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Federal contract ‘reverse auctions’ scrutinized

FedBid’s latest big hire is Joseph Jordan, a former federal procurement official.

FedBid’s latest big hire is Joseph Jordan, a former federal procurement official.

NEW YORK — It is like an eBay of Washington, a well-appointed and well-connected online marketplace for lucrative government contracts.

Deals for everything from pens to pesticides, from painting offices to performing autopsies — all that and more is up for grabs on FedBid, a fast-growing private company that has positioned itself at the profitable nexus of government and business.

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Financed by an investment company connected to Stephen M. Case, of AOL fame, and Ted Leonsis, majority owner of the Washington Wizards, FedBid has assembled a roster of Beltway insiders to promote an unusual approach to how contracts are meted out. Its latest big hire is Joseph Jordan, who was until recently head of procurement policy for the Obama administration.

Through FedBid, government agencies use “reverse auctions” — in which the lowest bid wins, rather than the highest — to decide who is awarded contracts. In theory, the process can save money for taxpayers by encouraging businesses to offer the best possible prices.

In practice, it also makes a lot of money for FedBid, which can collect fees from the winning bidders who, in turn, pass those costs to the government.

At issue is whether FedBid encourages competition, as its proponents argue, or simply prompts companies to submit unrealistically low bids to outmaneuver business rivals.

Detractors contend that awarding contracts based solely on price means the government risks ending up with inferior products and services, though this is a risk even when the government does not use reverse auctions. A recent government study, which reviewed reverse auctions at top agencies, found that roughly a third of FedBid auctions involved a single bidder, meaning they were closer to no-bid contracts than true auctions.

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The Government Accountability Office and others have warned that reverse auctions in general, and those conducted through FedBid in particular, are less transparent than traditional contracting practices, raising questions about how good a deal the government is getting, and where taxpayer dollars are going.

“These reverse auctions only make sense when all you care about is price,” said Daniel I. Gordon, who preceded Jordan as the head of the Office of Federal Procurement Policy. “Does FedBid have any interest in discouraging an agency that wants to buy brain surgery services? Of course not.”

What is clear is that FedBid, based in Vienna, Va., a Washington suburb, has carved out a profitable niche for itself as a middleman of government contracting. FedBid enables agencies to post terms for a contract — they can vary from skeletal descriptions of services to highly specific part numbers — and then let bidders vie for the work.

Agencies have turned to reverse auctions in hopes of cutting costs. Over the past five years, contracts awarded through FedBid reverse auctions have nearly tripled in value. The company is a major private sector player in the federal market: More than 99 percent of reverse auctions listed on the government’s contract advertising website in 2012 used FedBid, according to the GAO report, issued in December. Some agencies use other auction platforms.

In fiscal 2013, federal agencies used FedBid to award about $1.8 billion in contracts, according to data provided by FedBid. The company said it saved those agencies $160 million in that period, calculating the difference between target prices set by agencies and the winning bids.

FedBid declined to disclose how much money it collected. According to online federal procurement records, FedBid collected an extremely small amount from the federal government in fiscal 2013: $8.

In reality, agencies have paid millions of dollars indirectly to FedBid. That is because the company sometimes charges winning contractors a fee of up to 3 percent of a contract’s value, which is automatically tacked onto the government’s bill. For fiscal 2012, the GAO estimated, FedBid collected $13.4 million in fees off about $828 million in contracts for four top agencies. In comparison, the Defense Logistics Agency uses software from a company called Procurex for reverse auctions. Last year, it awarded about $25 billion through reverse auctions; Procurex, which charges a publicly available fee, collected $288,000 for its work.

FedBid declined to disclose billing details. FedBid was used to award less than 1 percent of the roughly $500 billion worth of contracts awarded last year but hopes to triple its share in the next four years, it said.

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