[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





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                     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 
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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.

                                 
                    Prepared Statement of Nigel Cary
    Chairmen Coffman and Hanna, Ranking Members Kirkpatrick and Meng, 
and members of the Subcommittees, thank you for inviting the Associated 
General Contractors of America (AGC) to testify on federal agency use 
of reverse auctions to procure construction services. AGC represents 
over 25,000 construction contractors, suppliers and service providers 
across the nation.
    My name is Nigel Cary. I have been a member of AGC for over 30 
years and currently serve as vice-chair of the Federal & Heavy 
Construction Division. I have worked at Cox Construction Co., since 
1981 and was president of the firm from 1991 to 2011. We are a federal 
small business construction contracting firm based in San Diego County, 
California that specializes in work for government agencies. Since the 
Cox Construction's founding in 1979, we have constructed over 150 
public projects, ranging in size from $25 thousand to $30 million. Cox 
Construction has bid or proposed on hundreds of projects for federal 
agencies and completed projects for the U.S. Army Corps of Engineers 
(USACE), Naval Facilities Engineering Command (NAVFAC), the Air Force 
Civil Engineer Center (AFCEC), and United States Postal Service (USPS), 
among others. For our work, we have won Contractor of the Year 
accolades from USACE four times--in 1991, 1998, 2007 and 2008.
    Today, I will discuss:

    I. Why my company and many other construction companies--both small 
and non-small businesses--do not participate in reverse auction 
procurements;

    II. Why the U.S. Army Corps of Engineers--the largest and most 
experienced federal construction agency--no longer procures 
construction services through reverse auctions;

    III. How the Department of Veterans Affairs and General Services 
Administration, among other agencies, continue to use and to push 
reverse auctions for construction services; and

    IV. Why Congress should enact measures prohibiting reverse auctions 
for federal construction services contracts, like H.R. 2751, the 
Commonsense Contracting Act of 2013.

I. The Problems with Reverse Auctions for Construction Services 
        Contracts and How Reverse Auctions Limit Competition
    AGC strongly supports full and open competition for contracts 
necessary to construct improvements to real property. This includes 
competition among general contractors, specialty contractors, suppliers 
and service providers. Over the years, it has been established that 
such competition energizes and improves the construction industry to 
the benefit of the industry and the nation as a whole, especially 
taxpayers. As Congress considers the changing the federal procurement 
landscape, we offer the following points for consideration during your 
evaluation of reverse auctions.

    a. Reverse Auctions Do Not Provide Benefits Comparable to Currently 
Recognized Selection Procedures for Construction Contractors

    Vendors promoting online reverse auctions are selling technology 
for which there may be legitimate economic justifications for some 
types of procurements. However, those vendors have yet to present 
persuasive evidence that reverse auctions will generate real savings in 
the procurement of construction or will provide benefits of ``best 
value'' comparable to currently recognized selection procedures for 
construction contractors, which have been carefully and specifically 
tailored for all types of construction. Manufactured goods are 
commodities subject to little or no variability or change in 
manufacture or application. In comparison, construction services are 
project-specific and inherently variable. Each construction services 
contract is subject to the unique demands of the project, including: 
the geography--including but not limited to site conditions, the 
seasonality of certain construction activities, project proximity to 
major suppliers, and site ingress and egress in conjunction with other 
landowners--the needs, requirements, personnel and budgetary criteria 
of the owner, specific and unique design features, construction 
requirements and parameters, and the composition of the project team.
    Federal procurement laws recognize that construction stands apart 
from commodities or manufactured goods. AGC contends that vendors that 
promote reverse auctions for construction services misuse a procurement 
process originally designed for commodities. It ignores the unique 
nature of construction. Construction contractors, specialty 
contractors, subcontractors and suppliers offer and provide a mix of 
services, materials and systems. They do not ``manufacture'' buildings, 
highways, or other facilities. In fact, the construction process is 
fundamentally different from the manufacturing process.

    b. Reverse Auctions Do Not Guarantee Lowest Price

    In the context of construction, AGC believes that most of the 
claims of savings are unproven and that reverse auction processes may 
not lower the ultimate cost of construction. For example, ``winning'' 
bids may simply be an established increment below the second lowest bid 
not the lowest responsible and responsive price. Moreover, in reverse 
auctions, each bidder recognizes that he or she will have the option to 
provide successively lower bids as the auction progresses. As a result, 
a bidder has no incentive to offer its best price and subsequently may 
never offer its lowest price--as opposed to during low price 
technically acceptable procurements and other contracting approaches. 
In addition, savings from reverse auctions can be one time occurrences.

    c. Reverse Auctions May Encourage Imprudent Bidding

    Reverse auctions create an environment in which bid discipline is 
critical yet difficult to maintain. The competitors have to deal with 
multiple rounds of bidding, all in quick succession.
    The process may move too quickly for competitors to accurately 
reassess either their costs or the way they would actually do the work. 
If competitors act rashly and bid imprudently, the results may be 
detrimental to everyone, including the owner. There are even reported 
cases in which owners actually step in to keep an overzealous supplier 
from obtaining an order that would potentially jeopardized the business 
viability of the supplier. Absent such steps, imprudent bidding may 
lead to performance and financial problems for owners and successful 
bidders, which may have the effect of increasing the ultimate cost of 
construction as well as the cost of operating and maintaining the 
facility.
    During reverse auctions, small construction businesses are most 
likely to fall victim to such imprudent bidding and experience the 
greatest harm. Small construction businesses have less cash flow and 
reduced ability to handle risk than non-small construction businesses. 
Federal construction spending is down over 20 percent since August 2011 
according to the U.S. Census Bureau. And, the outlook for public 
construction remains grim as agencies at all levels of government 
continue to cut construction spending. Given this reality, small 
business contractors may simply bid a job below cost to maintain some 
form of cash flow to remain in businesses. Additionally, some may fall 
victim to the auction's time restraints and consequent knowledge gap. 
Under pressure to win the job, a small business may unwittingly 
underbid, thinking that the subcontractors it has lined up would 
perform at that low of a price. Unable to have subcontractors perform 
the work, the prime small business may not have the capability to 
actually perform all of the work on its own and default. And, to add 
insult to injury, the federal government can even file a claim against 
the contractor when it underbids a contract under the False Claims Act. 
\1\
---------------------------------------------------------------------------
    \1\ In the case of Hooper v. Lockheed Martin Corp., the U.S. Court 
of Appeals for the Ninth Circuit ruled for the first time that 
underbidding or making false estimates in bids or proposals submitted 
in response to federal government solicitations may constitute 
violations of the False Claims Act. In a situation where a bidder needs 
a contract to maintain cash flow, the reverse auction can serve as an 
easy way for some contractors to do that. However, as this case 
reflects, there can now be legal liability for doing so that could 
further endanger the company. For more information see http://
www.mckennalong.com/media/site--files/1979--FCA%20Article.pdf

    d. Reverse Auctions Do Not Allow Thorough Evaluation of Value, 
---------------------------------------------------------------------------
Unlike Negotiated Procurements

    Where price is not the sole determinant, federal owners 
increasingly have utilized processes focused on negotiation to expand 
communication between the owner and prospective contractors for the 
purpose of discussing selection criteria such as costs, past 
performance and unique project needs. These processes recognize the 
value and quality of project relationships that share expertise to 
promote greater collaboration among the owner and project team members. 
These processes also consider quality, safety, system performance, time 
to complete and overall value that can, in fact, outweigh the lowest 
price to arrive at the best value for the owner. Such an approach also 
offers both the owner and contractor the opportunity to discuss and to 
clarify performance requirements of the project.
    On the other hand, reverse auctions do not promote communication 
between the owner and bidders. Rather, they promote a dynamic in which 
bidders repeatedly attempt to best each other's prices. In fact, 
reverse auctions between buyers and suppliers often have a deleterious 
effect on the relationship between buyer and seller. Non-price factors 
of consequence to the owner, such as quality of relationship, past 
performance, scheduling, long-term maintenance and unique needs, are 
deemphasized in the auction. As a result, reverse auctions do not offer 
owners an opportunity to evaluate non-price factors.

    e. Sealed Bidding Assures that the Successful Bidder is Responsive 
and Responsible

    Where price is the sole determinant, the sealed bid procurement 
process is well-established to ensure integrity in the award of 
construction contracts. Under sealed bid procurement each proposer 
offers its best price and bids are evaluated through the use of 
objective criteria that measure responsiveness of the bid to the 
owner's articulated requirements and the responsibility of the bidder. 
In this manner, sealed bidding ensures fairness and value for the 
federal owner. On the other hand, reverse auctions ignore this 
tradition. The pressure and pace of the auction environment removes any 
assurance that initial and subsequent bids are responsive and material 
to the federal owner's articulated requirements. These auctions expose 
federal owners to the real possibility that they may award contracts to 
what would otherwise be non-responsive bidders. In addition, reverse 
auctions ignore the protections of the sealed bid procurement's laws, 
regulations and years of precedent that address critical factors and 
ensure the integrity of the process.

    f. Reverse Auctions Limit Competition

    My company--as well as many AGC members of all sizes--choose not to 
participate in reverse auctions for all of their risks and faults 
articulated above. Again, AGC strongly supports full and open 
competition for contracts necessary to construct improvements to real 
property. We contend that reverse auctions create an environment where 
competition is unnecessarily limited to the detriment of the federal 
government and taxpayers. In fact, we contend that no objective public 
or private study, including a U.S. Army Corps of Engineers (USACE) 
study on the issue, has provided persuasive evidence that reverse 
auctions generate the best cost, or best value for the procurement of 
construction services.
II. Federal Agency--USACE--Report, Experience and Policy on Reverse 
        Auctions
    We have reviewed the findings of a federal agency--USACE--study, 
published in 2004 entitled ``Final Report Regarding the U.S. Army Corps 
of Engineers Pilot Program on Reverse Auctioning'' (see enclosure). The 
report determined that although reverse auctioning had potential in the 
purchase of ``simple commodities'' where variability is exceedingly 
small or nil (identical products under identical conditions), its use 
for the purchase of construction services where the dynamics and 
variables are just too diverse ``should be the very rare exception and 
not the rule - if used at all.'' The USACE report further states that 
on the rare occasion reverse auctioning may be considered as an 
acquisition method, such consideration should only be made after sealed 
bidding has failed.
    On March 6, 2008, Major General Ronald L. Johnson, former Deputy 
Commanding General of USACE, testified before the House Committee on 
Small Business on this very issue. MG Johnson testified that ``[t]he 
Corps, through our pilot study, found no basis to claim that reverse 
auctioning provided any significant or marginal savings over a 
traditional contracting process for construction or construction 
services.'' MG Johnson also testified that ``[w]hile this tool may be 
appropriate and beneficial in more repetitive types of acquisition, we 
did not find it to be a useful tool for our construction program and do 
not currently utilize it today to any great extent.''
    Most recently, on May 23, 2013, USACE Engineering and Construction 
Chief James C. Dalton, P.E., also testified before the House Committee 
on Small Business on a similar topic. Mr. Dalton noted that reverse 
auction procurement ``provides a benefit when commodities or 
manufactured goods procured are of a controlled and consistent nature 
with little or no variability. Construction is not a commodity.'' He 
went on to state that ``procuring construction by reverse auction 
neither ensures a fair and reasonable price nor a selection of the most 
qualified contractors.'' As a result of its experiences, USACE does not 
procure construction services using reverse auction procurement.
    Furthermore, the federal government has elsewhere acknowledged that 
construction services stand apart from commodities or manufactured 
goods. In a July 3, 2003 memorandum from Office of Federal Procurement 
Policy Administrator Angela Styles, the government states that ``[n]ew 
construction projects and complex alteration and repair, in particular, 
involve a high degree of variability, including innumerable 
combinations of site requirements, weather and physical conditions, 
labor availability, and schedules.'' This memorandum was sent to all 
federal procurement executives to encourage them not to treat 
construction as a commodity for government procurement purposes.
III. Reverse Auctions in the Department of Veterans Affairs and the 
        General Services Administration
    Over the years since USACE's first-hand insight on reverse auction 
procurement of construction services, AGC has found that some 
agencies--including the Department of Veterans Affairs (VA) and the 
General Services Administration (GSA)--continue to use or push this 
acquisition tool for construction. By no means are these two agencies 
alone. AGC has also brought the inappropriate use of reverse auctions 
to the attention of the National Parks Service and other agencies 
within the Department of Interior. For the purposes of today's hearing, 
we will address our concerns with the VA and GSA.

    a. Department of Veterans Affairs

    The VA construction program separates into two appropriation 
accounts: (1) minor construction, for projects of $10 million or less; 
and (2) major construction, for projects over $10 million. Similarly, 
the VA structures its construction program into two organizations, one 
where the 22 regional Veterans Integrated Services Network (VISNs) 
offices procure minor construction contracts and the other in the 
Office of Construction and Facilities Management (CFM) that handles 
major construction contracts.
    In AGC's experience, the inappropriate use of reverse auction rests 
with the VISNs and not with CFM. AGC has tried to reach out to VISNs 
that utilize this acquisition tool to inform them of prior federal 
agency experience and the inherent risks they bring. However, they have 
not been responsive. As such, AGC recently reached out to CFM about 
minor construction project awards procured through the reverse auction 
process since 2011. Those awards included the following 14 examples:

    1. VA261-13-B-0854, Renovation Support - Facility Space 
Realignment, San Francisco VA Medical Center, California; Award: 
$888,508.80

    2. VA247-13-R-1355, Floor Maintenance and Repair, Central Alabama 
Veterans Health Care System (CAVHCS), Montgomery and Tuskegee, Alabama; 
Award: $727,924.10

