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Last edited 12 Nov 2020
Reverse auctions occur when suppliers compete for business in an online event by submitting the lowest bid during a specific timeframe. Reverse auctions can either be open or closed/private and are forms of Dutch auctions (also known as open descending-bid auctions where an initial price is set and progressively lowered until a bidder is prepared to accept the amount offered).
The purpose of a reverse auction is to allow business owners or procurement managers to purchase construction services at the lowest price. It does not take into consideration the experience or qualifications of the bidder.
This form of service procurement originated in the US the 1990s as businesses began to incorporate Internet-based methods to increase the speed of their procurement processes. The approach was initially used to purchase items such as office supplies and manufacturing equipment, and services such as tech support. It was not until 2000 that reverse auctions were used construction services in the US by large retailers, pharmaceutical companies and automobile manufacturers.
Reverse auctions were introduced in the UK in the early 2000s when the Office of Government Commerce (OGC) tested it as a procurement method for negotiating contracts for products and services not specifically associated with construction. It became more popular within the government and is still used today.
- Is the marketplace competitive?
- Does the bid include all of the specifics of the project?
- Have contracting firms been properly pre-screened before being permitted to participate in the auction?
- Is there an understanding of how change orders will be handled once the project begins?
- Will the bid allow them to deliver the results as promised without compromising issues such as safety or timeframe?
- Will the delivery of the project have a negative impact on the outcome of other projects - whether it be profit margin or reputation?
- Will the bid cover the costs of all subcontractors on the project?
- Is there a limit to how low they will bid before walking away from the project?
By treating construction projects as commodities (such as office supplies or manufacturing equipment), the reverse auction process can fail to properly consider external variables such as weather, personnel, site conditions and other so on. This method has generally not been popular within the construction industry.
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