Study refutes cost-saving ‘myth’ of online reverse auctions

Online reverse auctions and their cost-saving claims may not be as substantial as hundreds of published articles would have contractors and subcontractors believe, according to a current study by two Louisiana State University professors.

James Gill and Yilmas Karasulu authored the first of two phases of the study, “Online Reverse Bid Auctions for Construction Contractors and Subcontractors.” The two researchers reviewed hundreds of published articles, papers and reports relating to the “auctioning” of commodities and services.

Online reverse auctions function much like an eBay auction. The owner establishes an electronic forum, and contractors submit bids – the lowest bid within the time limit wins the contract.

“Every once in a while, information comes along that shatters a myth,” said Rick Wanner, president of the Foundation of the American Subcontractors Association. “The LSU study on reverse auctions is one of these moments.

“If there are any cost savings associated with reverse auctions for construction bids, someone’s keeping a big secret.”

The Associated General Contractors Education and Research Foundation and the FASA commissioned the study and provided the primary financial support for it. The second phase is due later this spring, and will gauge the impact of online reverse auctions in the construction industry, such as the impact on bidding processes, project relationships and work quality.

“It [reverse auctions] needs to be look at and understood like any other process,” said David Mendes, spokesman for the FASA.

Mendes said some news stories implied cost savings could result from using reverse auctions. He said the literature review in the first part of the new study found this to be unsubstantiated.

“Nobody had really done what these two professors had done,” he said.

The study uncovered only one document that included aggregated data/analysis of cost savings of reverse auctions in the construction industry – it didn’t associate cost savings with this type of construction bid process. The Army Corps of Engineers published this report, “U.S. Army Corps of Engineers Pilot Program for Construction Projects,” in the summer of 2004.

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Mendes said large companies such as Target and Intel were the primary users of online reverse auctions. Because of their market clout, many other companies assumed the process was being used to save money, he said.

Other primary areas for which online reverse auctions are being used are airline tickets, computers, legal services, raw materials for manufacturing and U.S. government treasury transactions.

Certain states are also considering legislation encouraging or banning the use of the bidding process, which Mendes said is causing even more confusion.

There are also ethical concerns raised by some contractors.

Mendes said forcing contractors to recalculate their bid in an extremely short period of time – often as little as one minute – can devalue the entire project.

“That might work with [selling] bolts, but it doesn’t work with building a library,” he said.

Mendes said his organization has its members complete a bi-annual survey to find problematic issues with subcontractors. “A large increase among our members consider it a serious problem,” he said.

Ann Bigane Wilson, a former FASA committee member and president of Bigane Paving Company in Chicago, had only one experience with reverse auctions. And one time was enough for her.

“It was an incredibly negative experience,” Wilson said. “It damages relationships