    3. VA247-13-Q-1567, Place Ductwork and Equipment, Atlanta VA 
Medical Center, Decatur, Georgia; Award: $283,250.00

    4. VA247-13-B-1655, Auditorium Upgrades, Ralph H. Johnson VA 
Medical Center, Charleston, South Carolina; Award: $224,540.00

    5. VA2417-13-R-0228, Stairwell Repairs, Carl Vinson VA Medical 
Center, Dublin, Georgia; Award: $208,352.52

    6. VA247-13-R-1560, Fall Protection Installation, Atlanta VA 
Medical Center, Decatur, Georgia; Award: $101,053.30

    7. VA262-12-Q-0950, Construct Concrete Slab Parking Pad with 
Security Fence, VA Medical Center, North Las Vegas, Nevada; Award: 
$86,700.66

    8. VA262-13-Q-0514, Install/Replace Flooring, VA Medical Center, 
North Las Vegas, Nevada; Award: $82,297

    9. VA247-12-R-1390, Floor Restoration Building 802, Charlie Norwood 
VA Medical Center in Augusta, Georgia; Award: $81,267.00

    10. 542-11-4-5306-0076, Retaining Wall Repair, VA Medical Center, 
Coatesville, Pennsylvania; Award: $75,639.08

    11. VA247-12-R-1396, Floor Restoration, Charlie Norwood VA Medical 
Center in Augusta, Georgia; Award: $52,009.85

    12. VA247-13-Q-1348, Medical Air Compressor Installation, VA 
Medical Center, Fort McPherson, Georgia; Award: $51,685.40

    13. 561-13-4-503-0021, Remodel of Homeless Services Domiciliary, 
Lyons, New Jersey; Award: $47,728.71

    14. VA247-13-Q-0604-01, Roof Repairs, Carl Vinson VA Medical 
Center, Dublin, Georgia; Award: $25,000

    All of the solicitations previously mentioned were small business 
set-aside projects, many of which were for Service-Disabled, Veteran-
Owned small businesses. AGC holds that the VA should not jeopardize the 
financial stability of these veteran small businesses, whose 
development and well-being is within the VA's mission, for a short-
sighted and unproven construction services procurement method already 
abandoned by the largest federal construction agency.
    Additionally, these VA contract awards were for the procurement of 
professional construction services and not for the purchase of a simple 
commodity, commercial item or mere maintenance. AGC holds that the VA 
misclassified these contracts, often as some form of simple maintenance 
rather than as professional construction services. For example, the VA 
Northern California Health Care System awarded a nearly $900,000 
contract (VA261-13-B-0854) for ``numerous interior renovations 
throughout multiple buildings at the San Francisco VA Medical Center. . 
. [for which] [t]he contractor shall provide all labor, materials, and 
equipment.''
    Here, the VA sought to solicit construction services under the 
guise of simple maintenance of structures and facilities. However, 
under no circumstance were the tasks equivalent to cleaning bathrooms. 
In fact, the solicitation called for over 20 rooms to be renovated in 
some fashion, including but not limited to work on flooring, plumbing, 
mechanical and electrical installation. The solicitation also included 
construction services calling for the use of fire-stopping construction 
practices and construction operations occurring during business hours 
in a hospital facility. Additionally construction services contractors 
were responsible for worksite safety for the contractor workforce and 
the VA facilities employees and patients.
    For another example, the Carl Vinson VA Medical Center in Dublin, 
Georgia, awarded a $25,000 ``roof repair'' contract (VA247-13-Q-0604-
01) as a simple ``repair or alteration of structures and facilities.'' 
However, this project was not merely a roof repair; it appears to be a 
complete roof replacement. Roof replacement is a complex construction 
service. It should not be procured through a game-like, online reverse 
auction process in which price is the only factor.
    Whatever the cost of the total project, construction requires 
professional expertise. It is subject to, among other things, weather 
conditions, rapidly changing diesel fuel and material prices, as well 
as conditions that introduce an extreme degree of variability to 
construction, like changing labor supply, workforce safety, and 
equipment costs and time. Additionally, construction projects can 
include unforeseen site issues, such as the existence and necessary 
safe removal of hazardous materials that were not disclosed to the 
contractor or known to the owner.
    The complexities of these processes simply do not compare to the 
purchase of an off-the-shelf commercial item or mere maintenance. The 
reverse auction process ignores the expertise of the contractor or the 
unique nature of construction. Construction contractors, specialty 
contractors, subcontractors and suppliers offer and provide a mix of 
services, materials and systems. Again, they do not ``manufacture'' 
buildings, highways, or other facilities.

    b. General Services Administration

    Earlier this year, GSA launched an online reverse auction platform 
(http://reverseauctions.gsa.gov/) that enables any federal agency to 
procure construction services through a reverse auction. AGC notified 
GSA that it should remove from its Reverse Auction Platform the 
construction services options outlined in Schedule 56--noted below.
    Specifically, the Reverse Auction Platform enables federal agencies 
to procure ``Buildings and Building Materials, Industrial Services & 
Supplies'' through Schedule 56. Schedule 56 includes ``Ancillary Repair 
and Alteration requiring minor construction (includes Davis Bacon and 
construction clauses); and Installation and Site Preparation requiring 
Construction, which is necessary for Roof Repair or Replacement, to 
install a Pre-Engineered or Prefabricated Building or Structure, to 
install an Above Ground Storage Tank or to Install Alternative Energy 
and Power Distribution Solutions (includes Davis Bacon and construction 
clauses) '' and construction of foundations. \2\
---------------------------------------------------------------------------
    \2\ General Services Administration, ``Buildings and Building 
Materials, Industrial Services and Supplies Schedule 56: Frequently 
Asked Questions (FAQs),'' available at: http://www.gsa.gov/graphics/
fas/FAQs-Buildings-Schedule56.pdf
---------------------------------------------------------------------------
    While GSA may intend for the procurement of what is misclassified 
as ``simple,'' ``ancillary'' or ``preparatory'' construction services 
through a reverse auction, in practice, such undefined terms could 
allow for federal agency misuse of the Reverse Auction Platform, 
costing the federal government--and tax-payers--more in the long run. 
Determining which contractor is the most qualified at the lowest price 
to clear and improve land for construction, construct a building 
foundation, install prefabricated buildings, and repair roofs, among 
other things in Schedule 56, demands that a procurement agency 
evaluates a host of source selection factors together, which reverse 
auctions do not consider. For example, installation of prefabricated 
buildings can require a degree of design-build project delivery 
expertise that varies among contractors. However, a reverse auction 
only evaluates price, whereas established federal procurement practices 
allow for the consideration of this expertise.
    To GSA's credit, it met with AGC in September on this issue. At the 
meeting, GSA showed its willingness to consider AGC's input as to why 
specific construction services items in Schedule 56 should not be 
procured through reverse auctions. In addition the agency was open to 
feedback on how to prevent contract misclassification.
IV. Congress Should Prohibit the Use of Reverse Auctions for 
        Construction Services Contracts and Support Measures Like H.R. 
        2751.
    As our testimony and the record evidence, the experiences of one 
federal agency do not necessarily mean another federal agency will 
learn from them. Rather, we find that each federal agency learns the 
mistake of construction services reverse auction procurement on its 
own. This will neither benefit competition and the construction 
industry--especially small businesses--nor the American taxpayer. \3\
---------------------------------------------------------------------------
    \3\ As noted previously noted, the federal construction marketplace 
has retracted by over 20 percent since August 2011. This has come as a 
direct result of budget cuts--including sequestration--and the 
prevalence of continuing resolutions that prohibit necessary new 
project starts, which push back projects to outlying years. Some 
contractors have, in part, shifted resources towards competing on more 
private contracts, as that market has slowly improved, than they did 
previously. As such, competition for federal construction projects may 
decrease, impacting the price to the government. And, in relation to 
reverse auctions, those contractors that depend on federal work may 
become more desperate to win awards and imprudently bid on reverse 
auctions. Again, as previously noted, this can lead to possible 
contract defaults that cost federal agencies and taxpayers precious 
time and resources. In addition, such imprudent bidding can cause 
desperate prime contractors to put undue pressure on subcontractors, 
jeopardizing their businesses.
---------------------------------------------------------------------------
    As such, AGC holds that the only solution is for Congress to enact 
a law that prohibits reverse auction procurement of construction 
services. To the credit of Chairmen Graves, Hanna and Ranking Member 
Meng, they recently introduced H.R. 2751, the Commonsense Contracting 
Act of 2013. This bill would prohibit federal agencies from bidding 
construction contracts suitable for award to a small business through 
reverse auctions.
    AGC previously testified in support of such a measure earlier this 
year and echoes its support for H.R. 2751 today. However, this bill 
will not completely prevent federal agencies from using reverse 
auctions to procure all construction services contracts. Consequently, 
AGC would support additional legislative efforts to prohibit reverse 
auctions for all construction services federal contracts.
    Thank you for this opportunity to provide the views of the 
construction contractor industry in this important matter.

                                 
               Prepared Statement of Louis J. Celli, Jr.

    To ``aid, counsel, assist and protect, insofar as is possible, the 
interests of small business concerns'' \1\ (Original charter of the 
U.S. Small Business Administration)
---------------------------------------------------------------------------
    \1\ 15 U.S.C. Sec.  631 : US Code - Section 631: Declaration of 
policy - See more at: http://codes.lp.findlaw.com/uscode/15/14A/
631#sthash.y4mlz3Oa.dpuf

