Online Auctions: Another Tool for Savings

Imagine an auction in which sellers bid to be awarded government contracts and with every bid the purchase price for the goods or service lowers until the specified market time expires. Believe it or not, this is actually occurring in some states.

Our state currently uses an invitation to bid or request for quotation to solicit the majority of bids from potential suppliers. The suppliers are in the position of guessing the value of other bids and then submitting a proposal for what they think is slightly lower.

In an online auction, bidders for a contract engage in what is known as "reverse bidding" where the costs go down as bidders underbid each other. The state puts out a request for quotation and announces bidding times. In the online forum, new bids pop up almost instantly, giving other bidders the chance to see the competition price and underbid if possible. Online auctions also have less overhead, allowing bidders to lower their costs and return some of these savings to the buyer.

In Pennsylvania, the state has saved more than $9.3 million in 15 online auctions through FreeMarkets, an online auction business. Bids were procured for aluminum, office furniture, electricity, coal, road salt, sugar, telecom installation, diesel fuel, reflective sheeting, copy paper, loaders/backers and paint trucks.

Pennsylvania’s auction for purchasing aluminum is a tremendous example of how savings are achieved. When the auction began at 10:00am the price of aluminum needed to make Pennsylvania license plates was $2.7 million. In less than two hours, the state received 99 bids from four bidders, dropping the cost to $2.4 million. This 9.3% drop in price saved the taxpayers of Pennsylvania over $250,000 – just on the purchase of aluminum for license plates.

The state’s purchase of office furniture is another example of the savings possible with online auctions. The cost of the furniture was $12.9 million when the auction began; it took three bidders less than two hours to lower the contract price to $8.8 million – a 31% savings!

According to FreeMarkets, a few of the benefits of online auctions include:

• Reduced costs across a broad range of goods and services (2-25% savings).
• Ensured market pricing for purchases and asset disposal.
• Ability to make best value purchasing decisions based on numerous criteria such as price, past performance, and technical merit.
• Means for aggregating purchases across agencies to ensure best value purchasing decisions.
• Disclosed pricing information to the supply base to foster competition.
• Enhanced visibility of criteria for procurement decisions.

Our Department of General Administration has begun to explore the use of online auctions in Washington State. Since potential savings are already documented in other states, we need to move from exploration to implementation. Each day the state waits costs precious taxpayer dollars!

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org