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Reverse Auction

Reverse Auction

Reverse Auction

We are going after a project where instead of a bid opening the customer is going to have a reverse auction.  Is this exactly what the name implies....you start at a certain price and then the contractors keep lowering their bids until everyone else gives up?  What else should be expected?

Comments from anyone with experience on this would be appreciated.

RE: Reverse Auction

I've been indirectly involved with a couple of Reverse Auctions. The biggest problem that I see is that you have little control over the technical content of the bid. i.e., while bidders are lowering their price, what are they deleting? It could be that they are planning on using a lower quality component, or not including anything but the basics.

Then, some inexperienced bidders may bid too low, and they run out of money to finish the project, so you have to pull someone else in. That happens a lot.

A Reverse Auction doesn't always guarantee the lowest price possible, just the lowest price the bidders are willing to go to at the time.

RE: Reverse Auction

My fear in this would be that one bidder would get buck fever.  They would concentrate on getting the work and beating the other guy that they would end up with a price that would not support the work.

When that happens something has to give. It’s usually the quality of the work.

Then the owner ends up with less quality then he thought he was getting and pays more in the long run.

You get the best long-term price in conditions where both the owner and the contractor have full knowledge of what is in and what is out of the contract.

Getting cute may appear to save money in the short run but in the long run will cost you many times over.

Stick to the tried and true contracting models.

Since you are a bidder I on this work, I’d be concerned that the owner will get cute in other areas and be a pain to deal with.  I’d take a pass on this one or simply give your best price once and refuse to participate further.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

RE: Reverse Auction

Go to the AGC website (www.agc.org) They have a paper recently devloped by the Corp of Engineers on the topic. The Corp looked into it and decided it was not an effective means to obtain construction services. Basically it is like Ebay in reverse. The bid is open for a given period of time, and the bidders post their bids. The bids are "blind" i.e. you do not know who posts which bid. Some auctions only show the low bid. At any time during the auction you can change your bid. At the end of the time for the auction, the lowest bidder is awarded the job.
I personally feel the owners best interest is served by a publically opened pproposal by selected contractors who have been given ample time and information to carefully make their best proposal. The reverse auction is a problem waiting to happen.

RE: Reverse Auction

I have had experience on reverse bidding on material purchasing and is straight forward (bidders have to pre-qualify and the pre-awarded need to prove their tehcnical specs to get the purchase)
Now, for a project, I foresee to much risk.
On a project, you commit yourself on one date but the contractors will do a continous work afterwars. What if he, having half way done, fails? (This is an impossible situation on material procurement, where what you see on that moment is what you need/buy)
rgds, javier

RE: Reverse Auction

Generally construction companies post a bid bond and a material and perfomance bond (often refered to as a performance bond). The bonds are fincial guarentees by a fincial instition known as surites.Should the contractor refuse to enter a contract as it was competively bid the surity will pay a penalty, usually 1/3 of the bid price. Should the contractor fail to finish the work for reasons not due to the owner, the surity will finish the work, usually by hiring another contractor, or provide the bonded contractor with sufficent resources to complete the work. The bonding companies then recover their expenses from the company. Most construction company owners must give the bonding companies personal imdemnity agreements, which pledge personal assets incase the company defaults on the bond. In foriegn country, it is common for construction companies to giveowners an irrevocable letter of credit from their bank for a percentage of the contract.

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