    In 1953 the Small Business Act was signed into law, and created the 
Small Business Administration (SBA) we know today. The act was created 
to encourage and promote small business growth, and foster free market 
competition. In 1945 and 1946 millions of Americans took off their 
uniforms after WWII and came home to a job market that was shrinking 
because the war no longer provided economic stimuli. True to their very 
nature, American patriots turned to entrepreneurship. Still, large 
firms which grew powerful as a result of war production had a 
tremendous advantage over smaller, and start-up companies, so Congress 
created the SBA to help level the playing field.
    The Small Business Act applies government wide, not just to the 
SBA. Government has a fiduciary responsibility and legal obligation to 
treat small business fairly, and to not take advantage of its buying 
power and become predatory, or act as a monopolistic powerbroker.
    Over the past 10 years The American Legion has worked closely with 
hundreds of small business owners, and has established a Small Business 
Taskforce that is comprised of successful small and medium sized 
veteran owned businesses. Additionally, we have thoroughly researched 
numerous reports and articles both extolling the benefits of the 
reverse auction, and the disadvantages of them. Much of the research we 
reviewed was gathered from the Reverse Auction Research Center which is 
located in the Department of Management at Southeastern Louisiana 
University, and through senior leadership at Fed Bid, one of the major 
online reverse auction services used by the federal government.
    The American Legion appreciates the goal of the government 
contracting community to lower federal exposure through competitive 
contracting initiatives, but is concerned that misuse of extra-
governmental tools that have not suffered the scrutiny of the 
appropriations process, is putting veteran owned small businesses at 
risk and could also be serving to undermine the entire procurement 
process.
    According to the Institute for Supply Management, reverse auctions 
are ``a type of e-auction that is conducted online, in real-time, 
between a single buying organization and pre-qualified suppliers. 
Suppliers compete in presenting bids to the buyer for the supply of 
goods or services whose specifications for design, quantity, quality, 
delivery, and related terms and conditions have been clearly defined''; 
and David C. Wyld, Executive Director of the Reverse Auction Research 
Center reports in his 2011 report, Reverse Auctioning: Saving Money and 
Increasing Transparency, ``The reverse auction acquisition tool is not 
appropriate for all spending categories. In fact, there are ``sweet 
spots'' for the use of reverse auctioning, namely in the areas of 
commodity-type buys of goods and services and in goods that are readily 
specifiable.'' \2\
---------------------------------------------------------------------------
    \2\ See David C. Wyld, ``Reverse Auctioning: Saving Money and 
Increasing Transparency'' (July 2012), available at 
www.businessofgovernment.org/report/reverse-auctioning-saving-money-
andincreasing-transparency.
---------------------------------------------------------------------------
    The American Legion also notes that all of the evidence, both for 
and against reverse auctions consistently use the term ``when used 
correctly, reverse auctions can be an effective purchasing tool''. 
However, ``when used correctly'' turns out to be the default phrase 
that places the responsibility for proper use squarely on the customer, 
in this case - the federal government. Contracting officers who are not 
formerly trained to use these tools have ended up taking unfair 
advantage of small businesses, and because these tools are not 
government tools, the oversight for structure and use lacks proper 
implementation.
    Wyld's article also discusses a 2004 memo from Robert A. Burton, 
then the associate administrator of the Office of Federal Procurement 
Policy (OFPP), The OFPP urged each federal agency, in the interest of 
``maximizing productivity gains from technology ...to explore 
increasing the use of commercially available online procurement 
services''. One tool specifically mentioned in the Burton memo was 
reverse auctions, and the OFPP noted at the time that: ``If used 
correctly, the reverse auction approach can ensure that the government 
receives competitive prices''. \3\
---------------------------------------------------------------------------
    \3\ Ibid
---------------------------------------------------------------------------
    Reverse auctions are not necessarily bad, any more than firearms 
are bad, when used properly by trained professionals. But while largely 
unregulated and improperly utilized, reverse auctions pervert the 
federal procurement system and skew the economic marketplace by 
encouraging awards made through an unnatural procurement process that 
ultimately preys on weak businesses, rather than promote strong 
businesses. This process ends up giving a false valuation of fair 
market product pricing, and will eventually create a disparity between 
more thorough procurement vehicle processes where value is made part of 
the decision matrix, and the reverse auction where value or added value 
is often omitted from bid consideration. Further, reverse auctions 
appear to undermine the Government Services Administration's (GSA) 
application process that requires the government be offered the best 
possible price in the first place. If that is true, then how can GSA 
contract holders consistently compete in the reverse auction process at 
offers lower than their established GSA contract?
    An example of added value would be a printer and copier vendor 
that, through their negotiated license agreement with the manufacturer, 
is required to provide training and technical support on the products 
they sell. This added value increases the market price of the product, 
but may not be reflected in the sterile environment of the reverse 
auction bid process. Reverse auctions create a disproportionate 
disparity in the federal procurement industry while American Legion 
resolution 321 \4\ specifically calls for equal parity in federal 
procurement, and according to the Federal Acquisition Regulation (FAR); 
````Fair market price'' means a price based on reasonable costs under 
normal competitive conditions and not on lowest possible cost''. \5\ 
Further, Fair Market Price is mentioned in nearly every part of the FAR 
and that exact term can be found more than 30 times.
---------------------------------------------------------------------------
    \4\ Resolution No. 321: Support reasonable set-aside of federal 
procurements and contracts for business owned and operated by veterans, 
American Legion. National Convention August 2012 http://
archive.legion.org/handle/123456789/2190
    \5\ Federal Acquisition Regulation, March 2005, http://
www.acquisition.gov/far/current/pdf/FAR.pdf
---------------------------------------------------------------------------
    In the FAR we also find FAR part 19 Sec. 807 giving a definition of 
Estimating Fair Market Price;

    ``(c) In estimating a fair market price for a repeat purchase, the 
contracting officer shall consider recent award prices for the same 
items or work if there is comparability in quantities, conditions, 
terms, and performance times. The estimated price should be adjusted to 
reflect differences in specifications, plans, transportation costs, 
packaging and packing costs, and other circumstances. Price indices may 
be used as guides to determine the changes in labor and material costs. 
Comparison of commercial prices for similar items may also be used.''

    And FAR part 15 Sec. 404-1 discusses proper Proposal Analysis 
Techniques;

    ``(a) General. The objective of proposal analysis is to ensure that 
the final agreed-to price is fair and reasonable.'' \6\
---------------------------------------------------------------------------
    \6\ Ibid

    And finally FAR part 19.1405 outlines Service-Disabled Veteran-
---------------------------------------------------------------------------
Owned Small Business Set-Aside Procedures;

    ``(b)(2) Award will be made at a fair market price.'' \7\
---------------------------------------------------------------------------
    \7\ Ibid

    While reverse auctions may have a place in federal procurement, in 
a limited capacity, The American Legion believes that the federal 
contracting office has the primary responsibility to ensure that every 
product that the government spends tax payer dollars on, is purchased 
at fair market value. This assurance protects the tax payer, the small 
business, and the market.
    Generally, reverse auctions are not popular in the commercial 
marketplace because the buyer doesn't always know what they are 
getting. Another example of reverse auctions is the online travel 
auction site Priceline. In these auctions the buyer knowingly 
understands that they are probably going to sacrifice comfort, 
convenience and quality for a lower price. Our federal government is 
not authorized to and should not be willing to forfeit those 
necessities, and congress does not fund government with the 
understanding that they must purchase marginally acceptable equipment 
and services, just as there is no pending legislation requiring federal 
travelers to use Priceline for their travel needs in an effort to save 
money. Also, Congress appropriates funds through an analytical process 
based on funding projections. If the government under spends the 
appropriated amount because they are thwarting the procurement process, 
then they should be mandated to immediately return the unobligated 
funds to the treasury, not obligate them for another purpose.
    The American Legion is extremely concerned that reverse auctions 
will lead to decreased quality and decreased employment opportunities 
for veterans, which is in direct violation of American Legion 
resolution number 50 \8\ that supports more hiring opportunities for 
veterans. Reverse actions will encourage vendors to learn how to 
provide the cheapest product and service in order to maintain profit 
margins, and government will be stuck purchasing poor quality because 
they will have no ability to shop for best value, only best price. 
These types of business models favor home-based business that primarily 
operate online and have no other employees than the owner, and no 
customer support. Businesses of this type end up relying solely on 
federal procurement as their only source of income, and this type of 
business model severely disadvantages businesses that hire veterans 
because businesses that hire employees have increased overhead 
expenses.
---------------------------------------------------------------------------
    \8\ Resolution No. 50: Support legislation that bolsters the hiring 
of veterans in the public and private sectors, American Legion. 
National Convention, August 2012 http://archive.legion.org/bitstream/
handle/123456789/2212/2012N050.pdf?sequence=1
---------------------------------------------------------------------------
    Businesses that have used reverse auctions successfully include 
very large businesses like Wal-Mart, Target, and Home Depot, who are in 
business for the sole purpose of making a profit. Purchasing at the 
lowest possible price is a core tenet for businesses like this as they 
have no legal, civic responsibility to protect small business like the 
federal government does, which is probably one reason our military 
isn't outfitted with products from Wal-Mart.
    An article in Contract Management magazine points out a case study, 
conducted on The Department of State, reveals reverse auctions are 
already losing market share and have dropped 30 percent between 2007 
and 2010, despite an increase in bid notifications of more than 225 
percent. \9\
---------------------------------------------------------------------------
    \9\ Contract management Magazine, Reverse Auctions: Turning Winners 
into Losers, October 2012 http://www.nxtbook.com/nxtbooks/ncma/cm--
201210/index.php#/4
---------------------------------------------------------------------------
    There will be plenty of testimony presented today that will offer 
evidence of billions of dollars in savings - but at what cost? The 
American Legion has been able to find no evidence that this process 
contributes to business innovation, economic growth, or positive 
partner relationships between government and industry. The American 
Legion has found reverse auctions fosters resentment between sellers 
and buyers and leaves the seller with the attitude of not wanting to 
provide anything more than exactly what was paid for, thus obliterating 
any harmonious relationship that should be developed between buyer and 
seller.
    Guy Frankling, e-sourcing and implementation manager at Royal Dutch 
Shell, argues that specificity is key across all procurement methods. 
``If you are not clear on your specification, you won't be successful 
doing it (procuring the good or service) either manually or 
electronically''. \10\
---------------------------------------------------------------------------
    \10\ Reverse Auctioning: Saving Money and Increasing Transparency, 
2011, http://www.businessofgovernment.org/sites/default/files/
Reverse%20Auctioning.pdf
---------------------------------------------------------------------------
    The American Legion also learned that businesses answering 
solicitations for services find that customers rarely, if ever, include 
all necessary requirements in the original solicitation. What is wanted 
versus what was asked for continues to be a source of frustration 
between contractors and vendors. The American Legion has received 
numerous complaints from veteran business owners who routinely argue 
that their customer is dissatisfied based not on the work that was 
performed, but more importantly, based on the work that wasn't 
preformed because it wasn't specified in the original solicitation.
    The American Legion has worked with businesses that have gotten 
into trouble with reverse auction wins. In some cases they fail to 
realize the true expense required to deliver on a bid and have sold at 
such slim margins that they weren't able to sustain a viable business 
model - In other cases they bid based on agreements from other 
manufacturers or vendors, who, after the bid was won, chose not to 
perform on the agreement because the profit margins were too low and 
they subsequently diverted their manufacturing efforts to more 
profitable projects.
    A survey of our members found that opinions regarding reverse 
auctions were overwhelmingly negative. Some of the more common 
complaints included;

      Lack of trust in the system - not knowing who they are 
bidding against, no idea if automated systems are in place of live 
bidders.
      Lack of federal compliance oversight
      Federal government's use of a commercial service that has 
not been properly competed through the procurement process, or gone 
through the federal design build process.
      Buyer funded fees that are charged to the buyer, but paid 
by the seller. This creates a false sense of inflated receipts and 
places unnecessary burdens and expenses on the seller.
      Fear of grey market products being sold illegally
      Promotes direct competition between manufacturer and 
authorized reseller
      Creates unreasonable pressure on small businesses to 
engage in loss leader pricing strategies
      Quality is unsustainable as this process subverts a 
healthy and profitable industrial base
      Ultimately, higher quality and more successful businesses 
are going to walk away from the reverse auction vehicle, leaving only 
bottom feeders

    If the government is to continue to use reverse auctions, The 
American Legion recommends;

    1. More outreach training for small veteran owned businesses.

    2. Eliminate the LEAD or LAG indicators. This creates an 
unrealistic stressor for the seller and can be extremely detrimental 
for the nascent business.

    3. Collect fees directly from customer (buyer).

    4. Build a fair market price list into the process for commonly 
purchased items, and prevent sellers from going below the established 
fair market price.

    5. Make buyers attest that they have conducted proper and adequate 
market research to determine fair market price.

    6. Eliminate the ability of the buyer to set a minimally acceptable 
price, or clearly state to the seller what the starting price is.

    7. Requests for debrief, protests, and any other dispute resulting 
between the seller and the federal government needs to be handled 
directly by the federal government, not handled through a civilian 
commercial company who has no authority to represent the federal 
government.

    8. Exact Match Bids need to be more interactive. Government has 
unique needs and requirements, and even items issued under the same 
National Stock Numbers provide variation that can cause end user 
difficulties.

    The Honorable Mike Coffman, Chairman
    Subcommittee on Oversight and Investigations
    House Veterans Affairs Committee
    335 Cannon House Office Building
    Washington, D.C. 20510

    The Honorable Richard Hanna, Chairman
    Subcommittee on Contracting and Workforce
    House Committee on Small Business
    2361 Rayburn House Office Building (RHOB)
    Washington, D.C. 20515

    December 9, 2013

    Dear, Chairman Coffman, and Chairman Hanna;

    Neither The American Legion nor I have received any federal grants 
or contracts, during this year or in the last two years, from any 
agency or program relevant to the December 11, 2013, Subcommittee on 
Oversight and Investigations House Veterans Affairs Committee and the 
Subcommittee on Contracting and Workforce House Committee on Small 
