A reverse auction is a type of auction in which the roles of the buyer and seller are reversed. Sellers compete to obtain business from the buyers. Buyers post an sollicitation of what they want to purchase, sellers compete in a live reverse auction and the lowest bidder wins. Today, reverse auctions are used by large corporations to purchase raw materials, supplies and services. Even though reverse auctions are a fraction of the cost of an RFP or RFX (1-3% of the cost), only a very small amount of procurement is done this way (about 1% of the auctions in dollar amount and 5% in volume). Why?
The adoption of reverse auctions has been slow because most reverse auction systems function on one criteria: price. Selections based on price only, typically yield the cheapest, lowest quality and often lesser value product. Humans and organizations do not make decisions based on price alone, so why would we think that procurement decisions could be made this way.
The solution to this challenge is a reverse auction with multi-criteria. Once you have multi-criteria, it is paramount to be able to trade the criteria off against one another because not all of the criteria have the same importance. As a conclusion a tradeoff based multi-criteria reverse auction delivers a low cost solicitation with high end-user adoption.
As evidence of this, the government is mandating the following in the Federal Acquisition Regulation (FAR)
15.101-1 — Tradeoff Process.
(a) A tradeoff process is appropriate when it may be in the best interest of the Government to consider award to other than the lowest priced offeror or other than the highest technically rated offeror.
(b) When using a tradeoff process, the following apply:
(1) All evaluation factors and significant subfactors that will affect contract award and their relative importance shall be clearly stated in the solicitation; and
(2) The solicitation shall state whether all evaluation factors other than cost or price, when combined, are significantly more important than, approximately equal to, or significantly less important than cost or price.
(c) This process permits tradeoffs among cost or price and non-cost factors and allows the Government to accept other than the lowest priced proposal. The perceived benefits of the higher priced proposal shall merit the additional cost, and the rationale for tradeoffs must be documented in the file in accordance with 15.406.
15.305 — Proposal Evaluation.
(a) Proposal evaluation is an assessment of the proposal and the offeror’s ability to perform the prospective contract successfully. An agency shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation. Evaluations may be conducted using any rating method or combination of methods, including color or adjectival ratings, numerical weights, and ordinal rankings. The relative strengths, deficiencies, significant weaknesses, and risks supporting proposal evaluation shall be documented in the contract file.
15.308 — Source Selection Decision.
The source selection authority’s (SSA) decision shall be based on a comparative assessment of proposals against all source selection criteria in the solicitation. While the SSA may use reports and analyses prepared by others, the source selection decision shall represent the SSA’s independent judgment. The source selection decision shall be documented, and the documentation shall include the rationale for any business judgments and tradeoffs made or relied on by the SSA, including benefits associated with additional costs. Although the rationale for the selection decision must be documented, that documentation need not quantify the tradeoffs that led to the decision.
15.306(d)(4) In discussing other aspects of the proposal, the Government may, in situations where the solicitation stated that evaluation credit would be given for technical solutions exceeding any mandatory minimums, negotiate with offerors for increased performance beyond any mandatory minimums, and the Government may suggest to offerors that have exceeded any mandatory minimums (in ways that are not integral to the design), that their proposals would be more competitive if the excesses were removed and the offered price decreased