focus will be entirely on problems within the government, not with the operations of a private contractor. VA's sole reverse auction contractor is FedBid. In choosing FedBid to conduct its reverse auctions, VA did not solicit offers from any other contractors, contradicting the spirit of the Competition in Contracting Act of 1984, which requires that agencies fully compete contracts except in limited circumstances. Of the $828 million in Federal agency reverse auctions awarded in FY2012, GAO reported that 99% were conducted by the same contractor, FedBid, and VA awarded the greatest dollar value of these - over $200 million. VA has signed three contracts with FedBid, each contract containing an action obligation of just one dollar. FedBid's real compensation comes from the fee (up to 3 percent) it adds onto the final award price of vendor contracts. Accordingly, some advocates have concluded from this arrangement that FedBid's service is free to the government. However, it is obvious that when FedBid's fee is tacked onto the final award price of a contract, the seller is effectively passing on the fee to the government. Of the $1.7 billion in Federal and commercial auctions conducted by FedBid in FY2013, FedBid claims to have saved its customers $159 million - savings of about 8.5 percent, including fees. GAO has cautioned that all information related to fees and savings is provided by FedBid itself. According to FedBid, it calculates its savings against the government's estimated target price. Unfortunately, this calculation assumes the government is thoroughly researching its cost estimates, when for commercial items, the government frequently just reviews list prices. As such, for commercial items, simply relying on published list prices is unlikely to result in the best price since volume discounts are frequently available. Significantly, until April 2012, VA did not attempt any independent assessment of those savings, although guidance issued by VA now requires independent confirmation. In theory, reverse auctions are intended to promote competition. However, in practice, this competition is too often absent. According to GAO, in FY2012, over one-third of reverse auctions conducted by FedBid for Federal agencies had no interactive bidding, where vendors engage in multiple rounds of bidding against each other to drive prices lower. In 27 percent of auctions, there was only one bidder. Further, in eight percent there were multiple bidders but only one round of offers. Agencies paid $3.9 million in fees for these procurement services. Perhaps even more problematic is the fact that for over 3,600 reverse auctions, $1.7 million in fees was paid even though only one offer was received from one bidder - thus the government paid extra to award a sole source contract. Another issue raised is whether VA contract specialists have delegated inherently governmental functions to FedBid. According to the FAR, an action should be undertaken only by a Federal employee if it could ``[b]ind the United States to take or not to take some action by contract,'' ``[d]etermine, protect, and advance United States . . . interests by contract management,'' or ``[e]xert ultimate control over the acquisition, use, or disposition'' of property or funds. While FedBid does not itself award contracts, it is in a position of exerting significant influence on who gets the award. For example, some vendors have complained that when they have posed a question to a VA contract specialist, they are being refused and referred to FedBid instead. In this regard, it is also significant that FedBid keeps independent past performance records on vendors which it shares with the government, including information regarding the creditworthiness of vendors, but does not share this information with the vendors. In some cases, it appears that the only function of the VA contractor is to sign off on an actual award. VA has begun reconsidering the circumstances in which it conducts reverse auction. In fact, in March 2012, Jan Frye, VA Deputy Assistant Secretary for the Office of Acquisitions and Logistics, suspended all use of FedBid due to a ```ground swell' of complaints from VA suppliers, . . . at least one protest, potential increased costs, small-business program anomalies, and `violations of our VA contract hierarchy.'' The suspension in 2012 lasted only one month, because use of reverse auctions was reinstated due to significant political pressure. We have just been notified that VA's use of reverse auctions again has been suspended. Clearly, the use of reverse auctions is a matter of procurement policy sorely in need of additional guidance. GAO has made recommendations in this regard that OMB has indicated agreement. However, follow through is necessary. Two additional points should be included. Reverse auctions may be appropriate for best price but not best value contract awards. Second, the Army Corps of Engineers has repeatedly found the use of reverse auctions for construction-related contracts and services to be improper. Given the VA's horrible track record with regard to major construction projects, I wholeheartedly agree that VA should not do anything to make matters worse.