Business hearing on the Contracting Away Accountability Reverse 
Auctions In Federal Agency Acquisitions.

    Sincerely.

    Louis J. Celli Jr.

                                 
             Prepared Statement of Michele Mackin, Director
    Chairmen Coffman and Hanna, Ranking Members Kirkpatrick and Meng, 
and Members of the Subcommittees:

    I am pleased to be here this morning to discuss the federal 
government's use of reverse auctions. In recent years, federal agencies 
have been using this mechanism--in which sellers compete against each 
other in an online venue to sell their products or services--as a tool 
to reduce the price they pay for certain types of items. In theory, a 
reverse auction leverages competition, enabling agencies to obtain 
lower prices and reduce acquisition costs. We found that government 
agencies were increasingly using reverse auctions as a means to drive 
down prices but without adequate guidance to ensure that the potential 
benefits were maximized.
    My remarks today are primarily based on our recently issued report 
on agencies' use of reverse auctions. Accordingly, this testimony 
addresses (1) what agencies are buying through reverse auctions and 
trends in their use; (2) how agencies are conducting reverse auctions; 
and (3) the extent to which the potential benefits of reverse auctions 
are being maximized. \1\ My testimony today will summarize our findings 
from that report.
---------------------------------------------------------------------------
    \1\ GAO, Reverse Auctions: Guidance Is Needed to Maximize 
Competition and Achieve Cost Savings, GAO-14-108 (Washington D.C.: Dec. 
9, 2013).
---------------------------------------------------------------------------
    To conduct our work, we used fiscal year 2012 contract award 
information from Federal Business Opportunities (FedBizOpps.gov) to 
identify the Departments of the Army (Army), Homeland Security (DHS), 
the Interior (DOI), and Veterans Affairs VA) as the primary users of 
reverse auctions, representing approximately 70 percent of the 
activity. Because the agencies did not maintain the level of detailed 
information needed for our review, we obtained reverse auction data 
from FedBid, Inc., the company that conducted almost all of the 
government's reverse auctions in fiscal year 2012, according to 
FedBizOpps.
    In addition, we reviewed, where applicable, government-wide and 
agency policies and guidance regarding reverse auctions at these 
agencies; interviewed government acquisition officials and officials 
from the Office of Management and Budget's Office of Federal 
Procurement Policy (OFPP); spoke with organizations representing 
government contractors; and reviewed a sample of contract files where a 
reverse auction was used. This work was performed in accordance with 
generally accepted government auditing standards. Our report provides 
further details on our scope and methodology.
Reverse Auctions Have Increased and Have Been Used Primarily to Buy 
        Commercial Products and Services
    Across the four agencies representing the bulk of reverse auction 
activity in fiscal year 2012, use of reverse auctions increased almost 
175 percent between fiscal years 2008 and 2012. Figure 1 summarizes the 
growth in use of reverse auctions in dollars and number of auctions.

[GRAPHIC] [TIFF OMITTED] 

    Of the $828 million in fiscal year 2012 contracting actions that 
resulted from reverse auctions at these agencies, $746 million--or 90 
percent--was for products. Services, in contrast, constituted about 10 
percent. Reverse auctions were used to purchase a variety of commercial 
products, primarily for information technology (IT) and medical 
equipment and supplies. While to date most reverse auctions have been 
used for commercial products, some agency officials told us that the 
use of reverse auctions to acquire services is increasing and that they 
are also being used for more complex contracts.
    Our analysis of the data also identified some common 
characteristics among contract awards resulting from reverse auctions. 
We found the following:

      About 95 percent of the reverse auctions resulted in 
awards of $150,000 or less.
      About 86 percent of the reverse auction awards--
representing 80 percent of the dollars--went to small businesses. 
Figure 2 shows a breakdown of small business dollars among the four 
agencies.
[GRAPHIC] [TIFF OMITTED] 

      Further, almost 50 percent of the reverse auctions were 
conducted to place orders under existing contracts. In some cases, the 
use of these contract vehicles includes a fee that the ordering agency 
must pay.
      And we also found that almost 60 percent of reverse 
auction awards were in the last quarter of the fiscal year. Agency 
officials told us this can occur due to the timing of when funds are 
released and that reverse auctions can facilitate the timely award of 
contracts late in the fiscal year.
Agencies Use the Same Fee-Based Contractor and Are to Follow 
        Established Contracting Procedures to Conduct Their Reverse 
        Auctions
    All four agencies contracted with FedBid, a fee-based contractor, 
to conduct their reverse auctions during fiscal year 2012. Agency 
officials stated that contracting officers are required to follow 
established contracting procedures and rules. The contracting officer 
must also establish the basis for award. For example, the contracting 
officer can make the award to the lowest bidder or make the award based 
on a cost/technical trade-off process where it is in the best interest 
of the government to consider other than the lowest price. In fact, on 
the basis of our analysis of a random sample of auctions, we estimate 
that 24 percent of all reverse auction contracts awarded by the four 
agencies in fiscal year 2012 were not awarded to the lowest bidding 
vendor. \2\
---------------------------------------------------------------------------
    \2\ This estimate has a 95 percent confidence interval that extends 
from 17 to 33 percent.
---------------------------------------------------------------------------
    Contracting officers can determine reverse auction features, such 
as the length of an auction, the amount of information available to 
bidders about each other's bids, and whether to set a target price, 
which may be based on a government cost estimate or market research. If 
a target price is in effect, or ``active,'' a vendor must bid below 
that price and have submitted the lowest bid in order to be identified 
as the leading vendor. The leading vendor has the lowest price (below 
the target price) at any given time during an auction. However, a 
contracting officer can still award a contract even if no submitted 
bids meet the target price, that is, when no vendors were identified as 
the leading vendor. These strategies or features can affect the 
competitive environment of the auction and affect the magnitude of cost 
savings.
    Vendors must register with FedBid and agree to the requirements 
established by the contracting officer before submitting a bid in an 
auction. Vendors can use FedBid's system to submit questions about 
requirements during the auction, and the system notifies the 
contracting officer via e-mail. It is up to the contracting officer to 
decide whether to answer them. Several vendors stated that FedBid's 
interface creates an additional layer between the vendor and the end 
user that can inhibit their efforts to clarify details in the 
solicitation--such as the type of material an agency requires--that are 
important in setting a bid price.
    As part of our review, we gained an understanding of how reverse 
auction fees are paid. When a vendor submits a bid, FedBid 
automatically adds its fee and ranks the adjusted bid (i.e., the 
vendor's bid plus the fee) against adjusted bids submitted by other 
vendors. When the reverse auction ends and the contracting officer 
receives the results, the bids, which already include FedBid's fee, are 
ranked from lowest to highest. Then, when the agency receives the goods 
or services, it pays the entire bid amount to the selected vendor, 
including the fee. FedBid then sends an invoice to the selected vendor, 
who remits the fee to FedBid directly.
    Agency officials and some vendors were confused about FedBid's 
fees. What we found is that FedBid caps its fee at 3 percent of the 
winning vendor's bid (though the fee is not to exceed $10,000), but the 
fee may be less depending on the specifics of FedBid's contract with 
the agency. In addition, FedBid may reduce its fee or charge no fee in 
specific circumstances. In fact, we found that FedBid received no fees 
in 20 percent of fiscal year 2012 reverse auctions.
    In July 2013, the General Services Administration (GSA) launched 
its own reverse auction tool to allow agencies to use reverse auctions 
with the GSA Schedule without using a separate contractor to conduct 
the auctions. GSA does not intend to charge a reverse auction fee for 
awards made to GSA Schedule holders, but agencies would still pay the 
0.75 percent GSA Schedule fee. We did not conduct a detailed review of 
GSA's reverse auction tool.
Competition and Savings Are Not Always Maximized, in Part Due to Lack 
        of Comprehensive Guidance
    Competition and savings--two of the key benefits of reverse 
auctions cited by the agencies we reviewed--are not always being 
maximized. Both have been limited because not all reverse auctions 
involve what we refer to as interactive bidding, where vendors engage 
in multiple rounds of bids against each other to drive prices lower. We 
found that over a third of the fiscal year 2012 reverse auctions had no 
interactive bidding--and agencies paid $3.9 million in fees for these 
auctions. Figure 3 shows the percentage of FedBid's fiscal year 2012 
auctions for the agencies in our review that had interactive bidding 
among multiple vendors, versus those that did not, and the fees the 
agencies paid to FedBid.
[GRAPHIC] [TIFF OMITTED] 

    In addition, agencies cite savings as one of the benefits of 
reverse auctions. Although the agencies in our review stated that they 
do not publicly report the savings, they use the information--provided 
by FedBid--to assess the potential costs and benefits of reverse 
auctions. Using FedBid's approach of calculating savings based on the 
delta between the agency's target price and the winning bid, savings 
from fiscal year 2012 reverse auctions for the selected agencies 
totaled about $98 million.
    However, it is unclear whether these savings are accurate. We found 
that

      the $98 million in estimated savings may be too high 
since it includes $24 million in savings from auctions without 
interactive bidding, which in theory would help drive prices lower, and
      1,111 auctions that had interactive bidding resulted in 
an award price higher than the agency's target price, which may 
indicate that the contracting officer set the target price too low.

    We also found that agencies

      rely on FedBid to identify their reverse auction 
activity,
      generally do not track how much they pay in reverse 
auction fees, \3\ and
---------------------------------------------------------------------------
    \3\ While agencies generally do not track the reverse auction fees 
they pay, pursuant to FedBid's GSA Schedule contract, federal agency 
buyers utilizing FedBid's reverse auction services reserve the right to 
pay the transactional fee directly to FedBid. We found that the VA in 
some instances asked FedBid for information regarding the fees paid on 
specific reverse auctions.
---------------------------------------------------------------------------
      sometimes pay two sets of fees when using an existing 
contract vehicle in conjunction with a reverse auction. For example, 47 
percent of acquisitions using reverse auctions were ordered under pre-
existing contracts. Agencies paid $6.5 million in fees to FedBid in 
these cases in addition to paying a separate fee to use some of the 
existing contracts..

    However, we found that VA in particular has taken steps to gain 
greater insight into its use of reverse auctions. In 2012, the agency's 
senior procurement executive temporarily halted use of reverse auctions 
while an assessment was made of their effect on VA acquisitions. The 
reverse auctions were subsequently resumed, requiring collection of 
savings and fee calculations, which we found evidence of in the 
contract files we reviewed.
    The Federal Acquisition Regulation (FAR) does not specifically 
address reverse auctions. Agencies have developed their own guidance, 
though most do not provide information on what to do in certain 
situations--for example, when only one vendor submits a bid. In our 
discussions with agency officials and vendors, we found they were 
uncertain about how reverse auction fees are paid and that confusion 
exists about how reverse auctions are managed. We believe that the lack 
of government-wide guidance addressing the use of reverse auctions and 
the confusion within the vendor community about the process may limit 
the potential benefits of reverse auctions.
GAO Recommends that Office of Federal Procurement Policy Take Actions 
        to Address the Use of Reverse Auctions
    Given the clear trends showing that reverse auctions are on the 
rise and the lack of government-wide guidance on their use, we made 
several recommendations in our report. We recommended that the FAR be 
amended to address reverse auctions from a regulatory standpoint, and 
also recommended that the Office of Management and Budget (OMB) issue 
guidance addressing competition and fees and to share agency best 
practices.
    OMB generally agreed with our recommendations.
    Chairmen Coffman and Hanna, Ranking Members Kirkpatrick and Meng, 
and Members of the Subcommittees, this concludes my prepared statement. 
I would be pleased to respond to any questions that you may have at 
this time.
Contacts and Acknowledgments
    If you or your staff have any questions about this statement, 
please contact Michele Mackin at (202) 512-4841 or [email protected] In 
addition, contact points for our Offices of Congressional Relations and 
Public Affairs may be found on the last page of this statement. 
Individuals who made key contributions to this testimony are Katherine 
Trimble, Assistant Director; Russ Reiter; Carl Barden; Virginia (Jenny) 
Chanley; Dayna Foster; Kristine Hassinger; Georgeann Higgins; Julia 
Kennon; Kenneth Patton; Roxanna Sun; Bob Swierczek; and Jocelyn Yin.

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                    Prepared Statement of Bill 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 the Workforce. My name is Bill Sisk and I am the Deputy 
Commissioner of the General Services Administration's Federal 
Acquisition Service.
    I have spent over twenty years at GSA. I started in GSA's Regional 
office in Atlanta in 1990 and have served in numerous management 
positions including Assistant Regional Administrator and Regional 
Commissioner. In my capacity as Regional Commissioner, I represented 
GSA's Assisted Acquisition Services, Network Services, and Personal 
Property. I have also served as Assistant Commissioner in the Office of 
General Supplies and Services within the Federal Acquisition Service 
and was appointed to the U.S. AbilityOne Commission which is a unique 
program that provides employment opportunities for individuals who are 
blind or have other significant disabilities.
    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 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 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 1st, 
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 eTool available to our government partners to use to facilitate the 
request for and submission of quotes or offers for products and 
services through GSA Multiple Award Schedules and Blanket Purchase 
agreements (BPAs), Veterans Administration's schedules, and Department 
of Navy BPAs against GSA schedule contracts. GSA leveraged existing e-
Buy and GSAAuctions.gov IT infrastructure resources which reduced 
development costs and provides users a familiar look and feel when 
using the Reverse Auction website. 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 broad 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 real-time pricing
      Provides customers with level III spend data (historical 
pricing data)
      Interfaces with existing systems, i.e., eBuy / eLibrary 
enabling vendor authentication to verify that contracts are still valid 
under the GSA Multiple Award Schedules program
      Assists in meeting small business goals
      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 2000 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 utilizing reverse auction 
procurement solutions. Additionally, we predict future spend data may 
provide insights for potential strategic sourcing opportunities. As we 
move forward, we welcome insights from Congress, from industry, and 
from partner 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 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.

                                 
               Prepared Statement of Major L. Clark, III
    Chairman Hanna, Ranking Member Meng, Members of the Small Business 
Contracting and Workforce Subcommittee as well as Chairman Coffman and 
Ranking Member 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 and 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 he looks forward to a continued 
partnership with you as we mutually strive to improve the economic 
climate for our small business stakeholders.
    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.
    My name is Major L. Clark, III, and I am the Assistant Chief 
Counsel for Procurement Policy for the Office of Advocacy. 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 Honorable Parren J. Mitchell of 
