• Internet Reverse Auctions: New Bid Method Raises Concerns

    Feb. 1, 2004
    Estimating and bidding a job is one of those essential processes at the heart of a contractors business. It is a complex process involving, among other

    Estimating and bidding a job is one of those essential processes at the heart of a contractor’s business. It is a complex process involving, among other things, an assessment of the scope of the job, estimating the costs of materials and labor involved, and putting forward the best price for the owner that will, hopefully, still make a reasonable profit for the contractor.

    Estimating and bidding can also be time-consuming, although the use of specialized software has reduced the time involved.

    Now, some Internet companies have introduced into the construction business a new twist on this process: a reverse auction mechanism first developed for procurement of goods and commodities.

    Reverse auctions may well work for commodities since these are manufactured with little or no variance. A user puts forward the need for a certain number of items, and sets up a website for receiving bids from manufacturers or suppliers of that item. After a certain number of rounds of bidding, during which the competitors can see each others’ bids, the lowest bid wins and that’s the end of the story. The product is shipped and, if it’s satisfactory, the agreed-upon price is paid.

    It’s assumed that bidders won’t go below the manufactured price (plus a profit) of the item. Companies that host these reverse auctions for commodities assert that the process saves money in procurement, although the method hasn’t been around long enough to demonstrate that conclusively.

    Companies wishing to host reverse auction sites for construction services also claim that the process will result in lower prices. Construction services, however, present a very different set of circumstances. Every construction project is inherently unique, with different requirements.

    Although Internet reverse auctions have been used for construction services, it’s certainly not a universally accepted method of procurement. Many construction associations, including MCAA, have devoted some time to studying the issue.

    One of the most interesting studies came from the well-respected Construction Users Roundtable (CURT). This organization, which presents the voice of the owner and whose stated goal is to “keep construction and maintenance costs competitive,” has raised a number of points in its Guidelines on the Use of Reverse Auction Technology. The document, which maintains a neutral stance, lays out a number of potential advantages and drawbacks.

    For owners, potential advantages include the possibility of more competitive bids. Bidders may profit from knowing how their bids compare to other competitors.

    Possible drawbacks for owners are that some well-qualified bidders won’t participate because they don’t trust the process, the lowest possible price may not actually be offered, and bidders may perceive cost as the only matter of importance to the owner.

    MCAA is concerned about these as well as other elements. One concern arises when the owner fails to prequalify the participating contractors. Another occurs when, as has been suspected, an owner acts as a “phantom bidder,” submitting bids to push down the price. In addition, because of the speed with which they are conducted and the pressure of meeting an online deadline, reverse Internet auctions increase the chances for errors in bidding, an eventuality that benefits no one.

    To counteract these possibilities, contractors should follow the same good business practices they use when negotiating a job or submitting a sealed bid. A history of dealing with the owner is beneficial; in its absence, knowing the owner’s reputation is important.

    If the owner has a good reputation for valuing a contractor’s excellence in project management, it’s a safe bet that the owner’s nature will not change just because he or she is using an Internet reverse auction to take bids. Doing your homework on the project is also essential, as it is with all bidding.

    MCAA’s task force on Internet reverse auctions is preparing a paper on the subject, which will be presented during MCAA’s annual convention, February 29 ¯ March 4, 2004 at Walt Disney World. In the meantime, MCAA recommends all parties in the construction process use caution and care in the use of Internet reverse auctions, as they should with any procurement process.

    Michael W. Gossman is chairman and CEO of Midwest Mechanical Contractors, Inc., a mechanical contracting company in Overland Park, KS. He is also the president-elect of the Mechanical Contractors Association of America, (MCAA) Inc. Gossman has been in the construction industry since 1973, joining Midwest Mechanical as president in 1990. He can be reached through MCAA at 301/869-5800.