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Savvy or Unethical? Should the Federal Government be a Phantom Bidder in Reverse Auctions?

Posted by Don Mansfield, 13 January 2012 · 6,133 views

I recently heard from a contractor regarding an experience he had with reverse auctions. A federal agency was conducting a reverse auction using FedBid and he decided to compete (FedBid, Inc., provides a service whereby federal agencies can conduct reverse auctions). Although he submitted several bids, he ultimately lost the reverse auction. When he checked to see who had won, he was surprised to see that the federal agency that was in need of the required items was the low bidder. In other words, the federal agency was submitting bogus bids in an effort to get the contractor to reduce his bid price. The federal agency then contacted him and offered to purchase the items from the contractor at his lowest bid price. Feeling that he had been duped, he told them to get lost.

The tactic employed by the federal agency, called phantom bidding, is not new. Many view the practice as unethical while others see it as a legitimate tactic. In regular auctions, the legality of seller participation in bidding varies from state to state. For those states that allow it, sellers typically must disclose that they reserve the right to participate in the bidding.

In any case, should the Federal Government be allowed to place phantom bids in reverse auctions? Would your answer be different if the disclosure of the practice was required prior to the reverse auction?

Speaking strictly as a taxpayer, I think this practice is entirely unethical and I do not want government agencies participating in it. It taints the procurement process. Moreover, it strikes me as being contrary to President Obama's promises of government transparency.

The Federal government should procure goods and services at a fair and resonable price, while permitting contractors to make a reasonable profit. Using phantom bids to drive down prices below what the market offers through legitimate competition is wrong, wrong, wrong.

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This practice is entirely unethical. It goes against the guiding principle for the Federal Acquisition System to; "Conduct business with integrity, fairness, and openness."
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Sounds like fraud. If another bidder placed bids and did not intend to perform a resulting contract from that bid, I would think the Government would consider it so. Is there coverage of this aspect when prospective bidders sign up for the reverse auctions?
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QUOTE (Gort @ Jan 20 2012, 05:56 AM)
Is there coverage of this aspect when prospective bidders sign up for the reverse auctions?

I don't know. I've heard through the grapevine that some powerful folks have read this blog post and are asking FedBid for an explanation.
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If the bidder knows that it is not in position to fill the order at the bid price and still submits a bit, the decision-maker should go to jail.
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I have learned through a reliable source that the story is false. The company misunderstood. Here is what actually happened:

"The practice is not phantom bidding. As in the case of forward auctions,
FedBid allows buyers to use an undisclosed reserve amount, called an active
target price (ATP), which indicates the amount the buyer expects or is able
to pay. We describe it clearly throughout our site and terms of use and so
it should not come as a surprise to anyone.

The definition for ATP is the first definition of our terms of use, and is
as follows: ATP "means the mechanism available to the Buyer that enables the
Buyer to establish a price-point that must be underbid before a Bid will
receive a LEAD Bid Status. (NOTE: ATP is usually based on a published
catalog price or valid market research quote.)"
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How does your source know what actually happened? How did they find out the identities of the vendor and the agency?
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I don't know the details. My source may not have been referring to the particular case you described. The source is reliable and said that there is no phantom bidding. I don't think he'd lie. That's all I know.
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QUOTE (Vern Edwards @ Jan 25 2012, 10:00 AM)
I don't know the details. My source may not have been referring to the particular case you described. The source is reliable and said that there is no phantom bidding. I don't think he'd lie. That's all I know.

I'm not saying that your source is lying, but I think he was just taking a guess at what happened. Without knowing the details, I don't think anyone can say that the story is false.

In any case, I sent your comment to the vendor and asked for a response. This is what he wrote back:

They may have been using ATP, I don't know. In this particular case, whenever we resubmitted the bid, we were shown to be in the lead for a short period of time, then lagged again, so "Someone" was entering a bid in response to our reduction. At the conclusion of bidding, we found out there were no other (genuine) bidders.

My employer was well known to the customer and also what our services and prices for those services were. If they established an ATP, one wonders how they did it. Some wishful number, or the budget available? I should point out that this was for services, not products. In either case, an inquiry about pricing details would have gotten the customer an answer.

I am quite familiar with auctions (classic automobiles being a hobby, see Barrett Jackson, etc.), and if the customer has an ATP or reserve, it would only be fair and ethical to announce that. The amount does not need to be disclosed, only that an ATP applies. In that case, instead of being informed that we are lagging, a "Reserve (or ATP) not met" announcement would pop up.
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I e-mailed FedBid with the following questions:

1. If a buyer sets an ATP, is it possible for the buyer to lower the ATP during a reverse eAuction?

2. In a reverse eAuction where an ATP is being utilized, is it possible for a seller?s status to change from ?Lead? to ?Lag? if no other bids have been submitted?

This is the response I got:

The Buyer cannot change the active target price during the course of the Buy. The Buyer would need to re-post the Auction to change the active target price. With a re-post, all bids would be removed and you would need to place a new bid.

If the target price is active, and the seller is given a status of lead after placing a bid, the only way that status could change to lag is if another seller placed a more competitive bid price.

As such, I don't think the use of ATP explains what happened to the vendor.
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