Maryland so thank you for having me back.
    I ask that this written testimony and two attachments be included 
as part of the official transcript of this hearing.
    In 1976, the Office of Advocacy was established pursuant to Public 
Law 94-305 to represent the views of small entities. Advocacy advances 
the interests and concerns of small business before Congress, the White 
House, federal agencies, federal courts, and policymakers. The Office 
of Advocacy is an independent office within the Small Business 
Administration, so the views expressed by this office do not 
necessarily reflect the views of SBA or the Administration. We work 
with federal agencies in the rulemaking process to implement the 
requirements of the Regulatory Flexibility Act (RFA). 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.
    Pursuant to the above statutory authority, the Office of Advocacy 
has been involved in the monitoring of reverse auction activities at 
the federal level since around 2006.
    On February 27, 2008, the Office of Advocacy sent a letter to 
Administrator Paul Denett of the Office of Federal Procurement Policy 
with a recommendation from small business stakeholders to better define 
the reverse auction process. I have submitted this document as 
Attachment one.
    Attachment two is a more recent letter to Acting Administrator 
Lesley Field of the Office of Federal Procurement Policy dated January 
21, 2012 from Dr. Sargeant of the Office of Advocacy. This letter 
expresses additional concerns regarding the negative impact of reverse 
auctions on small businesses.
    In the fall of 2012, we held a procurement roundtable in Seattle, 
Washington. During this roundtable, we heard from a woman-owned small 
business. The owner explained her recent experience with the reverse 
auction process where she lost an important contract. Moreover, when 
she tried to understand why she lost the contract, she could not 
receive a clear explanation for losing her bid. As a result, the 
inability of the contracting officer to explain clearly why she lost 
the auction was as frustrating to her as losing the bid. After our 
listening session, Advocacy conveyed this experience to the Office of 
Federal Procurement Policy.
    In response to Advocacy's concerns, the Office of Federal 
Procurement Policy convened a small business stakeholder session in 
Washington, D.C. in which the attendees conveyed their concerns with 
the reverse auction process. Some of the concerns included a lack of 
clear guidance to agencies, conflicts with Federal Acquisition 
Regulation Part 19, the role and responsibilities of the third party 
providers, and finally, the fees required to participate in the reverse 
auction process.
    More recently, small business associations that represent small 
architectural, engineering and surveying companies have reached out to 
the Office of Advocacy about reverse auctions with the same concerns as 
other small business stakeholders. It would appear that some agencies 
are attempting to use reverse auctions for these types of services.
    In conclusion, Chief Counsel Sargeant would like to make it 
perfectly clear that the Office of Advocacy is not in opposition to 
reverse auctions in the federal marketplace. The intent of this office 
is to make sure that our small business stakeholders have a voice. We 
are advocating for clear reverse auction guidance from the Office of 
Federal Procurement Policy.
    Thank you and I look forward to your questions.
Attachment One of Major L. Clark III's Testimony:

    February 27, 2008
    The Honorable Paul A. Denett
    Administrator
    Office of Federal Procurement Policy New Executive Office Building
    Washington, DC 20501

    Subject: ``Two Existing FAR Rules/Policies'' on Advocacy 's 2008 r3 
Top 10 List

    Dear Administrator Denett:

    The Office of Advocacy is charged with monitoring compliance with 
the Regulatory Flexibility Act (RFA) and works with federal agencies to 
ensure that they analyze the impact of their proposed regulations on 
small business. Under the RFA, agencies are required not just to review 
proposed rules, but to review existing rules -as mandated by section 61 
0 of the RFA. In an effort to increase compliance with section 610 and 
to ensure that agencies conduct transparent reviews in general, the 
Office of Advocacy developed the Regulatory Review and Reform (r3) 
initiative.
    This r3 initiative was designed to identify and address existing 
federal rules that should be reviewed and may need reforming. r3 is a 
tool for small business stakeholders to suggest needed reforms to 
regulations that are outdated, ineffective, duplicative, or otherwise 
in n need of review. After a call for nominations, over 80 existing 
rules were submitted by small businesses and their stakeholders 
identifying potential rules ready for review and reform. Following 
significant review and analysis of those nominations. I have selected 
the 2008 Top l0 rules for Review and Reform .
    The purpose of this letter is to inform you that your office has 
two regulatory initiatives that appear on our 2008 r3 Top 10 list. This 
first is a rule on Retainage for Fix Priced A&E contracts and the other 
item is the OFPP initiative on reverse auctions. Advocacy will be 
announcing the 2008 r3 Top 10 Rules for Review and reform and releasing 
its annual report on agency compliance with the RFA on Thursday, 
February 28, 2008 at the National Press Club. A list of the r3 Top 10 
rules can be found in the attached summary report. Additional 
information on the r3 initiative is available on our website: www 
.sba.gov/advo/r3. In addition, a six-month status report will be placed 
on our website to update the public regarding Advocacy and agency 
progress on the r3 Top 10 Rules for Review and Reform.
    Advocacy has been working with staff in your office on these 
regulatory initiatives and we see this Top 10 list as an opportunity 
for both of our offices to accomplish burden reduction for small 
business and to be responsive to the regulated public.
    We look forward to working with your office on these important 
reviews. If you have any questions or concerns, please do not hesitate 
to contact me or Major L. Clark, III on my staff at 202-205-7150 or 
[email protected]

    Sincerely,

    Thomas M. Sullivan
    Chief Counsel for Advocacy

    Enclosure
Attachment Two of Major L. Clark III's Testimony:

    January 21, 2012
    Lesley Field
    Acting Administrator
    Office of Federal Procurement Policy
    New Executive Office Building Washington, DC 20501

    Re: Impact of Reverse Auctions on Small Businesses

    Dear Administrator Field:

    The Office of Advocacy (Advocacy) of the U.S. Small Business 
Administration submits this request for a review of current acquisition 
policies and practices regarding the acquisition tool of reverse 
auctions and the impact of such policies and practices on small 
businesses.
Office of Advocacy
    Advocacy was established pursuant to Pub. L. 94-3051 to represent 
the views of small entities before federal agencies and Congress. 
Advocacy is an independent office within the U.S. Small Business 
Administration (SBA), so the views expressed by Advocacy do not 
necessarily reflect the views of the SBA or the Administration.
Background
    In 1997, the Federal Acquisition Regulations (FAR) were changed to 
allow for reverse auctions in the acquisition process. In Fiscal Year 
2006, the National Defense Authorization Act required the Office of 
Management and Budget to study and develop a report on all types of 
commercially available online procurement services, including reverse 
auctions. In response to this request from Congress, the Office of 
Federal Procurement Policy established an inter-agency working group to 
review regulations, policies, and business considerations related to 
the use of online procurement services. The Office of Advocacy 
participated in many of the discussions of the working group.
    On February 27, 2008, the Office of Advocacy submitted to 
Administrator Dennett of the Office of Federal Procurement Policy a 
recommendation from small business stakeholders regarding the need for 
better policies and/or regulations on the use of reverse auctions. This 
recommendation for action came as a result of this office seeking input 
from small business stakeholders across the country on regulations and 
policies that were negatively impacting their ability to obtain a level 
playing field in Federal acquisitions. A copy of the letter to 
Administrator Dennett is Attachment 1.
New Developments
    On July 15, 2010 former OFPP Administrator Daniel Gordon testified 
before the Committee on the Budget of the United States Senate that 
reverse auctions have had some positive impacts on improving the 
Federal acquisition process and in this regard, some small businesses 
have been beneficiaries of multi-million dollar awards. We commend 
these results.
    Notwithstanding these successful uses of reverse auctions, the 
Office of Advocacy continues to receive concerns from small business 
stakeholders regarding the lack of clarity in the application of 
reverse auctions from agency to agency. In this regard there is a 
current protest before GAO in which the small business alleges that the 
Army used the reverse auction acquisition tool but did not comply with 
the Small Business Act, (15 USC644). This case is: GAO PROTEST B-
406329. SBA has filed a letter in support of the small business. A copy 
of the SBA letter is Attachment 2.
    We believe this case raises concerns that some Federal agencies 
using reverse auctions may not be complying with the simplified 
acquisition threshold requirements for contracts to be reserved for 
small businesses. The Small Business Act (15 USC 644) states, 
``simplified acquisitions shall be reserved exclusively for small 
business concerns.''
Recommendations
    Small businesses have stated that because of a lack of uniform 
clarity in policy or regulations they find an uneven hand in the 
application of reverse auctions to micro purchases. We recommend:

    1. That the Office of Procurement Policy at a minimum provide a 
clear policy statement to the acquisition community that reverse 
auctions must comply with the requirements that contracts within the 
simplified acquisition threshold are to be reserved exclusively for 
small businesses.

    2. That the Office of Federal Procurement Policy make a clear 
policy statement that reverse auctions are best when used for commodity 
acquisitions and not for service contracts.

Conclusion
    We commend the efforts of the Federal acquisition community in its 
commitment of a level playing field for small businesses. We believe 
that the type of clarity being requested above will be of tremendous 
assistance to the federal acquisition workforce as it continues to meet 
the acquisition mission of their agencies. Thank you for your prompt 
consideration of this request.
    Please contact me or my Assistant Chief Counsel Major Clark at 202-
205-7150 should you have any questions.

    Best regards,

    Winslow Sargeant
    Chief Counsel for Advocacy

    Major Clark III
    Assistant Chief Counsel for Advocacy

    Cc: The Honorable Cass Sunstein, Administrator, Office of 
Information and Regulatory Affairs
    Footnote:
    1. 5 U.S.C.Sec.  601 et seq. \1\

    1 Attachment 1: Letter of Chief Counsel for Advocacy Thomas M. 
Sullivan to The Hon. Paul A. Dennett, February 27, 2008

    Attachment 2: Letter of SBA Associate General Counsel John W. Klein 
to Pedro Briones, Esq., January 5, 2012

                                 
                     Prepared Statement of Jan Frye
    Chairman Coffman, Chairman Hanna, Ranking Member Kirkpatrick, 
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 here today by Philip Matkovsky, Associate 
Deputy Under Secretary for Health for Administrative Operations.
    Reverse auctions is a type of electronic tool in which the roles of 
buyer and seller are reversed. Unlike the traditional auction in which 
the seller accepts the highest price, reverse auctions result in the 
buyer accepting the lowest price. VA issued guidance in 2003 on the use 
of this electronic tool.
    Since 2004, the Office of Management and Budget (OMB) Office of 
Federal Procurement Policy (OFPP) encouraged increased use of 
commercially available online procurement tools, including reverse 
auctions. In a September 2010 memorandum, OMB's Federal Chief 
Performance Officer encouraged senior executives to reform contracting 
through the continued implementation of innovative procurement methods 
such as the use of Web-based electronic reverse auctions.
    VA supports the use of reverse auction as an acquisition tool. Use 
of this tool was primarily limited to contractor support for VHA. 
However, early in fiscal year (FY) 2012, concerns surfaced regarding 
management of the reverse auction process. As a result VA senior 
procurement executives made the decision to invoke a moratorium and 
conduct a comprehensive evaluation of VA's current compliance with 
policy and regulations. The moratorium was put in place on March 3, 
2012. VA analyzed randomly selected files and determined that some 
contracting actions did not fully comply with VA policy and procedures. 
Since procuring activities had alternatives for obtaining the required 
supplies and services, invoking the moratorium had no effect on VA's 
delivery of health care to Veterans.
    The Senior Procurement Executive released the new policy and 
rescinded the moratorium on the use of reverse auctions on April 3, 
2012. The VA policy provides specific guidance for VA warranted 
contracting officers regarding the use of reverse auctions. It directs 
each Head of Contracting Activity (HCA) to develop internal controls 
including mandatory training, file documentation and reviews, and 
standard operating procedures to establish oversight of reverse auction 
procurements. It further directs that each HCA ensure the savings 
realized through using reverse auction techniques are auditable and 
transparent, independent of any reverse auction service provider. 
Further, each award file must be documented with the savings realized 
through the use of reverse auction techniques as well as the reverse 
auction fee paid. VA oversees the procurement process, including 
reverse auctions through its compliance review process.
    VHA leadership requested an internal quality assurance group to 
conduct a focused review of select procurements that employed reverse 
auctions as the vendor solicitation method. Results of these internal 
reviews were briefed to VHA senior management, and based on these 
reviews, VA is pausing further utilization of our reverse auction tool.
    We are assessing the degree to which we can ensure a consistent 
application of this solicitation method, which includes thorough 
documentation, and conforms to all aspects of VA policy. The Department 
will continue to procure products and services through other 
procurement methods.
    The Department conducted 2,261 reverse auctions in FY 2011 
representing over
    $78 million in total dollar volume; 60 percent went to small 
business. In FY 2012, VA conducted 7,587 reverse auctions representing 
approximately $305 million in total dollar volume; 79 percent of that 
total went to small business.
    The Department has exceeded goals for small business since FY 2010. 
The Department's small business accomplishments have ranged from 35-37 
percent against goals of 33-34 percent.
Conclusion:
    The Department 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. I appreciate the 
opportunity to testify today and am happy to answer any questions the 
Committees may have.

                                 
                       Statements For The Record
                              FedBid, Inc.
    Chairman Coffman, Chairman Hanna, Ranking Member Kirkpatrick, 
Ranking Member Meng, and Members of the committees, thank you for the 
opportunity to provide written testimony on the topic of reverse 
auction use within the Federal Government and provide commentary 
regarding the recently published Government Accountability Office (GAO) 
report GAO-14-108 on reverse auctions (GAO Report).
1. INTRODUCTION
    What is a reverse auction? A reverse auction is a competitive 
process in which a buyer solicits bids from sellers during a period of 
time set by the buyer. During the reverse auction, sellers have the 
opportunity to submit a single bid or multiple bids that decrease in 
price. Unlike a forward auction, like eBay, in which a seller is 
selling a product or service and buyers submit competing bids, thereby 
driving the price up, a reverse auction involves sellers submitting 
competing bids and driving the price down. An online or electronic 
reverse auction creates considerable process efficiencies, as seller 
bids and rebids can be submitted quickly, with real-time information 
provided to sellers regarding their relative competitive position. In 
the case of FedBid, sellers are notified whether they `lead' or `lag' 
to the low bid or buyer target price, and are not shown the identity or 
pricing of competitors.
    It is important to note that, in the case of FedBid, buyers are not 
required to make award to the lowest bid or even to make award at all. 
If they have opted to apply best value award criteria, buyers can make 
award to any seller whose bid, based on the stated award criteria 
(which can include past performance, technical capability, delivery, 
etc. in addition to price) provides the most advantageous terms. In 
addition, at the close of any buy, the buyer can decide to make award, 
cancel the buy, or repost the buy with different requirements or under 
a different acquisition scenario.
    Although reverse auctioning currently addresses only a very small 
percentage of Federal spending, it provides an important alternative to 
traditional procurement methods. With the continuing contraction of the 
Federal procurement workforce and ongoing budgetary pressures, many 
agencies have come to realize that traditional means of sourcing, 
competing and procuring everyday goods and simple services needed to 
support agency operations just do not work well enough.
    How groundbreaking is the government's use of reverse auctioning? 
As a commercial best practice used by almost all Fortune 500 companies, 
online reverse auctioning has been around for decades. The Federal 
government finally removed its prohibition on reverse auctioning as 
part of the 1997 Federal Acquisition Regulation (FAR) re-write, and 
then, in 2004, Office of Management and Budget's Office of Federal 
Procurement Policy (OFPP) issued a memorandum asking Federal agencies 
to ``explore increasing the use of commercially available online 
procurement services'', including reverse auctions. In 2005, both the 
GAO (MTB Group, Inc., B-295463 (February 23, 2005)) and the Court of 
Federal Claims (MTB Group, Inc. v. United States, 65 Fed. Cl. 516, 523-
24 (2005)) determined that reverse auctions are permissible methods of 
procurement. To date, agencies have used online reverse auctions to 
purchase billions of dollars worth of commercial goods and services, 
from IT products to tattoo removal machines and from lawn care to lab 
rats.
    In fact, when looking at the overall process of online reverse 
auctioning in comparison with the traditional buying process, the 
dramatic differences occur in the process and data automation and NOT 
within the procurement process itself. As with traditional acquisition 
methods, the agency buyer using reverse auctions works within 
established contracting procedures and maintains complete control over 
the purchasing process, including what to compete, which acquisition 
scenario to use, which award criteria to use (including other than low 
price technically acceptable, or LPTA) and to which seller to make 
award. When using FedBid to conduct reverse auctions, agencies 
typically use simplified acquisition procedures, as the vast majority 
of auctions on FedBid are for requirements below the simplified 
acquisition threshold (SAT) of $150,000.
    What makes reverse auctioning so attractive as an alternative 
procurement method? Because of the high degree of process automation, 
information access and uniformity and ease of use inherent in this form 
of electronic commerce, reverse auctions provide a number of advantages 
over traditional procurement methods for firm-fixed price purchases of 
commercial item goods and simple services. These advantages include 
cost savings, operational efficiencies, increased small business 
utilization, and better transparency, accountability and control over 
agency spend.
2. SAVINGS

        a. Cost Savings through Dynamic Competition

    The aspect of reverse auctions that seems to attract the most 
attention is cost savings, and promoting competition is universally 
regarded as the key to driving high-quality purchasing results, 
including lower cost. The FAR recognizes this dynamic, providing as one 
if the guiding principles for the Federal Acquisition System to 
``Satisfy the customer in terms of cost quality, and timeliness of the 
delivered product or service, by, for example . . . [p]romoting 
competition'' (FAR 1.102(b)). It also cites promoting competition in 
the acquisition process as a means of satisfying the customer in terms 
of cost, quality, and timeliness of the delivered product or service as 
a ``performance standard'' within the Federal Acquisition System (FAR 
1.102-2).
    As a commercial best practice, reverse auctioning is particularly 
effective in promoting competition through the concept of dynamic 
bidding, which enables sellers to not only submit an initial bid, but 
also to submit multiple re-bids - either through an automated re-
bidding function or manually - based on some indicator of relative 
pricing. In FedBid, sellers can re-bid manually or use an automatic 
rebidding feature that enables them to establish a bid range, including 
a minimum bid price. The system does not display competitor names or 
pricing, but simply indicates relative price positioning through a 
`lead' or `lag' notification, enabling a seller to rebid if it lags to 
another seller or the buyer's target price. The relative pricing 
indicator approach helps protects against collusion and ``winner's 
curse'' situations by encouraging sellers to rebid, but to do so by 
reviewing their own pricing structure rather than that of another 
party.
    Even with the built-in competition aspect of reverse auctioning, 
the process in and of itself certainly does not guarantee competition 
in every circumstance. Rather, the nature of the purchase must provide 
a reasonable expectation of competitiveness, or the reverse auction 
process will have minimal, if any, impact on cost of the purchased 
item. For example, if the purchase is for a specific brand name 
product, there must be multiple manufacturers or authorized resellers. 
If a buyer is purchasing a product manufactured by one company and a 
direct sales model, there will be no competition, regardless of the 
acquisition method employed. As another example, specific to the 
Federal market, if the purchase is being made through a certain 
contract vehicle, there must be multiple suppliers under that contract 
that actually sell the required item as opposed to just being in the 
general item category. Not infrequently, a contract may include 
multiple sellers in a product category but provide little overlap of 
specific products. As yet another example, if a particular brand of 
product is being purchased through a contract vehicle using an economic 
set-aside, the combination of multiple limiting factors may easily 
restrict competition to a single supplier.
    Although the average Federal buy on the FedBid marketplace during 
FY13 resulted in push notifications to 3,447 sellers with profiles 
matching the buy requirements, the appropriate seller community is 
determined by each buyer. Depending on the characteristics of the buy, 
the size of that seller community can be reduced or expanded 
accordingly. The GAO Report mentions an example of a Department of 
Homeland Security contracting officer using multiple successive 
acquisition scenarios to increase the number of potential bidders in an 
auction. In that example, the buyer's first posting of auction 
solicited from among a small group of multiple award contract holders; 
the first repost of the auction increased the potential pool to GSA 
Schedule holders; and the second repost broadened the potential pool 
still further to include all sellers eligible for Federal award. The 
result of this approach was increasingly robust competition, which 
ultimately provided the best price after 21 bidders submitted 74 bids. 
The advantage of using an online reverse auction tool in this case was 
that the buyer was able to quickly and easily repost the buy to broaden 
the eligible seller community after evaluating the results of the prior 
posting, literally with a couple of clicks of the mouse.

        b. The Role of the FedBid Fee in Achieving Savings

    FedBid's 100% performance-based transactional fee structure plays a 
key role in validating buy results, including savings. FedBid receives 
a transactional fee, consisting of not more than 3% of the transaction, 
but only if the buyer: 1) determines that the reverse auction has met 
the competition, savings and other buyer generated criteria for the 
procurement and 2) selects a winning seller. Once the buyer selects a 
seller, it issues an order to the selected seller for delivery of the 
commodity or service. When the buyer receives the procured items or 
services, it pays to the selected seller the total bid amount, which 
includes the transactional fee. FedBid then collects from the selected 
seller the transactional fee. There are no fees for buyers or sellers 
to register, view, or post/bid on an auction, and sellers incur no out-
of-pocket costs to use FedBid.

    FedBid's 0-3% fee structure enables FedBid to adjust its fee 
downward to address situations in which the buyer has met its 
competition and other procurement goals through FedBid but the fee has 
caused the selected seller's bid to exceed a target price based on an 
actual market research quote or official published contract price. In 
such cases, FedBid reserves the right to reduce or remove its fee so 
that the awarded price will not exceed the target price. Accordingly, 
the fee can be as low as 0% on a given transaction. Because FedBid is 
only paid upon award and the buyer can cancel the buy or repost at any 
time, FedBid's fee model is risk-free for the buyer - effectively 
guaranteeing that the buyer will not pay more using FedBid than if they 
purchase offline. In addition, FedBid limits fee cost to Federal 
agencies, capping fees per auction at $10,000, so that fee is never a 
primary factor in considering whether to use reverse auctioning - even 
for larger procurements.
    The GAO Report raises an issue of a transaction being subject to 
two fees if an agency uses FedBid in conjunction with, for example, 
Schedule contracts. However, FedBid's performance-based fee structure 
means that no fee is incurred unless the agency realizes true value in 
using the reverse auction process. As part of the FedBid Terms of Use, 
FedBid specifically guarantees that it will reduce or remove its fee if 
it is notified that the fee causes the total price to exceed the 
seller's published contract price. Government-wide FedBid receives no 
fee on approximately 20% of all awarded buys. In the Veterans Health 
Administration (VHA), which employs a more restrictive competitive 
approach through its contract hierarchy, FedBid receives no fee on 
approximately 35% of actions, regardless of cost savings or 
competition. In fact, for the average GSA/Federal Supply Schedules 
(FSS) buy, FedBid collects a $414 fee, but yields an average of $5,072 
in savings, providing a 12x return on investment. Overall, FedBid helps 
Federal agencies save nearly 10%, including $121 million in FY12 and 
$160 million in FY13.
    Finally, it is important to emphasize that the FedBid fee is the 
only way FedBid gets paid on Federal purchases. Because it is 100% 
performance-based, FedBid does not get paid on canceled, reposted or 
zero fee buys, even though it has performed all services required to 
compete the buy on FedBid. Those services include provision, operation 
and management of the FedBid online marketplace and its reverse auction 
and related functionality; buyer training (in-person, remote and 
online) and onsite and remote support; seller sourcing, recruitment, 
training (in-person, remote and online) and support; market support; 
helpdesk services; quality assurance; reporting; marketplace 
application feature development and site enhancements; system 
development, operations, maintenance and upgrades; and, applicable 
customer system interface development. In other words, FedBid doesn't 
just promise results; it delivers.

        c. Operational Efficiencies through Managed Automation

    The GAO Report mentions that ``agency officials stated that using 
reverse auctions reduced some of the time that would otherwise be spent 
on the acquisition'' \1\ and that ``[a]gency acquisition officials told 
us that using a contractor for their reverse auctions reduced some of 
their administrative duties and allowed senior contracting officers to 
spend more time on complex acquisitions.'' \2\ This aspect of savings - 
operational savings through improved process efficiencies - in fact, is 
often a major driver of agency use of reverse auctions, and the FedBid 
marketplace in particular. Studies conducted by Department of State, 
Navy, and Customs and Border Protection (CBP) have all validated both 
the direct impact on time savings for procurements conducted through 
FedBid as well as secondary impact of improving operations by being 
able to utilize that time savings to better negotiate complex 
procurements, perform contract due diligence and closeout, or conduct 
training. The study conducted by CBP found that, on average, buyers 
could save approximately 8 hours per buy competed through the FedBid 
marketplace. This time savings is particularly critical during the 
fourth quarter of the government's fiscal year, when most procurement 
is conducted. As mentioned in the GAO Report, ``According to agency 
officials, reverse auctions, which can take as little as an hour for 
uncomplicated purchases, can facilitate the timely award of contracts 
at the end of the year.'' \3\
---------------------------------------------------------------------------
    \1\ GAO Report at 18.
    \2\ Id. at 12.
    \3\ Id.
---------------------------------------------------------------------------
    Why does reverse auctioning through FedBid save so much time? The 
platform effectively automates the communication and competition and 
documentation aspects of the procurement process through an intuitive 
web-based interface. Accordingly, buyers across the government can 
process thousands of auctions simultaneously, each involving multiple 
sellers submitting multiple bids on multiple items. Buyers simply 
perform market research as usual, post requirements according to the 
acquisition scenario of their choice, then review bid results, perform 
due diligence and make award. Buyers can access all of their reverse 
auction activity 24 hours a day, without any practical limitation on 
the number of requirements posted on the site or the number of auctions 
running through the site, and all marketplace data is reportable to the 
buying agency. In addition to the automation, FedBid provides 
comprehensive support services to both buyers and sellers and complete 
management of the marketplace.
3. SMALL BUSINESS UTILIZATION
    Although the FAR requires a fair and open procurement process that 
encourages maximum participation by sellers, traditional procurement 
techniques available to the government buyer make that a difficult 
standard for buyers to achieve and maintain. Actively notifying sellers 
of appropriate opportunities and ensuring that minimum response goals 
are met is time consuming, and traditional offline bid and proposal 
processes are cumbersome. In fact, even with the advent of FedBizOpps, 
which serves as the online publication site (or governmentwide point of 
entry) for Federal procurements, access issues remain. Publication to 
FedBizOpps is generally not required for awards under FSS or other 
authorized multiple award contracts, and while the site provides static 
notification, sellers must still actively search the site for 
opportunities corresponding with their offerings.
    Traditional process limitations and inefficiencies, coupled with an 
increasing workload and decreasing numbers of procurement personnel, 
typically mean that most competitive commodity procurements involve a 
relatively small number of sellers. It also means that sellers who 
would like to participate in those procurements have a more difficult 
time tracking them and competing for award. For small businesses, with 
limited sales and marketing budgets, participation in Federal 
acquisitions is even more difficult. Thus, even in spite of the 
government's ambitious set-aside programs and small business 
utilization mandates, Federal agencies continue to fall short of their 
goals to increase small business participation.

        a. FedBid's Impact on Small Business Utilization

    FedBid helps buyers meet the challenge of finding and engaging 
small businesses, with instant access to thousands of small businesses 
across every socio-economic, product and service category. The GAO 
Report finds that reverse auctions provide ``high rate of awards to 
small businesses.'' \4\ In fact, about 86% of FY12 acquisitions using 
reverse auctions--16,906 of 19,688--went to small businesses, in 
keeping with the FAR requirement that acquisitions of supplies or 
services with expected values of more than $3,000 but not over $150,000 
are reserved for small businesses, with some exceptions. \5\ These 
acquisitions accounted for $661 million (80%) of the dollar value of 
all reverse auction awards.'' \6\ During FY12, Federal agencies awarded 
$1.03 billion to small businesses through FedBid, with 18% ($240 
million) to VOSBs, including 14% ($181 million) to SDVOSBs. During 
FY13, the small business award volume number grew to $1.25 billion, 
with 27% ($333 million) to VOSBs, including 21% ($259 million) to 
SDVOSBs.
---------------------------------------------------------------------------
    \4\ Id. at 5.
    \5\ FAR Sec.  19.502-2(a) states each acquisition of supplies or 
services that has an anticipated dollar value exceeding $3,000, but not 
over $150,000 is reserved for small business concerns and shall be set 
aside for small business unless the contracting officer determines 
there is not a reasonable expectation of obtaining offers from two or 
more responsible small business concerns that are competitive in terms 
of market prices, quality, and delivery.
    \6\ GAO Report at 9.
---------------------------------------------------------------------------
    These statistics have been remarkably consistent year-over-year for 
more than a decade. FedBid attributes this to three primary attributes 
of the marketplace: i) relatively low dollar size of the buys, 
including an average buy size of $44,825 during the study timeframe of 
FY12, which means more reseller participation and reduced need for 
commercial financing; ii) ease of access - the opportunities are 
readily available and simply aggregated without access costs; and iii) 
ease of use - the marketplace is relatively simple and efficient to 
use.
    FedBid is completely free for sellers to register and use and 
provides a central location for businesses to filter, search and bid on 
tens of thousands of solicitations from Federal, state and local and 
commercial buyers. Federal buyers are able to automatically post 
combined synopsis/solicitations to FedBizOpps as required by 
regulation, and FedBid proactively contacts sellers when opportunities 
arise, using seller-selected profile criteria to communicate complete, 
detailed information for each procurement. This approach minimizes 
seller resources required to pursue each opportunity and compete for 
business, increasing opportunity awareness while lowering sales costs. 
In addition, because the services are web-based, there is no software 
to load, and sellers need only Internet access and a browser to 
participate. Automated bidding and other time-saving features enable 
sellers to compete on multiple simultaneous opportunities with fewer 
resources and fewer costs.

        b. FedBid's Impact on VHA's Small Business Utilization

    As today's hearing focuses on use of reverse auctions by the VHA, 
it is notable that FedBid has had a materially positive impact on VHA's 
utilization of small businesses - particularly with respect to VHA 
purchases below the SAT of $150,000, which makes up the vast majority 
of VHA's purchases through FedBid. The chart, below, compares all VHA 
awards for purchases below the SAT with VHA awards for purchases below 
the SAT made using FedBid during FY12, which was the time period under 
review by GAO. The data shows that VHA's use of FedBid resulted in:

      A higher share of awards and dollars to small businesses, 
including VOSBs and SDVOSBs;
      Greater FSS utilization pursuant to agency policy; and
      Broader supplier utilization, with most awards to other 
than top 5% of suppliers.
    Incidentally, the data for FY13 shows very similar results, albeit 
with a higher comparative percentage of awards and dollar volume 
through FedBid

                                      FY12 Purchases by VHA $3,000-$150,000
----------------------------------------------------------------------------------------------------------------
             Metric                 All VHA Purchases as Reported in FPDS \7\      VHA Purchases Using FedBid
----------------------------------------------------------------------------------------------------------------
        Total Number of Awards                                       136,043                             6,994
----------------------------------------------------------------------------------------------------------------
        Total Amount of Awards                                $2,747,165,200                      $171,817,992
----------------------------------------------------------------------------------------------------------------
 Awards to top 5% of Suppliers                                  $1.73B (63%)                     $81.83M (48%)
                            (%)
----------------------------------------------------------------------------------------------------------------
 FSS Contract Utilization (%)                                  $854.6M (31%)                     $78.80M (46%)
----------------------------------------------------------------------------------------------------------------

  Large Business Volume                                $405.6M (47%)                     $18.74M (24%)
               (%)
----------------------------------------------------------------------------------------------------------------

  Small Business Volume                                $449.0M (55%)                     $60.05M (76%)
               (%)
----------------------------------------------------------------------------------------------------------------

     VOSB Volume (%)                                   $128.6M (15%)                     $18.35M (23%)
----------------------------------------------------------------------------------------------------------------

    SDVOSB Volume (%)                                  $80.80M (10%)                      12.15M (15%)
----------------------------------------------------------------------------------------------------------------
Non-FSS Contract Utilization (%)                                $1.89B (69%)                     $93.02M (54%)

----------------------------------------------------------------------------------------------------------------

  Large Business Volume                                $1.015B (54%)                     $10.15M (11%)
               (%)
----------------------------------------------------------------------------------------------------------------

  Small Business Volume                                $876.9M (46%)                     $82.87M (89%)
               (%)
----------------------------------------------------------------------------------------------------------------

     VOSB Volume (%)                                   $361.9M (19%)                     $30.97M (33%)
----------------------------------------------------------------------------------------------------------------

    SDVOSB Volume (%)                                  $285.4M (15%)                     $25.63M (28%)
----------------------------------------------------------------------------------------------------------------
\7\  The Federal Procurement Data System (FPDS) data also includes purchases conducted using FedBid.

4. TRANSPARENCY, ACCOUNTABILITY AND CONTROL
    Beyond the benefits of the reverse auction process, reverse auction 
platforms are data rich tools that can provide agencies with real-time 
controls over the purchasing process and comprehensive data that can be 
used to manage their organizations better and make smarter procurement 
decisions.
    With respect to tactical operations, FedBid provides agency 
contracting officials and management with real-time access to all 
procurements utilizing the marketplace. Through the Supervisor 
Dashboard, agency management can review and manage each step of the 
purchasing process for every buy - before the buy is posted to the 
marketplace for competition, during the competitive process, after the 
buy closes but before award, and after award. The dashboard enables 
them to review and comment on, transfer, or take direct control of the 
buy. If there are policies related to contract hierarchies, set-aside 
preferences or other acquisition strategies, management can confirm 
that those are followed for each buy.
    Whereas platform features help improve operations on the individual 
buy level, it is the data that can provide a significant impact on 
agency acquisition strategy. Not surprisingly, the basis for the GAO 
Report on use of reverse auctions is data provided by the reverse 
auction services provider, FedBid. In fact, the breadth and depth of 
the procurement data processed and provided through FedBid to agency 
customers provides those organizations with a tremendous resource by 
which they can analyze their spend - what they are buying, when and how 
they are buying it, from whom, for how much - down to the unit pricing 
of each line item. This type of centrally accessible granular 
information regarding agency spend is available nowhere else in 
government procurement. Notably, the GAO Report mentions that another 
agency using a different reverse auction platform was unable to provide 
the data necessary for reviewing its reverse auction activity because 
``the agency collected only summary level information . . . providing 
the data for each auction would require them to review all contract 
files to determine whether a reverse auction had been used.'' \8\ This 
lack of data access and reporting capability is not limited to a single 
agency and a specific platform; it simply reflects the normal state of 
informational limitations within the typical agency procurement 
environment.
---------------------------------------------------------------------------
    \8\ Id. at 1.
---------------------------------------------------------------------------
    In contrast, FedBid prepares and electronically distributes to 
customers weekly, monthly and/or annual reports summarizing and 
detailing procurement activities for the previous desired time period, 
including, but not limited to, all posted, awarded, and cancelled 
procurements with the date of action, total dollar amount, name of 
buyer including buying division, and for awarded buys, the name of 
selected seller, business size, contract vehicle utilized, and 
percentage savings based on a total target price set by the buyer. An 
example of a reporting deliverable is an Agency Operations Report, 
which provides a detailed purchase history (monthly, annual, and multi-
year) of the purchasing activity of the agency, division and/or 
individual buyers. Standard data fields include: FedBid ID Number, 
Description, Contract Type, Internal Reference Number, Start Date, End 
Date, Target Price, Final Price, Selected Seller, Number of Bidders, 
Number of Bids, Number of No Bids, Socioeconomic data, and Savings. 
FedBid also provides buyers with all acquisition related data necessary 
for addressing seller issues and disputes, including those involving 
bid protests, alternative dispute resolution or other legal action.
    Reports themselves can be customized at the agency request, or 
agencies can consume raw data from FedBid and create their own reports. 
In either case, the available data can help agencies perform valuable 
analysis to determine the most effective acquisition scenarios for 
specific item types, the most advantageous timing for purchasing 
certain goods and services, whether the agency is meeting its socio-
economic utilization goals, or whether a contract vehicle provides 
adequate competition for particular goods and/or services. That 
information can then inform agency action to adjust purchase timing, 
increase or adjust use of set-asides, or award additional contracts 
under a contract vehicle.
5. CONCLUSION
    Reverse auctioning is not a cure-all for government procurement; 
rather, it is proven method for purchasing the types of commercial 
goods and simple services that Federal agencies use every day to 
support their operations. Its effectiveness as a procurement method is 
dependent on the circumstances of each purchase, and it should be 
approached with the same care and professionalism expected of any other 
government procurement. The FAR has laid out the both general 
principles and specific processes that apply not only to traditional 
procurement methods, but also to use of innovative methods such as 
online reverse auctions. With proper use of reverse auctions, 
procurement professionals can maximize competition and savings and 
increase small business utilization. And just as critically, agency 
management can use the comprehensive data from those reverse auctions 
to improve transparency of its procurement processes and actions, 
better gauge the effectiveness of its procurement strategies and 
practices, and craft specific means of improving agency performance.

    Respectfully submitted,

    Luther D. Tupponce
    Chief Administrative Officer and General Counsel
    FedBid, Inc.
    8500 Leesburg Pike, 6th Floor
    Vienna, VA 22182
    703-738-6886

                                 
           National Electrical Contractors Association (NECA)
    The National Electrical Contractors Association (NECA) appreciates 
the opportunity to submit a statement for the record ahead of the joint 
hearing entitled ``Contracting Away Accountability - Reverse Auctions 
in Federal Agency Acquisitions.'' NECA commends the Committees for 
holding a joint hearing conducting oversight over this important 
subject to examine the effects of this procurement tool and the 
negative effect its utilization will have in the procurement of 
construction services.
    Over a decade ago, advances in high-speed internet computer 
technology led to the introductory use of a new method of construction 
contract bidding - the internet reverse auction. Under this technique 
bidders send relevant project data, specifications, projected 
construction timetables and price. Owners would ask bidders to later 
gather around computers at a set time and compete for work by further 
whittling down their bid against the other competitors. The lowest bid 
is posted for all bidders to see - but the name of the current lowest 
bidder is withheld. The bidding continues with additional rounds of 
bidding. After each round of bidding the new low price is posted for 
all bidders to see. This continues until the lowest price is reached, 
at which time the bidding is closed and the winner declared.
    This scenario paints a clear picture of exactly why NECA and 
virtually every element of the construction industry has been united in 
its opposition to misguided attempts by federal agencies to treat 
construction as a commodity on grounds of efficiency or presumed cost 
savings--in particular, the use of internet reverse auctions for the 
procurement of construction services. Construction projects are not 
commercial commodities, mass-produced in a factory. The differences 
between even seemingly identical projects can be enormous.
    We strongly urge the Department of Veterans Affairs, as well as all 
of the federal construction agencies, to refrain from using internet 
reverse auctions or any other procurement tool that would treat 
construction as a commercial commodity. In fact, we urge Congress and 
the Administration to revise the Federal Acquisition Regulation (FAR) 
to expressly prohibit the use of reverse auctions for the procurement 
of construction-related services. This change in procurement policy 
would clearly establish that construction is not a commercial item, or 
commodity, and that Federal agencies shall not have the authority to 
procure construction-related services by reverse auction.
Reverse Auctions Do Not Serve the Interests of Owners or Construction 
        Contractors Well
    Reverse auctions have proven to be an unreliable procurement tool 
for the selection of construction contractors, specialty contractors, 
subcontractors, and suppliers. Software vendors promoting reverse 
auctions have not presented persuasive evidence that reverse auctions 
generate savings in the procurement of construction or provide benefits 
of ``best value'' outweighing currently recognized selection procedures 
for construction contractors. However, industry experience demonstrates 
that reverse auctions seldom provide benefits comparable to currently 
recognized selection procedures for construction contractors.
    As we have previously stated, the procurement of construction 
services cannot be treated like procurement of mass-produced 
commodities. Unfortunately, that is what reverse auctions accomplish. 
Every construction project and contract is unique and requires special 
knowledge, skill and training. Each project design and location is 
comprised of unique conditions that have to be met in a specific 
climate and location. Reverse auctions do not allow consideration of 
those variables.
    Electrical contractors spend substantial time, money and effort in 
preparing their bids. The price they submit is not arbitrary, but based 
upon the best prices they have been able to obtain from any 
subcontractors and suppliers they may utilize and their best estimate 
of the price at which they can bring in a project and still make a 
reasonable profit. Reverse auctions do not allow for consideration of 
those very important differences.
    For the owner, reverse auctions never guarantee the lowest price. 
Vendors claim that reverse auctions significantly reduce the cost of 
construction and save substantial amounts of time. In the context of 
construction, most of these claims have not been proven and the reverse 
auction processes do not lower the ultimate cost of construction. In 
reverse auctions, each bidder recognizes that he or she will have the 
option to provide successive bids as the auction progresses. As a 
result, a bidder has little incentive to offer its best and 
subsequently may never offer its lowest price. Ultimately, best-price 
sealed bidding is still the most effective way to obtain the highest 
quality construction at the lowest price. Sealed bidding ensures that 
competitors have only one opportunity to price the work, encouraging 
each bidder to present his or her best price.
    Where price is not the sole determinant, owners increasingly have 
utilized processes focused on negotiation to expand communication 
between the owner and prospective contractors for the purpose of 
discussing selection criteria such as costs, past performance and 
unique needs. Unfortunately, reverse auctions do not allow for a 
contract to be awarded based on ``best value,'' but on driving the 
price to an absolute minimum and awarding the contract to the lowest 
bidder. This is a poor use of taxpayers' money. Reverse auctions 
actually deprive taxpayers the full benefits of fair competition, 
quality construction and consideration of life-cycle costs. Reducing 
one's original bid price (as a contractor is forced to do when someone 
comes in with a lower bid during the reverse auction process) cheats 
the government by creating cost-value disparity in the finished 
product. Reducing a bid price requires cutting costs in the areas of 
materials and/or labor, which is significant in determining a 
structure's overall quality and value. Reverse auctions do not promote 
communication between the parties, they promote a dynamic in which 
parties repeatedly attempt to best each other's prices. As a result, 
reverse auctions do not offer owners a good way to evaluate non-price 
factors.
Reverse Auctions Upend Well Established Bidding Practices
    Reverse auctions create an environment in which bid discipline is 
critical, yet difficult to maintain. The competitors have to deal with 
multiple rounds of bidding, all in quick succession. The process may 
move too quickly for competitors to accurately reassess either their 
costs or the way they would actually do the work. If competitors act 
rashly and bid imprudently, the results may be detrimental to everyone, 
including the owner. Imprudent bidding may lead to performance and 
financial problems for owners and successful bidders, which may have 
the effect of increasing the ultimate cost of construction as well as 
the cost of operating and maintaining the structure. Some contractors 
who have learned to ``game'' reverse auctions inflate their initial 
bids to allow room to move their price downward. Should other bidders 
do the same, owners may actually end up paying more than they would 
have under a sealed bid system. In fact, responsible estimating 
practices dissolve during the reverse auction process and drives out 
the most responsible bidders in favor of those who are willing to cut 
corners and/or squeeze subcontractors to get at a lower price.
    It is clear that the sealed bidding process ensures that the 
successful bidder is both responsive and responsible. The sealed bid 
procurement process was established to ensure integrity in the award of 
construction contracts where price is the sole determinant. In a sealed 
bid, each bid is evaluated through the use of objective criteria that 
measure responsiveness of the bid to the owner's articulated 
requirements and the responsibility of the bidder and ensuring fairness 
and value for the owner. Reverse auctions ignore and upend this 
paradigm. The pressure and pace of the auction environment removes any 
assurance that initial and subsequent bids are responsive and material 
to the owner's articulated requirements. These auctions expose owners 
to the real possibility that they may award contracts to what would 
otherwise be non-responsive bidders. In addition, reverse auctions 
ignore the protections of the sealed bid procurement's laws, 
regulations and years of precedent that address these critical factors 
and ensure the integrity of the process.
Federal Policy Has Not Supported Reverse Auctions for Construction 
        Services
    While reverse auctions may demonstrate some value to the government 
in the purchase of commodities, no public or private studies have 
presented persuasive evidence that reverse auctions will generate 
savings in the procurement of construction when compared to currently 
recognized selection procedures for construction contractors. Upon the 
advent of the use of reverse auctions, the federal government took 
careful and decisive action to study this critical issue. First, the 
Office of Federal Procurement Policy issued a policy memorandum on July 
3, 2003 recognizing that construction services cannot be equated to 
commodities or manufactured goods when it acknowledged, ``new 
construction projects and complex alterations and repairs . . . involve 
a high degree of variability.'' The policy went on to state 
unequivocally that ``FAR Part 12, which addresses the acquisition of 
commercial items . . . should rarely, if ever, be used for new 
construction acquisitions or non-routine alteration and repair 
services.'' Second, the Department of Defense tasked the U.S. Army 
Corps of Engineers (USACE) to examine the use of reverse auctions. A 
subsequent report issued by USACE in 2004 found that there was no proof 
that reverse auctions provide any significant or marginal edge in 
savings over the sealed bid process for construction services for the 
following reasons:

      There was no proof that a consistent, reliable and valid 
measurement method for projecting savings could be established from 
reverse auctioning;
      Absent any specific price history for an identical 
project under identical conditions, there was no practical way to 
measure or compare any projected savings by reverse auctions over 
sealed bidding; and,
      There was no proof reverse auctions provided any 
significant or marginal savings in comparison to the government 
estimate.

    Finally, NECA argues that the use of reverse auctions with respect 
to construction services may violate procurement laws at the federal 
and state level. The FAR, as well as other current procurement statutes 
reflect a clear policy of not disclosing contractor price information. 
This is especially true once one realizes that price disclosure is a 
core characteristic of the reverse auction process and violates current 
federal procurement law.
Concluding Remarks
    It is for these reasons we reiterate our recommendation that 
Congress and the Administration take action and implement what we 
believe is an appropriate and responsible solution that will meet the 
acquisition needs of the federal government. The federal agencies need 
flexibility in the acquisition process and should have all tools 
available to them to allow for optimized savings. While reverse 
auctions can be a tool in the acquisition toolbox for mass produced 
commodities, it is clear that they should not be utilized for the 
acquisition of construction services. Congress and the Administration 
should finally codify this policy recommendation and we hope you will 
support this change. Lastly, we appreciate the time the Committees have 
taken to examine this complex issue and offer our assistance and 
expertise to help this process move forward.

                                 
                                COFPAES
    Since its inception in 1966, the Council on Federal Procurement of 
Architectural & Engineering Services (COFPAES) has provided the design 
community with a common voice on federal procurement law and 
regulations. COFPAES continues to serve the American public as a well-
known and respected forum for the consideration of policy and 
operational changes in the selection procedures for design 
professionals. Because of its emphasis on professionalism in the 
procurement process, COFPAES assists the federal government in assuring 
that the design of projects to satisfy the building, infrastructure, 
resource, and program management needs of our Nation are conducted in 
an efficient and quality manner. Throughout its history, COFPAES has 
focused on ensuring quality and competence in the procurement of 
professional architectural and engineering (A/E) services, including 
surveying and mapping services. COFPAES serves the American public by 
assisting Congress and federal agencies with policies to ensure that 
projects to satisfy the building, infrastructure, resource, defense, 
and security needs of the Nation are conducted in an efficient and 
quality manner. The member organizations of COFPAES are the American 
Institute of Architects, American Society of Civil Engineers, MAPPS - 
the association of private geospatial firms, National Society of 
Professional Engineers, and National Society of Professional Surveyors.
    COFPAES is pleased to submit this statement for the record of the 
December 11, 2013 hearing of the House Committee on Small Business, 
Subcommittee on Contracting and Workforce, on ``Contracting Away 
Accountability-Reverse Auctions in Federal Agency Acquisitions''.
    Over the past decade or more, the federal government's in-house A/E 
capability has been reduced. Retirements, attrition, recruitment and 
shifting priorities have all contributed to changes in the federal 
personnel structure that has resulted in fewer federal employees 
trained, qualified and actually engaged in evaluating, awarding and 
managing Federal A/E contracts. Notwithstanding this workforce 
reduction, the federal government's demand and expenditures for A/E 
services has remained steady or in some cases increased.
    The loss of an A/E acquisition workforce has caused a number of 
undesirable trends in A/E procurement. Federal contracts for A/E 
services have become larger in dollar value, longer in duration, 
bundled with other services, and less competitive. The advantages of 
QBS are being diminished. Moreover, given that the private A/E market 
is overwhelmingly comprised of small businesses, the trend has resulted 
in the creation of a virtual oligopoly. There are now fewer A/E 
contracts. They are now for longer time periods, with some potentially 
lasting 15 years when options are exercised. The use of design-build 
procedures, once reserved for rare and unique projects, has become more 
common. And the advent of GSA Federal Supply Schedules for services has 
resulted in rampant abuse of such schedule contracts in violation of 
the QBS law. And the rise of reverse auctions has threatened the public 
health, welfare and safety when applied to services that are considered 
A/E services under the Brooks Act 940 U.S.C. 1101 et. seq. and part 
36.6 of the Federal Acquisition Regulation (FAR). None of these trends 
favor the government, and the taxpayer, and they certainly put small 
business A/E firms at a disadvantage.
    The reason for this trend is simple - - supply and demand - - 
within the federal government. Fewer government A/E professionals 
experienced in acquisition are responsible for awarding more work. The 
decline in the federal A/E acquisition workforce led Congress to enact 
section 1414 of Public Law 108-136 and a provision in the 2008 National 
Defense Authorization Act, - 41 USC 1704(h).
    For purposes of federal procurement, A/E services are defined in 
federal law (40 U.S.C. 1101) as:

    (A) professional services of an architectural or engineering 
nature, as defined by State law, if applicable, which are required to 
be performed or approved by a person licensed, registered, or certified 
to provide such services as described in this paragraph;

    (B) professional services of an architectural or engineering nature 
performed by contract that are associated with research, planning, 
development, design, construction, alteration, or repair of real 
property; and

    (C) such other professional services of an architectural or 
engineering nature, or incidental services, which members of the 
architectural and engineering professions (and individuals in their 
employ) may logically or justifiably perform, including studies, 
investigations, surveying and mapping, tests, evaluations, 
consultations, comprehensive planning, program management, conceptual 
designs, plans and specifications, value engineering, construction 
phase services, soils engineering, drawing reviews, preparation of 
operating and maintenance manuals, and other related services.

    Unlike many products, for which the government awards contracts to 
the lowest bidder, or other services, which are awarded based on the 
``best value'', A/E services have long been recognized as having a 
significant impact on public health, welfare and safety. Moreover, A/E 
services amount to 1/10th of 1 percent of the life cycle cost of a 
project or program, but the quality of the A/E services determines the 
price and efficiency of the other 99.9 percent. As a result, Congress 
has long recognized the efficiency and economy of selecting firms for 
A/E services ``on the basis of demonstrated competence and 
qualification for the type of professional services required'', and 
negotiating a fee with the most qualified firm only after the firm's 
credentials have been established. This process, which is commonly 
known as qualifications based selection, or QBS, is codified in 40 
U.S.C. 1101 et.seq. and is implemented in the Federal Acquisition 
Regulation in 48 CFR 36.6. The definition in the FAR closely follows 
the statutory definition above and provides further clarification of 
the application of QBS to surveying and mapping, in subpart 36.601-4:

    (a) Contracting officers should consider the following services to 
be ``architect-engineer services'' subject to the procedures of this 
subpart:

    (1) Professional services of an architectural or engineering 
nature, as defined by applicable State law, which the State law 
requires to be performed or approved by a registered architect or 
engineer.

    (2) Professional services of an architectural or engineering nature 
associated with design or construction of real property.

    (3) Other professional services of an architectural or engineering 
nature or services incidental thereto (including studies, 
investigations, surveying and mapping, tests, evaluations, 
consultations, comprehensive planning, program management, conceptual 
designs, plans and specifications, value engineering, construction 
phase services, soils engineering, drawing reviews, preparation of 
operating and maintenance manuals and other related services) that 
logically or justifiably require performance by registered architects 
or engineers or their employees.

    (4) Professional surveying and mapping services of an architectural 
or engineering nature. Surveying is considered to be an architectural 
and engineering service and shall be procured pursuant to section 
36.601 from registered surveyors or architects and engineers. Mapping 
associated with the research, planning, development, design, 
construction, or alteration of real property is considered to be an 
architectural and engineering service and is to be procured pursuant to 
section 36.601.

    COFPAES is deeply concerned that reverse auctions have been 
attempted by federal agencies. We know of three instances in which such 
a process, which COFPAES believes to be in violation of the Brooks Act, 
was attempted.
    In once such instance, Solicitation Number 0040073949, issued on 
April 5, 2013, the U.S. Geological Survey, Department of the Interior, 
announced its intention ``to conduct an online competitive reverse 
auction to be facilitated by the third-party reverse auction provider, 
FedBid, Inc.'' This reverse auction was for an aerial geophysical 
survey, using the standard NAICS code (541360), which the federal 
government defines as ``Geophysical Surveying and Mapping Services. 
This industry comprises establishments primarily engaged in gathering, 
interpreting, and mapping geophysical data. Establishments in this 
industry often specialize in locating and measuring the extent of 
subsurface resources, such as oil, gas, and minerals, but they may also 
conduct surveys for engineering purposes. Establishments in this 
industry use a variety of surveying techniques depending on the purpose 
of the survey, including magnetic surveys, gravity surveys, seismic 
surveys, or electrical and electromagnetic surveys.''
    The solicitation was set aside for small business, with a small 
business size standard of $14 million. These are the NAICS Code and 
size standard for such surveying and mapping services ordinarily 
subject to the Brooks Act. The Solicitation was released on April 5 
with the reverse auction to be conducted on April 9. For a professional 
service such as a geophysical survey, this is insufficient time for a 
firm, particularly a small business, to investigate, analyze and 
develop a proposal.
    The scope of work is consistent to the requirements of the Brooks 
Act. It required the aerial geophysical survey, including GPS 
elevations, precise XYZ positions of observed field measurements, and 
positions computed using the WGS-84 datum and the NAD27 datum. This is 
clearly a surveying service.
    This procurement was executed in such secrecy and haste that 
COFPAES nor its member organizations were aware of it in time to lodge 
a protest or attempt to advise the contracting agency of its violation 
of the law.
    Solicitation G13PS00201 was issued by the USGS in August of 2013 
for 4-band (true color and near infrared) digital orthoimagery at 0.05 
meter ground sample distance, and stereo imagery for select portions of 
the Edwin B. Forsythe National Wildlife Refuge in coastal New Jersey. 
This included aerial photography, airborne GPS, rectified image maps, 
and elevation data. This is clearly a professional surveying and 
mapping service, yet was proposed to be carried out by FedBid, Inc. as 
a reverse auction. Fortunately, the public was protected as MAPPS, a 
COFPAES member organization, contacted the USGS officials responsible 
for such services and the auction was canceled. The work was assigned 
as a task order to a firm already under a USGS Geospatial Products and 
Services (GPSC) contract, a Brooks Act-compliant ID/IIQ contract.
    On December 28, 2012, the U.S. Army, Fort Benning, Georgia, issued 
Solicitation Number: 001025774 for a reverse auction for digital 
orthophoto mapping, through FedBid, Inc. The response date was January 
11, 2013. Officials at Fort Benning were advised by MAPPS that the 
scope of work was for engineering-related surveying and mapping 
services as defined by the Brooks Act, the FAR, Corps of Engineers 
regulations, and applicable Comptroller General decisions. Moreover, 
such services are the practice of land surveying, as defined by the 
State of Georgia, Sec.  43-15-2, Code of Georgia, requiring compliance 
with 40 USC 1101 and FAR 36.6, requiring performance by a Georgia 
licensed surveyor. Finally, any Georgia licensed surveyor who responds 
to the solicitation with a price quote would be in violation of state 
conduct regulation 180-6-.06.1. The Army did not require a surveyor 
licensed in Georgia.
    COFPAES is deeply concerned about this flagrant disregard for the 
law. The public health, welfare, and safety are jeopardized when 
reverse auctions are used in lieu of the statutory requirements of the 
Brooks Act and the FAR, as well as when state licensing law is ignored. 
Moreover, such processes put law abiding small business architecture, 
engineering, surveying and mapping firms at a competitive disadvantage.
    COFPAES looks forward to working with the Committee on Small 
Business, other committees of Congress with jurisdiction over this 
matter, and the relevant federal agencies to assure that reverse 
auctions are no longer inappropriately applied to A/E services.